Exhibit 99.1
[DELANO LOGO]
ARRANGEMENT INVOLVING
DELANO TECHNOLOGY CORPORATION
AND
DIVINE, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
AND
MANAGEMENT INFORMATION CIRCULAR
OF
DELANO TECHNOLOGY CORPORATION
June 14, 2002
[DELANO LOGO]
To the Shareholders of Delano Technology Corporation ( "Delano"):
After careful consideration, the board of directors of Delano has approved
a combination between divine, inc. ("divine") and Delano by way of a plan of
arrangement under Section 182 of the Business Corporations Act (Ontario) (the
"Arrangement"). If the Arrangement is completed, each Delano common share will
be exchanged for a number of shares of divine Class A common stock or a number
of shares of Delano that are exchangeable on a one-for-one basis for shares of
divine Class A common stock (the "Exchangeable Shares") equal to the exchange
ratio for a Delano common share, as described in the attached circular. The
exchange ratio is subject to adjustment, as described in the attached circular.
Only certain Delano shareholders who are Canadian residents or who hold Delano
common shares on behalf of Canadian residents are entitled to receive
Exchangeable Shares. divine's common stock is normally quoted on the Nasdaq
National Market under the trading symbol "DVIN", however, as a result of
divine's recently implemented reverse stock split, divine's common stock will be
quoted under the trading symbol "DVIND" through June 25, 2002. On June 14, 2002,
the closing price of divine common stock was US$3.79 per share. The Exchangeable
Shares will not be listed or quoted on any stock exchange.
Under the transaction, outstanding options to purchase Delano common shares
that have an exercise price less than or equal to the product of (i) the
exchange ratio multiplied by (ii) the closing sale price of the divine common
stock on the trading day which is ten business days prior to the effective time
of the Arrangement ("In-the-Money Options") and that holders have not exercised
prior to the effective time of the Arrangement will be exchanged for
economically equivalent options to purchase shares of divine Class A common
stock based on the same exchange ratio applicable to Delano common shares, as
described above. Outstanding options to purchase Delano common shares that are
not "In-the-Money Options" will be terminated under the transaction. Also under
the Arrangement, outstanding warrants to purchase Delano common shares shall be
amended to provide for the purchase of the number of shares of divine Class A
common stock based on the same exchange ratio applicable to Delano common
shares, as described above. Employees of Delano who participate in the Delano
employee share purchase plan will be permitted to use funds already deposited
under the plan to purchase Delano common shares before the deadline to elect to
receive Exchangeable Shares (as set out in the attached circular) in order to be
able to participate in the Arrangement. Any remaining funds which have been
deposited pursuant to the Delano employee share purchase plan will be remitted
by Delano to the relevant employees.
The Exchangeable Shares will entitle their holders to dividends and other
rights (including voting rights) that are substantially economically equivalent
(without taking into account tax consequences) to those rights attaching to the
shares of divine Class A common stock. Holders of Exchangeable Shares, however,
will not have the right to vote at meetings of the shareholders of Delano but
will, through a voting trust arrangement, be entitled to vote at meetings of
divine shareholders.
The attached document serves as a Delano management information circular.
It provides detailed information concerning divine, Delano and the Arrangement.
Please give all of the information contained in the attached document your
careful attention. In particular, you should carefully consider the discussion
in the Section entitled "Risk Factors" beginning on page 15 of the attached
document. The board of directors of Delano has unanimously approved the
Arrangement and recommends that the Delano shareholders vote in favour of the
Arrangement. Approximately 14% of Delano's outstanding common shares are subject
to an agreement between certain Delano shareholders and divine pursuant to which
such Delano shareholders have already agreed to vote in favour of the
Arrangement.
Shareholders of Delano are cordially invited to attend a special meeting of
shareholders to vote on the Arrangement. The meeting will be held on July 25,
2002 at 10:00 a.m. local time at the TSE Conference Centre at The Toronto Stock
Exchange, the Exchange Tower, 130 King Street West, Toronto, Ontario. Only
holders of Delano common shares who held such shares at the close of business on
June 17, 2002 will be entitled to vote at this special meeting of shareholders.
Please note, certificates representing Delano common shares, the letter of
transmittal and election form (on blue paper) and all other documentation
required to be delivered in connection with the exchange of Delano common shares
pursuant to the Arrangement (but not your proxy) must be delivered to
Computershare Trust Company of New York at its offices in New York, New York,
USA. A pre-addressed envelope is included for your convenience.
Your vote is very important. Whether or not you plan to attend the Delano
shareholders' meeting, please complete, sign, date and return the accompanying
proxy (on yellow paper) in the enclosed self-addressed stamped envelope marked
"For Proxy Only" to Computershare Trust Company of Canada at its offices in
Toronto, Ontario, Canada. The "For Proxy Only" envelope is postage pre-paid for
mailing within Canada. If you are mailing your proxy from outside of Canada,
please make sure to affix appropriate postage. Returning the proxy does not
deprive you of your right to attend the meeting and to vote your shares in
person. Thank you for your consideration of this matter.
Dennis Bennie
[SIGNATURE]
Chairman
Delano Technology Corporation
This document is dated June 14, 2002 and was first mailed to Delano shareholders
on or about June 24, 2002.
DELANO TECHNOLOGY CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 25, 2002
To the holders of common shares of Delano Technology Corporation ("Delano"):
A special meeting of the holders of common shares of Delano will be held at
the TSE Conference Centre at The Toronto Stock Exchange, the Exchange Tower, 130
King Street West, Toronto, Ontario, on July 25, 2002 at 10:00 a.m. (Toronto
time) for the following purposes:
1. to consider, pursuant to an interim order (the "Interim Order") of the
Ontario Superior Court of Justice dated April 22, 2002, and if deemed
advisable, to pass, with or without variation, a special resolution
(the "Arrangement Resolution") to approve an arrangement under Section
182 of the Business Corporations Act (Ontario) (the "Arrangement")
pursuant to which divine, inc. will become the owner of all the common
shares of Delano issued and outstanding immediately following the
Arrangement, all as more particularly described in the accompanying
Delano management information circular (the "Circular"); and
2. to transact such further or other business as may properly come before
the meeting or any adjournment or postponement thereof.
The full text of the Arrangement Resolution is set out as Annex F to the
attached Circular. Delano's notice of application for the Interim Order and for
a final order approving the Arrangement and the full text of the Interim Order
is set out in Annex B to the attached Circular.
Pursuant to the Interim Order, registered holders of common shares of
Delano may dissent in respect of the Arrangement Resolution. If the Arrangement
becomes effective, dissenting Delano registered shareholders who comply with the
dissent procedures (which are described in the Circular under the heading
"Dissenting Shareholder Rights") will be entitled to be paid the fair value of
their common shares of Delano. Failure to comply strictly with such dissent
procedures may result in the loss or unavailability of any right to dissent.
DELANO SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE
REQUESTED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED FORM OF PROXY (ON
YELLOW PAPER) IN THE ENCLOSED ENVELOPE (MARKED "FOR PROXY ONLY") OR BY FACSIMILE
TO DELANO TECHNOLOGY CORPORATION, C/O COMPUTERSHARE TRUST COMPANY OF CANADA, 100
UNIVERSITY AVENUE, 9TH FLOOR, TORONTO, ONTARIO, M5J 2Y1, FACSIMILE NUMBER (416)
263-9524 OR (866) 249-7775. THE "FOR PROXY ONLY" ENVELOPE IS POSTAGE PRE-PAID
WITHIN CANADA. IF YOU ARE MAILING YOUR PROXY FROM OUTSIDE OF CANADA, PLEASE MAKE
SURE TO AFFIX APPROPRIATE POSTAGE. THE COMPLETED FORM OF PROXY MUST BE RECEIVED
BY COMPUTERSHARE TRUST COMPANY OF CANADA PRIOR TO 4:00 P.M. (TORONTO TIME) ON
JULY 23, 2002 OR, IN THE EVENT THAT THE MEETING IS ADJOURNED OR POSTPONED, PRIOR
TO 4:00 P.M. (TORONTO TIME) ON THE SECOND BUSINESS DAY PRIOR TO THE DAY FIXED
FOR THE ADJOURNED OR POSTPONED MEETING.
DATED at Toronto, Ontario, the 14th day of June, 2002.
By order of the Board
[SIGNATURE]
David L. Lewis
Corporate Secretary
ARRANGEMENT INVOLVING
DELANO TECHNOLOGY CORPORATION
AND
DIVINE, INC.
MANAGEMENT INFORMATION CIRCULAR
OF
DELANO TECHNOLOGY CORPORATION
June 14, 2002
DELANO TECHNOLOGY CORPORATION
MANAGEMENT INFORMATION CIRCULAR
The information concerning divine, inc. contained in this circular,
including the Annexes, has been taken from or is based upon publicly available
documents and records on file with the United States Securities and Exchange
Commission, other public sources and information provided directly by divine,
inc. The information concerning divine, inc. after the completion of the
transaction, including pro forma financial information, has been jointly
provided by divine, inc. and Delano Technology Corporation. Although Delano
Technology Corporation has no knowledge that would indicate that any statement
contained herein taken from or based on such documents and records is untrue or
incomplete, Delano Technology Corporation assumes no responsibility for the
accuracy of the information contained in such documents, or for any failure by
divine, inc. to disclose events which may have occurred that may affect the
significance or accuracy of any such information but which are unknown to Delano
Technology Corporation.
No person is authorized to give any information or to make any
representation not contained in this circular and, if given or made, such
information or representation should not be relied upon as having been
authorized. The timing of the delivery of this document shall not, under any
circumstances, create any implication that there has been no change in the
information set forth herein since the date of this document until the date of
delivery.
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
Unless otherwise indicated, all dollar amounts contained in this circular
are expressed in U.S. dollars.
Except as otherwise expressly noted, the financial information regarding
divine, inc. and Delano Technology Corporation, including the Delano Technology
Corporation audited financial statements and the Delano Technology Corporation
unaudited financial statements, have been prepared in accordance with U.S. GAAP.
Delano Technology Corporation's financial statements prepared in accordance with
Canadian GAAP are also attached to this circular.
The unaudited pro forma financial statements contained in this document
have been prepared in accordance with U.S. GAAP.
EXCHANGE RATES
The following table sets forth, for each period indicated, the high and low
exchange rates for one U.S. dollar expressed in Canadian dollars, the average of
such exchange rates during such period, and the exchange rate at the end of such
period, based upon the Bank of Canada Noon Rate:
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, --------------------------------
2002 2001 2000 1999
---- ---- ---- ----
High ............. 1.61 1.60 1.56 1.53
Low .............. 1.58 1.49 1.43 1.44
Average .......... 1.59 1.55 1.50 1.49
Period End ....... 1.59 1.59 1.50 1.44
On March 12, 2002, the last trading day prior to the announcement of the
transaction, the exchange rate for one U.S. dollar expressed in Canadian dollars
was Cdn.$1.59, based on the Bank of Canada Noon Rate. On June 14, 2002, the
exchange rate for one U.S. dollar expressed in Canadian dollars based on the
Bank of Canada Noon Rate was Cdn.$1.55.
NOTICE TO CANADIAN SHAREHOLDERS OF DELANO TECHNOLOGY CORPORATION
divine, inc. is organized under the laws of the State of Delaware, United
States. All of the directors and executive officers of divine, inc. and many of
the experts named in the circular are residents of the United States. In
addition, substantial portions of the assets of divine and of such individuals
and experts are located outside of Canada. As a result, it may be difficult or
impossible for persons who become securityholders of divine, inc. or any of its
subsidiaries to effect service of process upon such persons within Canada with
respect to matters arising under Canadian securities laws, or to enforce against
them in Canadian courts, judgments predicated upon the civil liability
provisions of Canadian securities laws. There is some doubt as to the
enforceability in
the United States in original actions, or in actions for enforcement of
judgments of Canadian courts, or civil liabilities predicated upon Canadian
securities laws. In addition, awards or punitive damages in actions brought in
Canada or elsewhere may be unenforceable in the United States.
Disclosure in this circular relating to divine, inc. has been prepared in
accordance with U.S. securities laws. Shareholders should be aware that these
requirements may differ from Canadian requirements. THE FINANCIAL STATEMENTS OF
DIVINE, INC. INCLUDED IN THIS CIRCULAR HAVE NOT BEEN PREPARED IN ACCORDANCE WITH
CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND MAY NOT BE COMPARABLE TO
FINANCIAL STATEMENTS OF CANADIAN COMPANIES.
See the section of this circular entitled "Tax Considerations for Delano
Shareholders" for certain information concerning Canadian tax consequences of
the proposed arrangement with divine, inc. for shareholders of Delano Technology
Corporation who are Canadian residents.
Neither the exchangeable shares of Delano Technology Corporation nor the
shares of divine, inc. Class A common stock have been approved or disapproved by
the United States Securities and Exchange Commission or securities regulatory
authorities in any state of the United States or province of Canada, nor has the
United States Securities and Exchange Commission or the securities regulatory
authorities of any state of the United States or province of Canada passed on
the adequacy or accuracy of this circular. Any representation to the contrary is
a criminal offence.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT
This document includes forward-looking statements that reflect the current
expectations and projections of divine, inc. and Delano Technology Corporation
about their future results, performance, prospects, and opportunities. divine,
inc. and Delano Technology Corporation have tried to identify these
forward-looking statements by using words such as "may," "will," "expect,"
"anticipate," "believe," "intend," "plan," "estimate," and similar expressions.
These forward-looking statements are based on information currently available to
divine, inc. and Delano Technology Corporation and are subject to a number of
risks, uncertainties, and other factors that could cause divine, inc.'s and
Delano Technology Corporation's actual results, performance, prospects, or
opportunities to differ materially from those expressed in, or implied by, these
forward-looking statements.
The section entitled "Risk Factors" beginning on page 15 contains a
description of these factors. Other matters, including unanticipated events and
conditions, also may cause actual future results of divine, inc. and Delano
Technology Corporation to differ materially from these forward-looking
statements. There can be no assurance that the expectations of divine, inc. and
Delano Technology Corporation will prove to be correct. In addition, all
subsequent written and oral forward-looking statements attributable to divine,
inc. or Delano Technology Corporation, or persons acting on their behalf, are
expressly qualified in their entirety by the cautionary statements mentioned
above. You should not place undue reliance on these forward-looking statements.
All of these forward-looking statements are based on expectations of divine,
inc. and Delano Technology Corporation as of the date of this circular. Except
as required by U.S. federal securities laws, divine, inc. does not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
TABLE OF CONTENTS
PAGE
----
DELANO TECHNOLOGY CORPORATION
GLOSSARY OF TERMS .......................................................... 1
SUMMARY .................................................................... 5
RISK FACTORS ............................................................... 15
General Risks Relating to the Proposed Transaction ........................ 15
Risks Relating to divine .................................................. 18
Risks Relating to Delano .................................................. 19
COMPARATIVE MARKET PRICE AND TRADING VOLUME INFORMATION .................... 20
THE SPECIAL MEETING OF DELANO SHAREHOLDERS ................................. 22
General ................................................................... 22
Date, Time and Place ...................................................... 22
Purpose of the Special Meeting ............................................ 22
Record Date for the Special Meeting ....................................... 22
Vote Required ............................................................. 22
Quorum .................................................................... 23
Non-Registered Shareholders ............................................... 23
Solicitation of Proxies and Expenses ...................................... 23
Voting of Proxies at the Special Meeting and
Revocation of Proxies ................................................... 23
Dissenting Shareholder Rights ............................................. 24
Other Matters ............................................................. 24
Recommendation of the Delano Board of Directors ........................... 24
THE TRANSACTION ............................................................ 25
General ................................................................... 25
Background of the Transaction ............................................. 26
Recommendation of Delano's Board of Directors ............................. 27
Reasons for the Transaction ............................................... 27
Conclusion of Delano's Board of Directors ................................. 28
Opinion of Delano's Financial Advisor ..................................... 28
Interests of Certain Persons in the Transaction ........................... 29
Shareholder Voting Agreement .............................................. 30
Court Approval of the Arrangement and
Completion of the Transaction ........................................... 30
Stock Exchange Listings ................................................... 31
Regulatory Matters ........................................................ 31
Resale of Exchangeable Shares and Shares of
divine Common Stock ..................................................... 31
Delisting and Deregistration of Delano
Common Shares After the Transaction ....................................... 33
Ongoing Canadian Reporting Obligations .................................... 33
Treatment of Stock Options and Warrants ................................... 33
Future Issuances of Shares ................................................ 34
Further Issuances of Options .............................................. 34
Expenses .................................................................. 34
COMPILATION REPORT ......................................................... 35
PRO FORMA FINANCIAL STATEMENTS ............................................. 36
PRO FORMA CAPITALIZATION ................................................... 43
THE COMBINATION AGREEMENT .................................................. 44
Structure of the Arrangement .............................................. 44
Completion and Effectiveness of the Arrangement ........................... 44
Exchange of Shares on the Arrangement ..................................... 44
Fractional Shares ......................................................... 45
Delano's Representations and Warranties ................................... 45
Representations and Warranties of divine .................................. 46
Delano's Conduct of Business Before
Completion of the Arrangement ........................................... 47
divine's Conduct of Business Before
Completion of the Arrangement ........................................... 48
Material Covenants ........................................................ 49
Employee Matters .......................................................... 50
Other Covenants ........................................................... 50
Conditions to Completion of the Arrangement ............................... 52
Termination of the Combination Agreement .................................. 53
Payment of Termination Fees and Expenses .................................. 55
Extension, Waiver and Amendment of the
Combination Agreement ................................................... 55
TRANSACTION MECHANICS ...................................................... 56
The Arrangement ........................................................... 56
Share Certificates ........................................................ 57
Procedures for Exchange of Share Certificates
by Shareholders ......................................................... 58
Fractional Shares ......................................................... 59
Reverse Stock Split of divine Common Stock ................................ 59
DESCRIPTION OF EXCHANGEABLE SHARES ......................................... 59
General ................................................................... 59
Voting, Dividend and Liquidation Rights ................................... 60
Optional Redemption by Holders ............................................ 62
Mandatory Redemption by Delano and divine Call Right ...................... 62
Ranking ................................................................... 64
Certain Restrictions ...................................................... 64
Amendment and Approval .................................................... 64
divine Support Obligation ................................................. 65
Withholding ............................................................... 66
Disclosure of Interest in Exchangeable Shares ............................. 66
DIVINE CAPITAL STOCK ....................................................... 66
General ................................................................... 66
Voting, Conversion, Dividend, Redemption,
Liquidation and Appointment Rights ...................................... 67
Stockholder Rights Plan ................................................... 68
DELANO SHARE CAPITAL PRIOR TO THE TRANSACTION .............................. 68
Common Shares ............................................................. 68
Preference Shares ......................................................... 69
DELANO SHARE CAPITAL AFTER THE TRANSACTION ................................. 69
Common Shares ............................................................. 69
Exchangeable Shares ....................................................... 69
BUSINESS OF DIVINE ......................................................... 69
Overview .................................................................. 69
BUSINESS OF DELANO ......................................................... 72
Overview .................................................................. 72
Executive Compensation for the fiscal year
ended March 31, 2002 ...................................................... 73
Options Grants in Fiscal 2002 and Year End Values ......................... 73
Option Exercises in Fiscal 2002 ........................................... 74
Compensation of Directors ................................................. 74
Executive Officer Employment Agreements ................................... 74
i
PAGE
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Other Information Concerning Delano ...................................... 75
THE COMPANIES AFTER THE TRANSACTION ....................................... 75
General .................................................................. 75
Plans and Proposals ...................................................... 75
Directors and Officers ................................................... 75
Share Capital Matters .................................................... 75
Auditors ................................................................. 76
Transfer Agent and Registrars ............................................ 76
TAX CONSIDERATIONS FOR DELANO SHAREHOLDERS ................................ 76
Canadian Tax Considerations for Delano Shareholders ...................... 76
Certain United States Federal Tax Considerations ......................... 84
United States Federal Income Tax
Considerations for U.S. Holders ........................................ 85
United States Federal Income and Estate Tax
Consequences to Non-U.S. Holders ......................................... 87
Backup Withholding and Information Reporting ............................. 88
COMPARISON OF SHAREHOLDER RIGHTS .......................................... 89
Required Vote for Certain Transactions ................................... 89
Cumulative Voting ........................................................ 89
Calling a Shareholder Meeting ............................................ 90
Amendment of Certificate of Incorporation or
Articles of Incorporation .............................................. 90
Amendment of Bylaws ...................................................... 90
Dissenters' or Appraisal Rights .......................................... 91
Oppression Remedy ........................................................ 92
Shareholder Derivative Actions ........................................... 92
Director Qualifications .................................................. 93
Fiduciary Duties of Directors ............................................ 93
Number of Directors ...................................................... 93
Removal of Directors ..................................................... 93
Filling Vacancies on the Board of Directors .............................. 94
Advance Notice Provisions for Shareholder
Nominations and Proposals .............................................. 94
Shareholder Action by Written Consent .................................... 94
Indemnification of Officers and Directors ................................ 94
Director Liability ....................................................... 95
Anti-Take-Over Provisions and Interested Shareholders .................... 96
Access to Corporate Records .............................................. 96
DISSENTING SHAREHOLDER RIGHTS ............................................. 96
LEGAL MATTERS ............................................................. 99
INDEPENDENT AUDITORS ...................................................... 99
ENFORCEABILITY OF CIVIL LIABILITIES ....................................... 99
CERTIFICATE OF DELANO ..................................................... 100
Annex A--COMBINATION AGREEMENT AND AMENDMENT TO COMBINATION AGREEMENT
Annex A-1--SHAREHOLDER VOTING AGREEMENT
Annex B--INTERIM ORDER AND NOTICE OF APPLICATION
Annex C--FORM OF PLAN OF ARRANGEMENT
Annex D--FORM OF EXCHANGEABLE SHARE SUPPORT AGREEMENT
Annex E--FORM OF VOTING AND EXCHANGE TRUST AGREEMENT
Annex F--ARRANGEMENT RESOLUTION
Annex G--OPINION OF BROADVIEW INTERNATIONAL LLC
Annex H--SECTION 182 OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
Annex I--DIVINE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 (U.S. GAAP)
Annex J--DELANO FORM 10-K FOR THE YEAR ENDED MARCH 31, 2001 (U.S. GAAP)
Annex K--DELANO AUDITED ANNUAL FINANCIAL STATEMENTS FOR THE FISCAL
YEARS ENDED MARCH 31, 2001, 2000 AND 1999 (CANADIAN GAAP)
Annex L--DELANO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEARS
ENDED MARCH 31, 2001, 2000 AND 1999 (CANADIAN GAAP)
Annex M--DELANO FORM 10-Q FOR THE THREE AND NINE-MONTH PERIODS ENDED
DECEMBER 31, 2001 (U.S. GAAP)
Annex N--DELANO INTERIM FINANCIAL STATEMENTS AND INTERIM MANAGEMENT'S
DISCUSSION AND ANALYSIS FOR THE THREE AND NINE-MONTH PERIODS ENDED
DECEMBER 31, 2001 (CANADIAN GAAP)
Annex O--DELANO MANAGEMENT INFORMATION CIRCULAR DATED JUNE 11, 2001,
PREPARED FOR THE ANNUAL AND SPECIAL MEETING OF DELANO SHAREHOLDERS ON
JULY 26, 2001
Annex P--DIVINE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS HELD ON MAY 21, 2002, AND FILED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION APRIL 24, 2002
Annex Q--DIVINE FORM 8-K DATED APRIL 5, 2002, RESPECTING THE PROPOSED MERGER
TRANSACTION WITH VIANT CORPORATION
Annex R--HISTORICAL FINANCIAL STATEMENTS OF VIANT CORPORATION
Annex S--HISTORICAL FINANCIAL STATEMENTS OF ROWECOM INC.
Annex T--DIVINE FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2002
(U.S. GAAP)
Annex U--DIVINE FORM 8-K DATED MAY 3, 2002, RESPECTING THE RESIGNATION OF
THOMAS J. MEREDITH FROM DIVINE'S BOARD OF DIRECTORS
Annex V--DIVINE FORM 8-K DATED MAY 29, 2002, RESPECTING THE PRIVATE PLACEMENT
WITH OAK INVESTMENT PARTNERS
ii
GLOSSARY OF TERMS
"1933 ACT" means the United States Securities Act of 1933, as amended.
"1934 ACT" means the United States Securities Exchange Act of 1934, as amended.
"ACQUISITION PROPOSAL" means any offer or proposal relating to any transaction
or series of related transactions involving any of the following:
o any merger, amalgamation, arrangement, reorganization, share exchange,
consolidation, recapitalization, liquidation, dissolution or other
business combination or similar transaction involving Delano or the
acquisition or purchase from Delano by any person or group of 50% or
more of any class of equity securities of Delano;
o any take-over bid or tender offer (including issuer bids and
self-tenders) or exchange offer, that if consummated would result in
any person or entity beneficially owning 50% or more of any class of
any equity securities of Delano; or
o any sale, lease, license or other disposition (by sale, merger or
otherwise) of 50% or more of the book or market value of assets
(including securities of any Delano subsidiaries) of Delano and its
subsidiaries, taken as a whole.
"AFFILIATE" has the meaning ascribed thereto in the OBCA.
"ARRANGEMENT" means an arrangement under Section 182 of the OBCA on the terms
and subject to the conditions set out in the Plan of Arrangement and subject to
any amendments or variations thereto made in accordance with the Combination
Agreement, the Plan of Arrangement or made at the direction of the Court in the
Final Order.
"ARRANGEMENT RESOLUTION" means the special resolution of the Delano
shareholders, to be substantially in the form and content of Annex F attached
hereto.
"ARTICLES OF ARRANGEMENT" means the articles of arrangement of Delano in respect
of the Arrangement, required by the OBCA to be sent to the Director after the
Final Order is made.
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of divine to
effect the automatic exchange of Exchangeable Shares for shares of divine Common
Stock pursuant to the Voting and Exchange Trust Agreement.
"BROADVIEW" means Broadview International LLC, financial advisor to Delano.
"BUSINESS DAY" means any day on which commercial banks are open for business in
Toronto, Ontario and Chicago, Illinois other than a Saturday, a Sunday or a day
observed as a holiday in Toronto, Ontario under applicable laws or in Chicago,
Illinois under applicable laws.
"CANADIAN GAAP" means Canadian generally accepted accounting principles.
"CIRCULAR" means the notice of special meeting to be sent to holders of Delano
Common Shares and the management information circular in connection with the
Special Meeting, as they may be amended.
"COMBINATION AGREEMENT" means the combination agreement dated as of March 12,
2002, as amended May 31, 2002, between divine and Delano, as further amended,
supplemented and/or restated in accordance with its terms prior to the Effective
Date, providing for, among other things, the Arrangement.
1
"COMPANY ACQUISITION" means, other than the transactions contemplated by the
Combination Agreement, either as a single transaction or a series of
transactions:
o a merger, amalgamation, arrangement, reorganization, share exchange,
consolidation, recapitalization, liquidation, dissolution or other
business combination involving Delano pursuant to which the
shareholders of Delano immediately preceding such transaction hold
less than 50% of the aggregate equity interests in the surviving or
resulting entity of the transaction;
o the acquisition or purchase by any person or group, including by way
of a tender offer or an exchange offer or issuance by Delano of 50% or
more of the equity securities of Delano, or the right to acquire such
securities; or
o the sale, lease, license or other disposition, by sale, merger or
otherwise by Delano of assets representing 50% or more of the book or
market value of the assets, including the assets of Delano and its
subsidiaries, taken as a whole.
"COURT" means the Ontario Superior Court of Justice.
"DELANO" means Delano Technology Corporation, a corporation existing under the
laws of the Province of Ontario.
"DELANO COMMON SHARES" means the common shares in the capital of Delano.
"DELANO ESPP" means the Delano Employee Stock Purchase Plan adopted by the
Delano board of directors on January 25, 1999.
"DELANO OPTIONS" means the Delano Common Share purchase options granted under
the Delano Stock Option Plan.
"DELANO STOCK OPTION PLAN" means the Delano Employee Stock Option Plan adopted
by the Delano board of directors on March 5, 1999, as amended and restated on
July 20, 2000.
"DELANO WARRANTS" means the share purchase warrants to purchase a total of
36,723 Delano Common Shares.
"DEPOSITARY" means Computershare Trust Company of New York.
"DIRECTOR" means the Director appointed pursuant to Section 278 of the OBCA.
"DIVINE" means divine, inc., a corporation existing under the laws of the State
of Delaware.
"DIVINE COMMON STOCK" means shares of Class A common stock, par value $0.001 per
share, of divine (including any attached rights issued pursuant to the divine
shareholder rights agreement dated February 12, 2001 between divine and
Computershare Investor Services, LLC, as amended).
"EFFECTIVE DATE" means the date shown on the certificate of arrangement to be
issued by the Director giving effect to the Arrangement.
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date.
"ELECTION DEADLINE" means 4:00 p.m. (Toronto time) on the date which is two
Business Days prior to the Special Meeting.
"EXCHANGE RATIO" means 0.04748, subject to adjustment as provided under the Plan
of Arrangement. See also "Transaction Mechanics -- Reverse Stock Split of divine
Common Stock".
"EXCHANGE RIGHT" means, pursuant to the Voting and Exchange Trust Agreement, the
right of the Trustee as trustee for and on behalf of, and for the use and
benefit of, the holders of Exchangeable Shares, upon the occurrence and during
the continuance of an Insolvency Event (as defined in the Voting and Exchange
Trust Agreement), to require divine to purchase from each or any holder of
Exchangeable Shares all or any part of the Exchangeable Shares held by such
holder.
"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the capital of
Delano, having the rights, privileges, restrictions and conditions set out in
Appendix 1 to the Plan of Arrangement.
2
"EXCHANGEABLE SHARE SUPPORT AGREEMENT" means an agreement to be made between
divine and Delano substantially in the form and content of Annex D.
"FINAL ORDER" means the final order of the Court approving the Arrangement as
such order may be amended or varied at any time prior to the Effective Date or,
if appealed, then, unless such appeal is withdrawn or denied, as affirmed or
amended on appeal.
"IN-THE-MONEY OPTIONS" means the Delano Options that have an exercise price per
Delano Common Share less than or equal to the product of (i) the Exchange Ratio
multiplied by (ii) the closing sale price of the divine Common Stock on the
trading day which is ten Business Days prior to the Effective Date.
"INTERIM ORDER" means the interim order of the Court attached as Annex B, as the
same may be amended, in respect of the Arrangement.
"MATERIAL ADVERSE EFFECT" means, with respect to divine or Delano or their
respective subsidiaries, any change, event, circumstance or effect that is or
would reasonably be expected to be materially adverse to the business, assets
(including intangible assets), financial condition, prospects or results of
operations or financial performance of divine or Delano taken as a whole with
their respective subsidiaries, other than any such change, event, circumstance,
or effect resulting from (i) the announcement of the execution of the
Combination Agreement or the consummation of the transactions contemplated
thereby, (ii) changes, circumstances or conditions generally affecting the
industry in which divine or Delano operates and not having a disproportionate
effect on such party, (iii) changes in general economic conditions in the United
States, Europe, Canada, or other foreign economies where divine or Delano
(together with their respective subsidiaries), as applicable, have operations or
sales, not having a disproportionate effect on such party; (iv) any change in or
effect on the business of divine or Delano (together with their respective
subsidiaries), as applicable, caused by, relating to or resulting from, directly
or indirectly, the transactions contemplated by the Combination Agreement or the
announcement thereof; (v) changes in the trading price for such party's capital
stock; or (vi) any business conditions of such party (including the state of
such person's liquidity or capital resources) to the extent set forth in the
divine and Delano disclosure schedules to the Combination Agreement, as
applicable. Any change in quarterly revenues, cash flow, or earnings from those
most recently reported by such party or from those included in any projections
disclosed to the other parties to the Combination Agreement by such person not
resulting from a change, event, circumstance, or effect that would otherwise
render any representation or warranty of such party in the Combination Agreement
untrue or inaccurate, or from the breach of any covenant of such party in the
Combination Agreement, shall not constitute a Material Adverse Effect.
"NASDAQ" means the Nasdaq National Market.
"NOTICE OF MEETING" means the notice of special meeting to be held on July 25,
2002, accompanying this Circular and sent to Delano shareholders.
"OBCA" means the Business Corporations Act (Ontario), as now in effect and as it
may be amended from time to time prior to the Effective Time.
"PLAN OF ARRANGEMENT" means the plan of arrangement substantially in the form
and content of Annex C attached hereto.
"REPLACEMENT OPTION" means an option to purchase the number of shares of divine
Common Stock equal to the product of the Exchange Ratio multiplied by the number
of Delano Common Shares subject to an In-the-Money Option, as adjusted for
fractional shares, resulting from the exchange under the Plan of Arrangement of
each In-the-Money Option outstanding at the Effective Time that has not been
cancelled, terminated or duly exercised prior to the Effective Time.
"REVISED WARRANT" means a warrant which provides for the purchase of the number
of shares of divine Common Stock equal to the product of the Exchange Ratio
multiplied by the number of Delano Common Shares subject to a Delano Warrant, as
adjusted for fractional shares, resulting from the amendment of each Delano
Warrant outstanding at the Effective Time.
"SEC" means the United States Securities and Exchange Commission.
3
"SPECIAL MEETING" means the special meeting of holders of Delano Common Shares,
including any adjournment or postponement thereof, to be called and held in
accordance with the Interim Order to consider and vote upon the Arrangement.
"SHAREHOLDER VOTING AGREEMENT" means the shareholder voting agreement made
between divine and certain Delano shareholders pursuant to which such Delano
shareholders have agreed, among other things, to vote their Delano Common Shares
in favour of the Arrangement Resolution.
"SPECIAL VOTING SHARE" means the share of preferred stock of divine which
entitles the holder of record of such share to a number of votes at meetings of
holders of shares of divine Common Stock equal to the aggregate number of votes
to which the holders of Exchangeable Shares outstanding from time to time (other
than Exchangeable Shares held by divine or its Affiliates) would be entitled if
such Exchangeable Shares were exchanged by the holders thereof for shares of
divine Common Stock, which share is to be issued, deposited with and voted by
the Trustee as described in the Voting and Exchange Trust Agreement.
"SUPERIOR PROPOSAL" means, under the terms of the Combination Agreement, an
Acquisition Proposal that the board of directors of Delano reasonably believes
in good faith, after consultation with Delano's financial advisor, to be
superior to the Delano shareholders from a financial point of view compared to
the terms of the Arrangement and reasonably capable of being consummated on a
timely basis, taking into account all legal, financial, regulatory and other
aspects of such Acquisition Proposal.
"TRANSFER AGENT" means Computershare Trust Company of Canada.
"TRUSTEE" means a Canadian trust company to be chosen by divine and Delano to
act as trustee under the Voting and Exchange Trust Agreement and any successor
trustee appointed under the Voting and Exchange Trust Agreement.
"TSE" means The Toronto Stock Exchange.
"U.S. GAAP" means United States generally accepted accounting principles.
"VOTING AND EXCHANGE TRUST AGREEMENT" means an agreement to be made among
divine, Delano and the Trustee in connection with the Plan of Arrangement
substantially in the form and content of Annex E attached hereto.
"VOTING RIGHTS" means the voting rights attached to the Special Voting Share.
4
SUMMARY
The following is a summary of certain information contained in this
Circular. This summary is not intended to be complete and is qualified in its
entirety by the more detailed information contained elsewhere in this Circular
and the attached Annexes. This summary may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents referred to for a more complete understanding of the Arrangement
and related transactions. In particular, you should read the Annexes attached to
this Circular, including the Combination Agreement and the form of Plan of
Arrangement, which are attached to this Circular as Annex A and Annex C,
respectively. Capitalized terms used herein without definition have the meanings
ascribed to such terms in the Glossary of Terms or elsewhere in this Circular.
Unless otherwise noted, all dollar amounts in this document are expressed
in U.S. dollars.
PARTIES TO THE TRANSACTION
DELANO TECHNOLOGY CORPORATION
302 Town Centre Blvd.
Markham, Ontario
L3R 0E8
Delano Technology Corporation was formed under the laws of Ontario, Canada
in May 1998. Delano develops and markets customer relationship management (CRM)
software that incorporates advanced analytics with interaction capabilities on a
flexible and scalable technology platform. This technology enables companies to
understand, personalize and manage interactions with customers across multiple
communication channels. These interactions consist of both inbound and outbound
communications through email, company websites, and wireless devices. Companies
can use Delano software applications to gain in-depth customer knowledge by
creating a unified view of the customer across disparate data, and use the
customer insight to initiate marketing campaigns, and route, track and respond
to customer service inquiries. Delano focuses its sales efforts on businesses in
the following industries: financial services, retail, technology,
telecommunications, and transportation and logistics, as well as other
organizations engaged in, or focused on, business-to-business or
business-to-customer commercial opportunities using the internet. Delano is also
increasing its activity with channel partners to further its penetration of
target industries. Delano's professional services group can assist its client's
internal IT personnel to implement its products.
DIVINE, INC.
1301 N Elston Avenue
Chicago, Illinois 60622
divine is a service and software company focused on solutions for the
extended enterprise. divine helps its clients maximize profits through better
collaboration, interaction, and knowledge sharing throughout their entire value
chain, including suppliers, partners, employees and customers. divine
facilitates its customers' integration of advanced enterprise Web solutions with
their business strategies and existing infrastructure, by providing a
combination of professional services, Web-based technology, and managed
applications capabilities. divine focuses on Global 5,000 and high-growth middle
market firms, government agencies and educational institutions, and currently
serves over 20,000 customers.
5
RECOMMENDATION OF DELANO'S BOARD OF DIRECTORS
IN APPROVING THE EXECUTION OF THE COMBINATION AGREEMENT, THE DELANO BOARD
OF DIRECTORS DETERMINED UNANIMOUSLY THAT THE TERMS OF THE ARRANGEMENT ARE FAIR
TO DELANO'S SHAREHOLDERS AND IN THE BEST INTEREST OF DELANO AND ITS
SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS OF DELANO HAS UNANIMOUSLY
APPROVED THE COMBINATION AGREEMENT AND RECOMMENDS THAT DELANO'S SHAREHOLDERS
VOTE FOR THE ARRANGEMENT RESOLUTION.
REASONS FOR THE TRANSACTION
The boards of directors of divine and Delano approved the Combination
Agreement and the transactions contemplated by the Combination Agreement,
including the Arrangement and the issuance of shares of divine Common Stock,
because they determined that the combined company would have the potential to
realize a stronger competitive position and improve long-term operating and
financial results. In approving the Combination Agreement, the Delano board of
directors considered a number of factors, including:
o the opportunity afforded by the transaction for Delano to combine its
operations with those of divine;
o the current industry and market trends affecting Delano;
o the risks and the potential rewards associated with, as an alternative
to the transaction, continuing to execute Delano's strategic plan as
an independent entity operating in a highly competitive environment;
o the historical trading prices of the shares of divine Common Stock and
the Delano Common Shares;
o the structure of the transaction, which effectively permits certain
Canadian resident Delano shareholders to receive Exchangeable Shares
(and certain ancillary rights), generally without realizing a gain for
Canadian federal income tax purposes at the time of the Arrangement;
o the amount of the termination fee and the circumstances in which it is
payable pursuant to the terms of the Combination Agreement;
o the fairness opinion of Delano's financial advisor, Broadview; and
o other factors that the Delano board of directors deemed relevant in
order to make its decision.
See "The Transaction -- Reasons for the Transaction" and "The Transaction
- -- Recommendation of Delano's Board of Directors".
OPINION OF DELANO'S FINANCIAL ADVISOR
In deciding to approve the Combination Agreement and the transactions
contemplated by the Combination Agreement, Delano's board of directors
considered an opinion from its financial advisor, Broadview. On March 12, 2002,
Broadview delivered its opinion to the board of directors of Delano that, as of
the date of such opinion, and subject to the limitations and assumptions in such
opinion, the Exchange Ratio was fair, from a financial point of view, to the
shareholders of Delano.
The full text of the Broadview opinion, which sets forth the assumptions
made, matters considered and limits on the review undertaken, is attached to
this document as Annex G. Delano shareholders are encouraged to read the opinion
carefully. The opinion of Broadview is addressed to the board of directors of
Delano and relates only to the fairness, from a financial point of view, of the
Exchange Ratio to the holders of Delano Common Shares. The opinion does not
address any other aspects of the Arrangement and does not constitute an opinion
or recommendation to any shareholder of Delano as to how such shareholder should
vote with respect to the Arrangement Resolution.
See "The Transaction -- Opinion of Delano's Financial Advisor".
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of the Delano board of directors with
respect to the transaction, you should be aware that certain members of the
management and board of directors of Delano have certain interests in the
transaction that may present them with actual or potential conflicts of interest
in connection with
6
the transaction. The Delano board of directors was aware of these interests and
considered them along with the other matters summarized above. Those interests
include:
o the receipt of options to purchase shares of divine Common Stock in
exchange for options to purchase Delano Common Shares;
o ownership of options to purchase Delano Common Shares and the
potential acceleration of the vesting schedule of such options held by
certain senior employees of Delano in certain circumstances;
o change of control benefits in employment agreements of certain senior
employees of Delano;
o a covenant by divine to grant options to purchase an aggregate of
110,000 shares of divine Common Stock to employees of Delano who
remain employees of Delano after the Effective Time; and
o a covenant by divine to provide directors and officers liability
insurance.
On May 21, 2002, Opera Ventures, LLC, a limited liability company entirely
owned by Vikas Kapoor, Chief Executive Officer of Delano, entered into an
Advisory Agreement with divine pursuant to which Mr. Kapoor will provide divine
certain advisory services after the Effective Time. Under the terms of such
agreement, which is contingent upon the closing of the Arrangement, Opera
Ventures will receive up to $500,000 for one year of service.
Furthermore, the Combination Agreement provides executive officers and
directors of Delano with continuing indemnification rights.
As of the close of business on June 14, 2002, directors and executive
officers of Delano (and their respective Affiliates) collectively owned or
exercised direction or control over 6,368,891 Delano Common Shares which
represents approximately 15% of the Delano Common Shares entitled to vote at the
Special Meeting. The vote required for approval of the Arrangement Resolution at
the Special Meeting is not less than two-thirds of the votes cast at the Special
Meeting by holders of Delano Common Shares.
See "The Transaction -- Interests of Certain Persons in the Transaction".
SHAREHOLDER VOTING AGREEMENT
divine has entered into the Shareholder Voting Agreement with three of the
Delano directors (or their respective related entities) whereunder the directors
have agreed, among other things, to vote their Delano Common Shares in favour of
the Arrangement Resolution. Approximately 14% of the outstanding Delano Common
Shares are subject to the Shareholder Voting Agreement.
STRUCTURE AND EFFECT OF THE TRANSACTION
The Combination Agreement between divine and Delano is dated March 12,
2002. The Combination Agreement and the form of Plan of Arrangement are attached
to this document as Annex A and Annex C, respectively. Please read the
Combination Agreement, the form of Plan of Arrangement and the other transaction
agreements as they are the principal legal documents that govern the
transaction.
The Combination Agreement and Plan of Arrangement provide for the
combination of divine and Delano in a transaction in which Delano will become a
subsidiary of divine. Pursuant to the Arrangement, divine will become the owner
of all of the Delano Common Shares outstanding immediately following the
Arrangement and each Delano shareholder (other than a holder who properly
exercises its dissent rights and divine or its Affiliates) will receive either:
o a number of shares of divine Common Stock equal to the Exchange Ratio
multiplied by the number of Delano Common Shares held by such holder;
or
o in the case of a Delano shareholder who is either, (i) a Canadian
resident for purposes of the Income Tax Act (Canada) not exempt from
tax under Part I of the Income Tax Act (Canada) holding Delano Common
Shares on its own behalf or (ii) a person who holds Delano Common
Shares on behalf of one or more Canadian residents for purposes of the
Income Tax Act (Canada) not exempt from tax under Part I of the Income
Tax Act (Canada), and who, in either case, validly so elects, a number
of Exchangeable
7
Shares issued by Delano (and certain ancillary rights) equal to the
Exchange Ratio multiplied by the number of Delano Common Shares held by
such holder.
Delano shareholders who are not eligible to receive Exchangeable Shares or
who are so eligible but do not validly elect to receive Exchangeable Shares will
receive a number of shares of divine Common Stock equal to the Exchange Ratio
for each Delano Common Share they own.
Delano shareholders who properly exercise dissent rights will not be
entitled to receive Exchangeable Shares or shares of divine Common Stock but
will be entitled to receive payment from Delano representing the fair value of
their Delano Common Shares.
The mechanics of the transaction will involve divine acquiring all of the
outstanding Delano Common Shares other than those Delano Common Shares in
respect of which a valid election has been made to receive Exchangeable Shares
(and other than those of dissenting Delano shareholders who will ultimately
receive the fair value of their Delano Common Shares and those held by divine or
its Affiliates), in exchange for shares of divine Common Stock. Delano Common
Shares in respect of which a valid election has been made to receive
Exchangeable Shares will be exchanged for Exchangeable Shares (which will be
securities issued by Delano). Delano will survive the Arrangement as a
subsidiary of divine. Holders of the Exchangeable Shares will be entitled to
dividend and other rights that are substantially economically equivalent to
those of holders of divine Common Stock. Under the terms of the Voting and
Exchange Trust Agreement, holders of the Exchangeable Shares will be entitled to
vote at meetings of divine stockholders. Exchangeable Shares will be
exchangeable at the option of the holder at any time on a one-for-one basis for
shares of divine Common Stock.
Delano Options that are not "In-the-Money Options" and not exercised prior
to the Effective Time will be terminated immediately prior to the Effective
Time. Each In-the-Money Option that has not been cancelled, terminated or duly
exercised prior to the Effective Time will be exchanged for an option to
purchase a number of shares of divine Common Stock equal to the Exchange Ratio
multiplied by the number of Delano Common Shares subject to such Delano Option,
with the total number of shares subject to the Replacement Option rounded down
to the nearest whole number. The exercise price per share of divine Common Stock
under the Replacement Options shall be equal to the exercise price per Delano
Common Share of such Delano Option immediately prior to the Effective Time
divided by the Exchange Ratio.
Each Delano Warrant outstanding at the Effective Time shall be amended to
provide for the purchase of the number of shares of divine Common Stock equal to
the Exchange Ratio multiplied by the number of Delano Common Shares subject to
such Delano Warrant, as adjusted for fractional shares. Such Revised Warrants
shall provide for an exercise price per share of divine Common Stock equal to
the exercise price per Delano Common Share of such Delano Warrant immediately
prior to the Effective Time divided by the Exchange Ratio.
Employees of Delano who participate in the Delano ESPP will be permitted to
use funds already deposited under the Delano ESPP to purchase Delano Common
Shares before the Election Deadline in order to be able to participate in the
Arrangement. Any remaining funds which have been deposited pursuant to the
Delano ESPP shall be remitted by Delano to the appropriate employees.
Since the date the Combination Agreement was signed, the board of directors
of divine has unanimously adopted a resolution approving, and divine's
stockholders approved, the amendment of divine's certificate of incorporation
authorizing a reverse stock split of the shares of divine Common Stock at a
ratio of 1-for-25. Pursuant to the Combination Agreement, the Exchange Ratio was
adjusted from 1.1870 to 0.04748 to reflect fully such reverse stock split.
Assuming that all Delano Common Shares are exchanged for shares of divine
Common Stock and based upon the number of Delano Common Shares and shares of
divine Common Stock outstanding as of June 14, 2002, immediately following
completion of the Arrangement, existing Delano shareholders would hold
approximately 2,062,042 shares of divine Common Stock, representing
approximately 10% of the outstanding shares of divine Common Stock after the
Arrangement and approximately 5% of the outstanding shares of divine Common
Stock after the acquisition by divine of Viant Corporation and the private
placement of the Series B convertible preferred stock of divine with Oak
Investment Partners and certain of its affiliates (assuming all of the preferred
stock and warrants issued and, pending stockholder approval, to be issued
pursuant to the private placement are converted or exercised). See "Business of
divine -- Proposed Acquisition
8
of Viant Corporation" and "Business of divine -- Private Placement with Oak
Investment Partners". Therefore, the approval of the Arrangement by divine's
stockholders is not required.
See "The Transaction", "Transaction Mechanics", "Description of
Exchangeable Shares", and "Pro Forma Capitalization".
COMPLETION AND EFFECTIVENESS OF THE TRANSACTION
divine and Delano are working toward satisfying the conditions to the
consummation of the Arrangement and completing the transaction as quickly as
possible. The transaction will be completed as soon as practicable after the
requisite shareholder, regulatory and court approvals have been obtained and are
final and all other conditions to the transaction have been satisfied or waived.
divine and Delano currently plan to complete the transaction during July 2002.
Because the Arrangement is subject to regulatory approvals and other conditions,
some of which are beyond divine's and Delano's control, the exact timing cannot
be predicted.
See "The Transaction -- Court Approval of the Arrangement and Completion of
the Transaction".
THE COMBINATION AGREEMENT
No Solicitation
Delano has agreed that, while the transaction is pending, it will not
solicit, initiate or engage in discussions with or disclose any non-public
information to, any third parties regarding an alternative transaction, such as
a merger, business combination or sale of a material amount of assets or capital
stock, provided that Delano may enter into such discussions with a third party
with respect to such a transaction if Delano's board of directors determines,
subject to the satisfaction of certain conditions, that such a transaction is
superior from a financial point of view to Delano's shareholders to the
transaction with divine.
See "The Combination Agreement -- Material Covenants ".
Conditions to Completion of the Arrangement
Completion of the Arrangement is subject to the satisfaction of a number of
conditions, including:
o the issuance of the Interim Order and the Final Order of the Court;
o the approval of the Arrangement Resolution by at least two-thirds of
the votes cast by the holders of Delano Common Shares who are
represented at the Special Meeting and in accordance with any other
conditions imposed by the Interim Order attached as Annex B to this
document;
o the approval by the Canadian securities regulatory authorities of the
issuance and resale of divine Common Stock and Exchangeable Shares
pursuant to the Arrangement, and the issuance and resale of divine
Common Stock upon exchange of the Exchangeable Shares and the exercise
of the Replacement Options;
o the absence of any law, decree or order preventing the consummation of
the Arrangement;
o the accuracy of the representations and warranties of divine and
Delano contained in the Combination Agreement;
o the performance or compliance by each party with its covenants in all
material respects;
o the compliance with applicable requirements under the 1933 Act for the
issuance of divine Common Stock;
o a Form S-3 pursuant to which shares of divine Common Stock issuable
upon exchange of the Exchangeable Shares can be issued having become
effective in accordance with the 1933 Act;
o the approval for listing on NASDAQ of the shares of divine Common
Stock to be issued pursuant to the Arrangement, upon exercise of the
Replacement Options and upon exchange of the Exchangeable Shares; and
o holders of no more than 5% of the issued and outstanding Delano Common
Shares having exercised and not withdrawn their dissent rights.
9
Some of the conditions to completion of the Arrangement may be waived by
the party entitled to assert the benefit of the condition.
See "The Combination Agreement -- Conditions to Completion of the
Arrangement".
Termination of the Combination Agreement
Delano and divine may mutually agree to terminate the Combination Agreement
without completing the transaction if the boards of directors of both divine and
Delano authorize termination. In addition, either Delano or divine may terminate
the Combination Agreement under any of the following circumstances:
o if the Arrangement has not occurred by August 15, 2002 (or September
15, 2002 if the failure to consummate the Arrangement prior to that
date was due to the failure to obtain any governmental approval,
waiver or consent);
o if a law is passed or a final non-appealable court or other
governmental order is issued prohibiting the Arrangement;
o if the requisite approval of the holders of Delano Common Shares is
not obtained; provided, however, that Delano may not terminate in such
event if the failure to obtain the approval of the holders of Delano
Common Shares shall have been caused by any action or failure to act
of Delano that constitutes a breach of the Combination Agreement;
o if the conditions to completion of the Arrangement would not be
satisfied because of a breach by the other party of any of its
covenants or other agreements contained in the Combination Agreement
or if any of the other party's representations or warranties becomes
untrue; or
o the other party materially breaches any of its representations,
warranties, covenants or agreements as set forth in the Combination
Agreement and that breach has not been, or cannot be, cured within 20
business days of such party receiving notice of such breach.
divine may also terminate the Combination Agreement under any of the
following circumstances:
o if Delano's board of directors withholds, withdraws or changes, in a
manner adverse to divine, its recommendation in favour of the adoption
and approval of the Combination Agreement and the transactions
contemplated by the Combination Agreement;
o if Delano's board of directors approves or recommends any Acquisition
Proposal from a third party;
o if Delano breaches the non-solicitation covenant, including if Delano
enters into a letter of intent or other agreement (other than a
confidentiality or standstill agreement) accepting any Acquisition
Proposal from a third party; or
o if a third party unaffiliated with divine undertakes a tender or
exchange offer relating to the securities of Delano, and Delano does
not recommend that its shareholders reject the offer within 15 days
after the offer is first made.
See "The Combination Agreement -- Termination of the Combination
Agreement".
Payment of Termination Fee
Under some circumstances, Delano may have to pay divine a termination fee
of $1 million and reimburse divine for up to $500,000 in expenses incurred by
divine if the Combination Agreement is terminated. Under other circumstances,
divine must pay Delano a termination fee of $2 million and reimburse Delano for
up to $500,000 in expenses incurred by Delano if the Combination Agreement is
terminated.
See "The Combination Agreement -- Payment of Termination Fees and
Expenses".
THE EXCHANGEABLE SHARES
The Exchangeable Shares will be securities of Delano that, together with
certain ancillary rights, are substantially economically equivalent to shares of
divine Common Stock. Holders of Exchangeable Shares will have certain ancillary
rights which consist of the Exchange Right, the Automatic Exchange Rights and
the Voting
10
Rights. As used in this Circular, the phrase "substantially economically
equivalent" in comparing the Exchangeable Shares to shares of divine Common
Stock does not take into account differing tax treatment of Exchangeable Shares
and shares of divine Common Stock. See "Tax Considerations for Delano
Shareholders -- Canadian Tax Considerations for Delano Shareholders". Pursuant
to the Plan of Arrangement, the terms of the Exchangeable Shares and the Voting
and Exchange Trust Agreement, the holders of Exchangeable Shares will have the
following rights:
o the right to exchange such shares for shares of divine Common Stock on
a one-for-one basis;
o the right to receive dividends, on a per share basis, in amounts (or
property in the case of non-cash dividends) which are the same as or
economically equivalent to, and which are payable at the same time as,
dividends declared on the shares of divine Common Stock;
o the right to vote at all shareholder meetings at which divine common
stockholders are entitled to vote; and
o the right to participate on a pro rata basis with the holders of
divine Common Stock in the distribution of assets of divine or upon
certain specified events relating to the voluntary or involuntary
liquidation, dissolution, winding up or other distribution of the
assets of divine among its stockholders for the purpose of winding up
its affairs, through the mandatory exchange of Exchangeable Shares for
shares of divine Common Stock.
Holders of Exchangeable Shares will be entitled, generally, to require
Delano to redeem any or all of their Exchangeable Shares for shares of divine
Common Stock for a purchase price per share of one share of divine Common Stock
and an amount equal to all declared and unpaid dividends on one Exchangeable
Share. However, in the event that a holder of Exchangeable Shares delivers
notice of its exercise of such redemption right, divine will have the overriding
right to purchase, in lieu of Delano, all of such holder's Exchangeable Shares
in respect of which the right to require redemption shall have been exercised.
Subject to applicable law and divine's call right (described immediately
below), on a date on or after the third anniversary of the Effective Date, as
established by Delano's board of directors, all of the outstanding Exchangeable
Shares (other than those held by divine or its Affiliates) will be redeemed by
Delano for a redemption price per share of one share of divine Common Stock and
an amount equal to all declared and unpaid dividends on one Exchangeable Share.
divine will have the overriding right to purchase on such redemption date the
outstanding Exchangeable Shares for a purchase price per share of one share of
divine Common Stock and an amount equal to all declared and unpaid dividends on
one Exchangeable Share.
In certain circumstances, Delano will have the right to require a
redemption of the Exchangeable Shares prior to the third anniversary of the
Effective Date, which right of early redemption is also subject to divine's
overriding right to purchase on such early redemption date the outstanding
Exchangeable Shares, for a purchase price per share of one share of divine
Common Stock and an amount equal to all declared and unpaid dividends on one
Exchangeable Share. An early redemption may occur, among certain other
circumstances, if:
o there are outstanding at any time after the first anniversary of the
effective date of the Arrangement fewer than 30% of the number of
Exchangeable Shares issuable as determined at the Effective Date
(other than Exchangeable Shares held by divine and its Affiliates);
o there are outstanding at any time fewer than 10% of the number of
Exchangeable Shares issuable as determined at the Effective Date
(other than Exchangeable Shares held by divine and its Affiliates); or
o any merger, amalgamation, arrangement, tender offer, material sale of
shares or rights or similar transaction involving divine occurs or any
proposal related to any such transaction exists; provided that, among
other things, the board of directors of Delano determines that it is
not reasonably practical to substantially replicate the terms and
conditions of the Exchangeable Shares in connection with such a
transaction and the redemption of Exchangeable Shares is necessary to
enable the completion of the transaction.
divine will also have the right to purchase all of the Exchangeable Shares
for consideration per share consisting of one share of divine Common Stock and
an amount equal to all declared and unpaid dividends on
11
one Exchangeable Share in the event of a change in Canadian and Ontario tax law
which would allow Canadian resident holders of Exchangeable Shares to exchange
such shares for divine Common Stock on a tax-deferred basis.
See "Description of Exchangeable Shares -- Mandatory Redemption by Delano
and divine Call Right".
TAX CONSIDERATIONS FOR DELANO SHAREHOLDERS
DELANO SHAREHOLDERS SHOULD READ CAREFULLY THE INFORMATION UNDER "TAX
CONSIDERATIONS FOR DELANO SHAREHOLDERS," WHICH QUALIFIES THE INFORMATION SET
FORTH BELOW, AND SHOULD CONSULT THEIR TAX ADVISORS. NO ADVANCE INCOME TAX
RULINGS HAVE BEEN SOUGHT OR OBTAINED WITH RESPECT TO ANY OF THE TRANSACTIONS
DESCRIBED HEREIN.
Canada
Those Canadian resident Delano shareholders who are entitled to receive
Exchangeable Shares and validly elect to receive such shares will generally
defer recognition of any accrued gain on their Delano Common Shares for Canadian
federal income tax purposes. Canadian resident Delano shareholders receiving
shares of divine Common Stock upon the Arrangement will generally recognize any
accrued gain or loss on their Delano Common Shares for Canadian federal income
tax purposes. Shares of divine Common Stock received by Delano shareholders that
are Canadian deferred income plans will be "qualified investments" but will be
"foreign property" for Canadian federal income tax purposes. Delano shareholders
who are not Canadian residents will not generally be subject to Canadian federal
income tax on the exchange of Delano Common Shares for shares of divine Common
Stock.
See "Tax Considerations for Delano Shareholders -- Canadian Tax
Considerations for Delano Shareholders".
United States
Delano shareholders who are U.S. Holders (defined below at "Tax
Considerations For Delano Shareholders -- United States Federal Income Tax
Considerations for U.S. Holders") may be justified in taking the position that
the Arrangement is a tax-free reorganization for U.S. federal income tax
purposes. If the Arrangement constitutes a tax-free reorganization for U.S.
federal income tax purposes, then U.S. Holders should not generally recognize
gain or loss for U.S. federal income tax purposes upon the receipt solely of
shares of divine Common Stock in exchange for their Delano Common Shares
pursuant to the Arrangement. If the Arrangement is not a tax-free reorganization
for U.S. federal income tax purposes, then U.S. Holders would generally
recognize gain or loss for U.S. federal income tax purposes upon their exchange
of Delano Common Shares for shares of divine Common Stock. Furthermore, U.S.
Holders may also be subject to the "passive foreign investment company" rules as
described in more detail below at "Tax Considerations for Delano Shareholders --
United States Federal Income Tax Considerations for U.S. Holders".
See "Tax Considerations for Delano Shareholders".
APPROVALS REQUIRED TO COMPLETE THE TRANSACTION
Delano Shareholder Approval
The Special Meeting will be held on July 25, 2002. At the Special Meeting,
the holders of Delano Common Shares will be asked to approve the Arrangement
Resolution. The Arrangement Resolution must be approved by the affirmative vote
of not less than two-thirds of the votes cast on the Arrangement Resolution by
the holders of Delano Common Shares present in person or by proxy at the Special
Meeting.
Approximately 14% of the outstanding Delano Common Shares are subject to an
agreement among certain Delano shareholders and divine pursuant to which such
Delano shareholders have already agreed to vote in favour of the Arrangement
Resolution.
See "The Special Meeting of Delano Shareholders -- Vote Required".
12
Court Approval
An Arrangement under the OBCA requires Court approval. Prior to the mailing
of this document in connection with the Special Meeting, Delano obtained the
Interim Order from the Court providing for the calling and holding of the
Special Meeting and other procedural matters. Subject to the approval of the
Arrangement Resolution at the Special Meeting, the hearing to obtain the Final
Order of the Court is scheduled to take place on or about July 30, 2002 at 10:00
a.m. (Toronto time) at the Toronto courthouse located at 393 University Avenue,
Toronto, Ontario.
See "The Transaction -- Court Approval of the Arrangement and Completion of
the Transaction".
RESTRICTIONS ON THE ABILITY OF DELANO SHAREHOLDERS TO SELL SHARES OF DIVINE
COMMON STOCK AND EXCHANGEABLE SHARES
All shares of divine Common Stock and all Exchangeable Shares received by
Delano shareholders in connection with the transaction and all shares of divine
Common Stock received upon exchange of Exchangeable Shares will be freely
transferable under U.S. securities laws unless a Delano shareholder is an
Affiliate of Delano prior to the completion of the transaction under the 1933
Act or becomes an Affiliate of divine after the completion of the transaction.
Shares of divine Common Stock held by Delano's or divine's Affiliates may only
be sold in compliance with Rule 145 under the 1933 Act.
divine applied on April 11, 2002, for a ruling of securities regulatory
authorities in Canada that the issuance of the Exchangeable Shares and the
shares of divine Common Stock issuable under the Arrangement, upon exchange of
Exchangeable Shares, upon exercise of Replacement Options and upon exercise of
Revised Warrants be exempted from otherwise applicable prospectus and
registration requirements. Application has also been made to permit resale of
those shares in various jurisdictions without restriction by persons other than
a "control person", subject to other customary qualifications for such orders,
including that no unusual effort is made to prepare the market for any such
resale or to create a demand for the securities which are the subject of any
such resale, no extraordinary commission or consideration is paid in respect
thereof and that any resale of shares of divine Common Stock is made through the
facilities of a stock exchange or market outside of Canada. The consummation of
the Arrangement is conditional upon receipt of these rulings or orders.
See "The Transaction -- Resale of Exchangeable Shares and Shares of divine
Common Stock".
STOCK EXCHANGE LISTINGS
The shares of divine Common Stock issued in connection with the transaction
will be quoted on NASDAQ. The Exchangeable Shares will not be listed or quoted
on any stock exchange.
See "The Transaction -- Stock Exchange Listings".
PROCEDURE FOR EXCHANGE OF SHARE CERTIFICATES BY SHAREHOLDER
Enclosed with this Circular is a letter of transmittal and election form
for exchanging Delano Common Shares. The letter of transmittal and election form
is printed on blue paper and when properly completed, duly executed and returned
together with a certificate or certificates for Delano Common Shares and all
other required documents, will enable each Delano shareholder to obtain
certificate(s) for that number of shares of divine Common Stock or (in the case
of eligible and validly electing Delano shareholders) Exchangeable Shares
(together with certain ancillary rights) equal to the number of Delano Common
Shares held by such Delano shareholder multiplied by the Exchange Ratio (subject
to adjustment for fractional shares, as discussed below). See "Transaction
Mechanics" and "Description of Exchangeable Shares". The letter of transmittal
and election form and the share certificate or certificates for Delano Common
Shares must be sent to Computershare Trust Company of New York at its offices in
New York, New York, USA. A pre-addressed envelope is included for your
convenience.
13
PROCEDURE FOR VOTING
Enclosed with this Circular is a proxy, which is printed on yellow paper.
Only the completed proxy is to be sent (in the enclosed postage pre-paid within
Canada envelope marked "For Proxy Only") to Computershare Trust Company of
Canada at its offices in Toronto, Ontario, Canada.
DISSENTERS' RIGHTS
Registered Delano shareholders who properly exercise their dissent rights
pursuant to the Interim Order issued by the Court will be entitled to be paid
the fair value of their Delano Common Shares by Delano. The dissent procedures
require that a registered Delano shareholder who wishes to dissent must provide
Delano a dissent notice prior to 4:00 p.m. (Toronto time) on the last Business
Day preceding the Special Meeting. It is important that Delano shareholders
strictly comply with this requirement, which is different from the statutory
dissent provisions of the OBCA which would permit a dissent notice to be
provided at or prior to the Special Meeting.
See "Dissenting Shareholder Rights".
14
RISK FACTORS
THE ARRANGEMENT INVOLVES A SUBSTANTIAL AMOUNT OF RISK. IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS DOCUMENT, THE FOLLOWING RISK FACTORS SHOULD
BE CONSIDERED BY DELANO SHAREHOLDERS IN EVALUATING THE TRANSACTION AND DECIDING
WHETHER TO APPROVE THE ARRANGEMENT RESOLUTION. BY VOTING IN FAVOUR OF THE
ARRANGEMENT RESOLUTION, DELANO SHAREHOLDERS WILL BE CHOOSING TO INVEST IN SHARES
OF DIVINE COMMON STOCK OR EXCHANGEABLE SHARES (AND CERTAIN ANCILLARY RIGHTS)
THAT ARE EXCHANGEABLE FOR SHARES OF DIVINE COMMON STOCK. AN INVESTMENT IN DIVINE
COMMON STOCK OR EXCHANGEABLE SHARES INVOLVES A SUBSTANTIAL AMOUNT OF RISK.
GENERAL RISKS RELATING TO THE PROPOSED TRANSACTION
DIVINE AND DELANO MAY NOT ACHIEVE THE BENEFITS THEY EXPECT FROM THE ARRANGEMENT,
IN WHICH CASE THE ARRANGEMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMBINED COMPANY'S BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
If the benefits of the Arrangement do not exceed the costs associated with
the Arrangement, including any dilution to divine shareholders resulting from
the issuance of shares in connection with the transaction, divine's financial
results, including earnings per share, could be adversely affected.
The successful execution of the Arrangement will involve risks and may not
be successful. These risks include the difficulty of incorporating technology
and rights into the combined company's products and services and the
unanticipated expenses related to technology integration.
The combined company may not succeed in addressing these risks or any other
problems encountered in connection with the Arrangement. There can be no
assurance that divine will successfully integrate the businesses, operations or
product lines of divine and Delano, or that divine will realize any of the
anticipated benefits of the Arrangement. Additionally, neither divine nor Delano
can give any assurance that the growth rate of the combined company will equal
the growth rate that has been experienced by divine or Delano in the past.
BECAUSE DELANO SHAREHOLDERS WILL RECEIVE A FIXED NUMBER OF SHARES OF DIVINE
COMMON STOCK OR EXCHANGEABLE SHARES, THE ACTUAL DOLLAR VALUE OF THE DIVINE
COMMON STOCK OR EXCHANGEABLE SHARES THAT DELANO SHAREHOLDERS RECEIVE WHEN THE
TRANSACTION IS COMPLETED MAY BE LESS THAN IT IS ON THE DATE THAT DELANO
SHAREHOLDERS VOTE ON THE TRANSACTION.
Upon the Arrangement's completion, each Delano Common Share will be
exchanged for either a number of shares of divine Common Stock equal to the
Exchange Ratio or, at the option of a Delano shareholder who is entitled to
elect to receive Exchangeable Shares, a number of Exchangeable Shares (and
certain ancillary rights) equal to the Exchange Ratio. Each Exchangeable Share
will be exchangeable after the Effective Time at the option of the holder for
one share of divine Common Stock. The Exchange Ratio for shares of divine Common
Stock is fixed, and there will be no adjustment for changes in the market price
of either Delano Common Shares or shares of divine Common Stock. In addition,
neither Delano nor divine may terminate the Combination Agreement or "walk away"
from the transaction solely because of changes in the market price of divine
Common Stock or Delano Common Shares. Accordingly, the specific dollar value of
shares of divine Common Stock or Exchangeable Shares that Delano shareholders
will receive upon the Arrangement's completion will depend on the market value
of shares of divine Common Stock at that time and may decrease from the date
Delano shareholders vote on the Arrangement. The share price of shares of divine
Common Stock is subject to the general price fluctuations in the market for
publicly traded equity securities and has experienced significant volatility.
divine and Delano urge you to obtain recent market quotations for shares of
divine Common Stock and Delano Common Shares and consult your own investment
advisor prior to voting. divine cannot predict or give any assurances as to the
market price of shares of divine Common Stock at any time before or after the
completion of the Arrangement.
THE MARKET PRICE OF BOTH SHARES OF DIVINE COMMON STOCK AND DELANO COMMON SHARES
MAY FLUCTUATE.
The market price for shares of divine Common Stock and Delano Common Shares
could each fluctuate significantly in response to various factors and events,
including the differences between divine's and Delano's
15
actual financial or operating results and those expected by investors and
analysts, changes in analysts' projections or recommendations, changes in
general economic or market conditions and broad market fluctuations. Because
historical market prices are not indicative of future market prices, Delano
shareholders should obtain current market quotations for the shares of divine
Common Stock and the Delano Common Shares prior to voting. There can be no
assurance that the market value of shares of divine Common Stock (and
accordingly the Exchangeable Shares) that the holders of Delano Common Shares
receive after consummation of the transaction will equal or exceed the market
value of the Delano Common Shares held by such shareholders prior to the
Effective Time.
DELANO SHAREHOLDERS WHO RECEIVE EXCHANGEABLE SHARES AND LATER REQUEST TO
EXCHANGE SUCH SHARES FOR DIVINE COMMON STOCK WILL NOT RECEIVE THE SHARES OF
DIVINE COMMON STOCK FOR SEVEN TO TEN BUSINESS DAYS FROM THE DATE THAT THEY
REQUEST SUCH AN EXCHANGE.
Delano shareholders who receive Exchangeable Shares on the Arrangement and
later request to receive divine Common Stock in exchange for their Exchangeable
Shares will not receive divine Common Stock for seven to ten Business Days after
the applicable request. During this seven to ten Business Day period, the market
price of divine Common Stock may increase or decrease. Any such increase or
decrease would affect the value of the consideration to be received by the
holder of Exchangeable Shares on the effective date of exchange.
FOR DELANO SHAREHOLDERS WHO ARE ENTITLED TO ELECT TO RECEIVE AND SO RECEIVE
EXCHANGEABLE SHARES AND THEREBY DEFER CANADIAN TAX ON ANY ACCRUED CAPITAL GAINS,
UNDER CURRENT LAW SUCH TAX DEFERRAL WILL ONLY BE AVAILABLE FOR AS LONG AS THEY
HOLD EXCHANGEABLE SHARES.
The Arrangement has been structured to allow Delano shareholders who are
either, (i) Canadian residents for the purposes of the Income Tax Act (Canada)
not exempt from tax under Part I of the Income Tax Act (Canada) holding Delano
Common Shares on their own behalf or (ii) a person who holds Delano Common
Shares on behalf of one or more Canadian residents for purposes of the Income
Tax Act (Canada) not exempt from tax under Part I of the Income Tax Act (Canada)
and who, in either case, validly choose to receive Exchangeable Shares (and
certain ancillary rights) pursuant to the Arrangement, to generally defer
Canadian income taxation of accrued capital gains on their Delano Common Shares.
Under current Canadian tax law, this deferral will generally continue only for
as long as those Delano shareholders continue to hold those Delano Exchangeable
Shares. Under current Canadian tax legislation, those Delano shareholders will
generally recognize a taxable dividend and/or a gain or loss upon the exchange
of their Exchangeable Shares for divine Common Stock. However, based on an
announcement of the Canadian Minister of Finance, it is possible that
legislation will be introduced under which an exchange of Exchangeable Shares
for divine Common Stock will be treated as a tax-deferred exchange in certain
circumstances.
The exchange of Exchangeable Shares for divine Common Stock may occur at
any time after the Effective Date if certain events occur permitting early
redemption, and in any event the Exchangeable Shares are redeemable at the
option of Delano at any time after three years. Because of the existence of the
call rights of divine and the exchange right, a holder of Exchangeable Shares
cannot control whether such holder will receive divine Common Stock by way of
Delano redeeming the Exchangeable Shares or by way of divine purchasing the
Exchangeable Shares. The Canadian federal income tax consequences of a
redemption differ from those of a purchase.
THE SALES AND MARKETING CHANNELS OF BOTH DIVINE AND DELANO MAY BE NEGATIVELY
AFFECTED.
divine and Delano may experience disruption in sales and marketing as a
result of attempting to integrate their respective sales channels, and may be
unable to smoothly or effectively correct such disruption, or to successfully
execute their sales and marketing objectives, even after the companies'
respective sales and marketing forces have been integrated. In addition, sales
cycles for the various products may vary significantly from product to product.
Sales personnel not accustomed to the different sales cycles and approaches
required for products newly added to their portfolio may experience delays and
difficulties in selling these newly added products. Furthermore, it may be
difficult to retain key sales personnel during the period prior to and after the
Effective Date. As a result, divine and Delano may be unable to take full
advantage of the combined sales
16
forces' efforts, and the sales approach and distribution channels of one company
may be ineffective in promoting the products of the other, which may have a
material adverse effect on the business, financial condition or operating
results of the combined company.
THE MARKET PRICE OF DIVINE COMMON STOCK (AND ACCORDINGLY OF THE EXCHANGEABLE
SHARES) MAY DECLINE AS A RESULT OF THE ARRANGEMENT.
The market price of divine Common Stock may decline as a result of the
Arrangement for a number of reasons, including if:
o divine does not achieve the perceived benefits of the transaction as
rapidly or to the extent anticipated by financial or industry
analysts; or
o the effect of the Arrangement on divine's financial results is not
consistent with the expectations of financial or industry analysts.
FAILURE TO COMPLETE THE ARRANGEMENT COULD NEGATIVELY IMPACT DELANO'S AND/OR
DIVINE'S STOCK PRICE, FUTURE BUSINESS AND OPERATIONS.
If the Arrangement is not completed, Delano and/or divine may be subject to
a number of material risks, including the following:
o Delano may be required under certain circumstances to pay divine a
termination fee of $1 million and reimburse divine for expenses
incurred by divine up to $500,000;
o divine may be required under certain circumstances to pay Delano a
termination fee of $2 million and reimburse Delano for expenses
incurred by Delano up to $500,000;
o to the extent that the relevant current market price reflects a market
assumption that the Arrangement will be completed, the price of Delano
Common Shares may decline; and
o certain costs related to the Arrangement, such as legal, accounting
and financial advisor fees, must be paid even if the Arrangement is
not completed.
In addition, Delano's and/or divine's customers and strategic partners, in
response to the announcement of the Arrangement, may delay or defer decisions
concerning the applicable company. Any delay or deferral in those decisions by
customers, strategic partners or suppliers could have a material adverse effect
on the business and operations of the applicable company, regardless of whether
the Arrangement is ultimately completed. Similarly, current and prospective
Delano and/or divine employees may experience uncertainty about their future
roles with divine until divine's strategies with regard to Delano are announced
or executed. This may adversely affect Delano's and/or divine's ability to
attract and retain key management, sales, marketing and technical personnel.
Further, if the transaction is terminated and Delano's board of directors
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to pay an equivalent or
more attractive price than the price to be paid by divine pursuant to the
Arrangement.
DIVINE AND DELANO EXPECT TO INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE
TRANSACTION.
The combined estimated fees, costs and expenses of divine and Delano in
connection with the transaction including, without limitation, financial
advisors' fees, filing fees, legal and accounting fees and printing and mailing
costs are anticipated to be approximately $1.75 million. divine believes the
combined company may incur charges to operations, which are not currently
reasonably estimable, in the quarter in which the Arrangement is completed or
the following quarters, to reflect costs associated with integrating the two
companies. There can be no assurance that the combined company will not incur
additional material charges in subsequent quarters to reflect additional costs
associated with the transaction.
17
DELANO MAY BE UNABLE TO OBTAIN THE REQUIRED COURT APPROVALS FOR COMPLETING THE
ARRANGEMENT.
Under the OBCA, the Arrangement must be approved by the Court. Prior to the
mailing of this document, Delano obtained the Interim Order providing for the
calling and holding of the Special Meeting and other procedural matters. Subject
to the approval of the Arrangement Resolution at the Special Meeting, the
hearing to obtain the Final Order of the Court is expected to take place on or
about July 30, 2002 at 10:00 a.m. (Toronto time) at the Toronto courthouse at
393 University Avenue, Toronto, Ontario.
DELANO EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS THAT MAY INFLUENCE THEM
TO SUPPORT AND APPROVE THE TRANSACTION.
The officers and directors of Delano have interests in the transaction that
are in addition to, or different than, those of Delano shareholders generally.
These interests may include the following:
o the receipt of options to purchase shares of divine Common Stock in
exchange for options to purchase Delano Common Shares;
o the potential receipt of change of control benefits in the employment
agreements of certain senior employees of Delano in certain limited
circumstances in which such senior employees' employment with the
combined company is terminated following consummation of the
transaction;
o the receipt of indemnification and insurance coverage with respect to
acts taken and omissions to take action in their capacities as
officers and directors of Delano;
o the ownership of options and restricted shares to purchase Delano
Common Shares and the potential acceleration of the vesting schedule
of such options and restricted shares held by certain senior employees
of Delano, including some whose employment will be terminated
following the Effective Time;
o the covenant by divine to grant options to purchase an aggregate of
110,000 shares of divine Common Stock to employees of Delano who
remain employees of Delano after the Effective Date;
o divine has entered into the Shareholder Voting Agreement with three of
the Delano directors (or their respective related entities) whereunder
the directors have agreed, among other things, to vote their Delano
Common Shares in favour of the Arrangement; and
o divine entered into an Advisory Agreement with Opera Ventures, LLC, a
limited liability company entirely owned by Vikas Kapoor, Chief
Executive Officer of Delano, pursuant to which Mr. Kapoor will provide
divine with certain advisory services after the Effective Time and
pursuant to which Opera Ventures will receive up to $500,000 for one
year of service.
For the above reasons, the directors and officers of Delano could be more
likely to vote to approve the Arrangement Resolution than if they did not hold
these interests. Delano shareholders should consider whether these interests may
have influenced these directors and officers to support or recommend the
transaction. The Delano board of directors was aware of these interests when it
approved the Combination Agreement. See "The Transaction -- Interests of Certain
Persons in the Transaction".
RISKS RELATING TO DIVINE
On April 5, 2002, divine announced that it had entered into a definitive
agreement with Viant Corporation ("Viant") (NASDAQ: VIAN), a provider of digital
business solutions, under which divine will acquire Viant in a stock-for-stock
transaction. Under the terms of the agreement, which has been approved by the
board of directors of divine and Viant, divine will acquire all of the
outstanding shares of Viant common stock for approximately 8 million shares of
divine's Common Stock, subject to certain customary closing conditions,
including the approval of the stockholders of both divine and Viant.
On May 31, 2002, divine announced that it had entered into an agreement
with Oak Investment Partners and certain of its affiliates for the private
placement of the Series B convertible preferred stock of divine and warrants for
divine Series B convertible preferred stock for an aggregate purchase price of
$61 million. Under
18
the terms of the agreement and, pending stockholder approval, Oak Investment
Partners and its affiliates will hold, on a fully diluted basis, 11,877,831
shares of divine Common Stock.
The issuance of divine Common Stock in connection with the Viant
transaction and the private placement with Oak Investment Partners will result
in significant dilution of shares of divine Common Stock. Further details with
respect to divine's proposed transaction with Viant and the private placement
with Oak Investment Partners are contained in divine's Forms 8-K attached hereto
as Annex Q and Annex V, respectively.
Other risks relating to divine include:
o divine's ability to become cash flow positive before it depletes its
unrestricted cash reserves or becomes insolvent;
o divine's ability to maintain its NASDAQ listing;
o divine's ability to execute its integrated Web-based software
services, professional services, and managed services strategy;
o divine's ability to successfully implement its acquisition strategy,
including its ability to integrate the operations, personnel,
products, and technologies of, and address the risks associated with,
acquired companies;
o divine's ability to develop enterprise Web software and services;
o the uncertainty of customer demand for enterprise Web software and
services;
o divine's ability to expand its customer base and achieve and maintain
profitability;
o divine's ability to retain key personnel;
o divine's ability to predict revenues from project-based engagements;
o divine's ability to keep pace with technological developments and
industry requirements;
o divine's ability to efficiently manage its growing operations;
o changes in the market for Internet services and the economy in
general, including as a result of any additional terrorist attacks or
responses to terrorist attacks;
o increasing competition from other providers of software solutions,
professional services, and managed applications;
o the extent to which customers want to purchase software applications
under hosted subscription-based models; and
o divine's ability to address the risks associated with international
operations.
Additional risk factors relating to the business of divine, the industry
within which it operates, and holding shares of divine Common Stock are set out
in divine's Annual Report on Form 10-K for the year ended December 31, 2001,
attached hereto as Annex I and divine's Form 10-Q for the three months ended
March 31, 2002 attached hereto as Annex T.
RISKS RELATING TO DELANO
The risk factors relating to the business of Delano and the industry within
which it operates are set out in Delano's Form 10-Q for the three and nine-month
periods ended December 31, 2001, attached hereto as Annex M.
19
COMPARATIVE MARKET PRICE AND TRADING VOLUME INFORMATION
divine Common Stock is quoted on NASDAQ under the symbol "DVIN", except for
the period May 29, 2002 through June 25, 2002, divine Common Stock will be
quoted under the symbol "DVIND". Delano Common Shares are traded on the TSE,
under the symbol "DLN" and on NASDAQ under the symbol "DTEC".
The following table sets forth, for the periods indicated, the high and low
sale prices per share, which prices have been adjusted to reflect divine's 1 for
25 reverse stock split effected on May 29, 2002, and the average trading volumes
of divine Common Stock as reported on NASDAQ.
DIVINE
COMMON STOCK DIVINE
PER SHARE SALES COMMON STOCK
PRICES DAILY AVERAGE
--------------- TRADING
FISCAL QUARTERS HIGH LOW VOLUME
- --------------- ---- --- ------
$ $
2000:
Third Quarter(1) ...... 311.00 90.75 12,747
Fourth Quarter ........ 106.25 25.00 6,803
2001:
First Quarter ......... 51.50 25.00 6,828
Second Quarter ........ 71.00 27.25 4,919
Third Quarter ......... 53.75 13.75 7,204
Fourth Quarter ........ 21.25 10.50 38,524
2002:
First Quarter ......... 23.75 12.25 53,206
April ................. 12.50 6.25 136,354
May ................... 7.50 4.00 84,197
June(2) ............... 5.21 3.73 50,115
- -------------
(1) divine completed its initial public offering on July 12, 2000.
(2) Through June 14, 2002.
20
The following table sets forth, for the periods indicated, the high and low
sale prices (expressed in Canadian dollars) per Delano Common Share and average
trading volume of Delano Common Shares as reported on the TSE, and as reported
on NASDAQ.
THE TORONTO STOCK
EXCHANGE(2) NASDAQ(1)
----------------------------- ---------------------------------
AVERAGE DAILY AVERAGE
HIGH LOW VOLUME HIGH LOW VOLUME
----- ----- ------- ----- ----- -------------
Cdn.$ Cdn.$ $ $
2000:
First Quarter(1) ..... 64.00 20.50 291,014
Second Quarter ....... 28.00 9.50 70,838
Third Quarter ........ 19.88 8.38 103,191
Fourth Quarter ....... 17.75 4.75 110,562
2001:
First Quarter ........ 5.73 1.31 122,339
Second Quarter ....... 1.50 0.46 16,939 1.97 0.31 81,910
Third Quarter ........ 0.65 0.15 13,286 0.42 0.11 66,869
Fourth Quarter ....... 1.50 0.15 14,794 0.99 0.10 162,241
2002:
First Quarter ........ 1.94 0.85 10,014 1.19 0.53 130,280
April ................ 0.82 0.47 8,789 0.56 0.29 169,350
May .................. 0.47 0.25 1,673 0.30 0.17 48,809
June(3) .............. 0.32 0.22 3,100 0.24 0.16 131,805
- -------------
(1) Delano completed its initial public offering on February 8, 2000.
(2) Delano Common Shares were listed on the TSE on May 3, 2001.
(3) Through June 14, 2002.
21
THE SPECIAL MEETING OF DELANO SHAREHOLDERS
GENERAL
Delano is furnishing this document to its shareholders in connection with
the solicitation of proxies by the management of Delano for use at the special
meeting of Delano shareholders to be held on July 25, 2002 (the "Special
Meeting").
DATE, TIME AND PLACE
The Special Meeting will be held on July 25, 2002 at 10:00 a.m. (Toronto
time) at the TSE Conference Centre at The Toronto Stock Exchange, the Exchange
Tower, 130 King Street West, Toronto, Ontario.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Delano shareholders will be asked:
1. to consider, pursuant to the Interim Order and, if deemed advisable,
to pass, with or without variation, the Arrangement Resolution
attached as Annex F to this document to approve the Arrangement under
Section 182 of the OBCA pursuant to which divine will become the owner
of all the Delano Common Shares issued and outstanding immediately
following the Arrangement; and
2. to transact such further or other business as may properly come before
the Special Meeting or any adjournment or postponement thereof.
Copies of the Combination Agreement entered into by Delano and divine on
March 12, 2002, as amended, and the form of the Plan of Arrangement are attached
to this document as Annex A and Annex C, respectively. Delano shareholders are
encouraged to read the Combination Agreement and related exhibits in their
entirety and the other information contained in this document, including the
Annexes, carefully before deciding how to vote.
RECORD DATE FOR THE SPECIAL MEETING
Pursuant to the OBCA and the Interim Order, the record date for determining
the Delano shareholders entitled to notice of and to vote at the Special Meeting
will be June 17, 2002.
VOTE REQUIRED
The Arrangement Resolution must be approved by not less than two-thirds of
the votes cast by the holders of Delano Common Shares present in person or by
proxy at the Special Meeting.
As of June 14, 2002, there were 43,429,694 Delano Common Shares
outstanding.
The Delano shareholders whose names were entered on the register of
shareholders of Delano at the close of business on June 17, 2002 will be
entitled to attend in person, or appoint a proxy nominee to attend, the Special
Meeting and to vote on a show of hands and, on a poll, to one vote for each
Delano Common Share held on that date.
In the event that a holder has transferred any Delano Common Shares after
June 17, 2002, the transferee is entitled to vote at the Special Meeting if such
transferee produces properly endorsed share certificates or otherwise
establishes proof of ownership of the shares and demands, not later than ten
days before the Special Meeting, that such transferee's name be included in the
list of shareholders entitled to vote at the Special Meeting. The list of
shareholders of Delano will be available for inspection on June 27, 2002, during
usual business hours at the Toronto office of Delano's Transfer Agent and at the
Special Meeting.
To the knowledge of the directors and senior officers of Delano, as at June
14, 2002, no person or company beneficially owned, directly or indirectly, or
exercised control or direction over, Delano Common Shares collectively carrying
more than 10% of the voting rights attributable to all the outstanding Delano
Common Shares, except with respect to the Shareholder Voting Agreement described
below.
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divine has entered into the Shareholder Voting Agreement with three of the
directors of Delano (or their respective related entities). Pursuant to the
Shareholder Voting Agreement, the three directors have agreed to vote
approximately 14% of the outstanding Delano Common Shares in favour of the
Arrangement Resolution.
QUORUM
A quorum of shareholders shall be present at a meeting of shareholders of
Delano if the holders of at least 10% of the shares entitled to vote at the
meeting are present in person or represented by proxy.
NON-REGISTERED SHAREHOLDERS
Non-registered shareholders should follow the directions of their
intermediaries with respect to the procedures to be followed for voting.
Generally, non-registered shareholders will not receive the same proxy form as
distributed by Delano to registered shareholders but will be provided with
either a request for voting instructions or a proxy form executed by the
intermediary but otherwise uncompleted. Intermediaries will then submit votes on
behalf of the non-registered shareholders. If you are a non-registered
shareholder, please submit your voting instructions to your intermediary in
sufficient time to ensure that your votes are received by Delano on or before
4:00 p.m., Toronto time, on July 23, 2002.
SOLICITATION OF PROXIES AND EXPENSES
Proxies may be solicited personally or by telephone by representatives of
Delano. The cost of solicitation will be borne by Delano.
VOTING OF PROXIES AT THE SPECIAL MEETING AND REVOCATION OF PROXIES
THE FORM OF PROXY ACCOMPANYING THIS DOCUMENT CONFERS DISCRETIONARY
AUTHORITY UPON THE PROXY NOMINEE WITH RESPECT TO ANY AMENDMENTS OR VARIATIONS TO
THE MATTER IDENTIFIED IN THE NOTICE OF MEETING AND ANY OTHER MATTER WHICH MAY
PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENT THEREOF.
IF A PROXY GIVEN TO DELANO MANAGEMENT IS SIGNED AND RETURNED, THE
SECURITIES REPRESENTED BY THE PROXY WILL BE VOTED FOR OR AGAINST THE ARRANGEMENT
RESOLUTION, IN ACCORDANCE WITH THE INSTRUCTIONS MARKED ON THE PROXY. IF NO
INSTRUCTIONS ARE MARKED, THE SECURITIES REPRESENTED BY SUCH A PROXY WILL BE
VOTED FOR THE ARRANGEMENT RESOLUTION AND IN ACCORDANCE WITH DELANO MANAGEMENT'S
RECOMMENDATION WITH RESPECT TO AMENDMENTS OR VARIATIONS OF THE MATTERS SET OUT
IN THE NOTICE OF MEETING OR ANY OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE
SPECIAL MEETING.
THE PERSONS NAMED IN THE DELANO FORMS OF PROXY ARE OFFICERS OF DELANO. A
DELANO SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A DELANO
SHAREHOLDER) TO REPRESENT SUCH SHAREHOLDER AT THE SPECIAL MEETING OTHER THAN THE
PERSONS DESIGNATED IN THE FORMS OF PROXY AND MAY EXERCISE SUCH RIGHT BY
INSERTING THE NAME IN FULL OF THE DESIRED PERSON IN THE BLANK SPACE PROVIDED IN
THE DELANO FORMS OF PROXY AND STRIKING OUT THE NAMES NOW DESIGNATED.
Shareholders who do not expect to attend the Special Meeting in person are
requested to complete, sign, date and return the enclosed form of proxy (on
yellow paper) in the enclosed postage pre-paid (for mailing within Canada)
envelope (marked "For Proxy Only") addressed to Delano Technology Corporation,
c/o Computershare Trust Company of Canada, 100 University Avenue, 9th Floor,
Toronto, Ontario, M5J 2Y1, facsimile number (416) 263-9524 or (866) 249-7775.
The "For Proxy Only" envelope is postage pre-paid for mailing within Canada. If
you are mailing your proxy from outside of Canada, please make sure to affix
sufficient postage. The Delano forms of proxy must be received by no later than
4:00 p.m. (Toronto time) on July 23, 2002 or, in the event that the Special
Meeting is adjourned or postponed, by no later than 4:00 p.m. (Toronto time) on
the second Business Day prior to the day fixed for the adjourned or postponed
Special Meeting.
A Delano shareholder executing the form of proxy enclosed with this
Circular has the power to revoke it by instrument in writing executed by either
the Delano shareholder or by an attorney authorized in writing or, where the
Delano shareholder is a corporation, by a duly authorized officer or attorney of
the corporation. The instrument of revocation must be delivered to Delano
Technology Corporation, c/o Computershare Trust
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Company of Canada, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1,
facsimile number (416) 263-9524 or (866) 249-7775 at any time up to and
including the last Business Day preceding the date of the Special Meeting or any
adjournment thereof or to the Chairman of the Special Meeting on the day of the
Special Meeting or any adjournment thereof before any vote in respect of which
the proxy is to be used is taken. A proxy may also be revoked in any other
manner permitted by law.
DISSENTING SHAREHOLDER RIGHTS
PURSUANT TO THE PROVISIONS OF THE INTERIM ORDER, REGISTERED DELANO
SHAREHOLDERS HAVE BEEN GRANTED THE RIGHT TO DISSENT WITH RESPECT TO THE
ARRANGEMENT RESOLUTION. IF THE ARRANGEMENT BECOMES EFFECTIVE, A REGISTERED
DELANO SHAREHOLDER WHO DISSENTS WILL BE ENTITLED TO BE PAID THE FAIR VALUE OF
ITS DELANO COMMON SHARES BY DELANO. THIS RIGHT TO DISSENT IS DESCRIBED IN THIS
DOCUMENT AND IN THE PLAN OF ARRANGEMENT WHICH IS ATTACHED TO THIS DOCUMENT AS
ANNEX C. THE DISSENT PROCEDURES REQUIRE THAT A REGISTERED HOLDER OF DELANO
COMMON SHARES WHO WISHES TO DISSENT MUST PROVIDE TO DELANO TECHNOLOGY
CORPORATION, C/O COMPUTERSHARE TRUST COMPANY OF CANADA, 100 UNIVERSITY AVENUE,
9TH FLOOR, TORONTO, ONTARIO, M5J 2Y1, FACSIMILE NUMBER (416) 263-9524 OR (866)
249-7775 A DISSENT NOTICE PRIOR TO 4:00 P.M. (TORONTO TIME) ON THE LAST BUSINESS
DAY PRECEDING THE SPECIAL MEETING. IT IS IMPORTANT THAT DELANO SHAREHOLDERS
STRICTLY COMPLY WITH THIS REQUIREMENT AND THE OTHER PROCEDURAL REQUIREMENTS
DESCRIBED IN THE INTERIM ORDER AND THIS DOCUMENT, WHICH ARE DIFFERENT FROM THE
STATUTORY DISSENT PROVISIONS OF THE OBCA THAT WOULD PERMIT A DISSENT NOTICE TO
BE PROVIDED AT OR AT ANY TIME PRIOR TO THE SPECIAL MEETING. FAILURE TO COMPLY
STRICTLY WITH THE DISSENT PROCEDURES MAY RESULT IN THE LOSS OR UNAVAILABILITY OF
ANY RIGHT OF DISSENT.
OTHER MATTERS
As at the date of this document, management of Delano is not aware of any
amendments or variations to the Arrangement Resolution, or of any other matter
to be presented for action at the Special Meeting.
RECOMMENDATION OF THE DELANO BOARD OF DIRECTORS
In approving the execution of the Combination Agreement, the board of
directors of Delano unanimously approved the Combination Agreement and the
transactions contemplated by the Combination Agreement, including the
Arrangement. Accordingly, the board of directors recommends that the
shareholders of Delano vote FOR approval of the Arrangement Resolution. In
considering such recommendation, Delano shareholders should be aware that some
Delano directors and officers have interests in the transaction which are
different from or in addition to, those of Delano shareholders generally, and
that divine has agreed to provide indemnification to directors and officers of
Delano. For more information about these interests see "The Transaction --
Interest of Certain Persons in the Transaction".
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF DELANO. ACCORDINGLY, YOU ARE URGED TO READ AND CAREFULLY
CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT, INCLUDING ITS ANNEXES, AND
TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED FORM OF PROXY (ON
YELLOW PAPER) IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE (MARKED "FOR PROXY
ONLY"). The "For Proxy Only" envelope is postage pre-paid for mailing within
Canada. If you are mailing your proxy from outside of Canada, please make sure
to affix appropriate postage.
24
THE TRANSACTION
The following is a description of the material aspects of the transaction,
including the Combination Agreement, the Plan of Arrangement and certain other
agreements to be entered into in connection with the transaction. While Delano
believes that the following description covers the material terms of the
Combination Agreement, the Plan of Arrangement and the related transactions and
agreements, the description may not contain all of the information that is
important to you. You should read this entire document and the other documents
referred to herein carefully for a more complete understanding of the
transaction. In particular, the following summaries of the Combination Agreement
and the Plan of Arrangement are not complete and are qualified in their entirety
by reference to the copies of the Combination Agreement and the Plan of
Arrangement which are attached to this document as Annex A and Annex C,
respectively, and are incorporated by reference into this document in their
entirety. You should read the Combination Agreement and the Plan of Arrangement
and the other transaction agreements in their entirety for a complete
understanding of the terms of the transaction.
GENERAL
The divine board of directors and the Delano board of directors have each
approved the Combination Agreement. The Combination Agreement provides that
divine will become the owner of all of the Delano Common Shares outstanding
immediately following the Arrangement, subject to, among other things:
o approval of the Arrangement Resolution by the Delano shareholders; and
o approval of the Arrangement by the Court.
As a consequence of the Arrangement, Delano will become a subsidiary of
divine. Pursuant to the Arrangement, divine will become the owner of all of the
Delano Common Shares outstanding immediately following the Arrangement and a
Delano shareholder (other than a shareholder who properly exercises its dissent
rights and divine or its Affiliates) will receive either:
o a number of shares of divine Common Stock equal to the Exchange Ratio
multiplied by the number of Delano Common Shares held by such holder;
or
o in the case of a Delano shareholder who is either, (i) a Canadian
resident for the purposes of the Income Tax Act (Canada) not exempt
from tax under Part I of the Income Tax Act (Canada) holding Delano
Common Shares on its own behalf or (ii) a person who holds Delano
Common Shares on behalf of one or more Canadian residents for the
purposes of the Income Tax Act (Canada) not exempt from tax under Part
I of the Income Tax Act (Canada), and, in either case, who validly so
elects, a number of Exchangeable Shares issued by Delano (and certain
ancillary rights) equal to the Exchange Ratio multiplied by the number
of Delano Common Shares held by such holder.
Delano shareholders who are not eligible to receive Exchangeable Shares or
who are so eligible but do not validly elect to receive Exchangeable Shares will
receive a number of shares of divine Common Stock for each Delano Common Share
they own equal to the Exchange Ratio.
None of divine, its Affiliates and directors and, to divine's knowledge,
its officers, currently own any Delano Common Shares. Assuming all Delano Common
Shares are exchanged for divine Common Stock and based upon the number of shares
of divine Common Stock and Delano Common Shares outstanding as of June 14, 2002,
immediately following completion of the transaction existing Delano shareholders
would hold approximately 2,062,042 shares of divine Common Stock, representing
approximately 10% of the outstanding shares of divine Common Stock after the
Arrangement and approximately 5% of the outstanding shares of divine Common
Stock after the acquisition by divine of Viant Corporation and the private
placement of divine Series B convertible preferred stock with Oak Investment
Partners and certain of its affiliates (assuming all of the preferred stock and
warrants issued and, pending divine stockholder approval, to be issued, pursuant
to the private placement are converted or exercised). See "Business of divine --
Proposed Acquisition of Viant Corporation" and "Business of divine -- Private
Placement with Oak Investment Partners". See "Pro Forma Capitalization".
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The Exchangeable Shares will be issued by Delano and their holders will be
entitled to dividend and other rights that are substantially economically
equivalent to those of holders of shares of divine Common Stock, including
pursuant to the Voting and Exchange Trust Agreement to vote at meetings of
divine shareholders. See "Description of Exchangeable Shares -- Voting, Dividend
and Liquidation Rights".
Holders of Exchangeable Shares will have the right at any time to exchange
each Exchangeable Share for one share of divine Common Stock and an amount equal
to the full amount of all declared and unpaid dividends on such Exchangeable
Share. At any time on or after the third anniversary of the Effective Date
(subject to acceleration if, (i) at any time after the first anniversary of the
Effective Date, there are then outstanding Exchangeable Shares constituting
fewer than 30% of the actual number of Exchangeable Shares issuable as
determined at the Effective Date (excluding Exchangeable Shares held by divine
and its Affiliates); (ii) if at any time there are then outstanding Exchangeable
Shares constituting fewer than 10% of the actual number of Exchangeable Shares
issuable as determined at the Effective Date (excluding Exchangeable Shares held
by divine and its Affiliates); (iii) if at any time a merger, amalgamation,
arrangement, tender offer, material sale of rights or similar transaction
involving divine occurs and the board of directors of Delano determines it is
necessary to the transaction for the redemption to occur; or (iv) in certain
other circumstances), Delano will have the right, but not the obligation, to
redeem all outstanding Exchangeable Shares (other than those held by divine and
its Affiliates) for an equal number of shares of divine Common Stock and an
amount equal to all declared and unpaid dividends on the outstanding
Exchangeable Shares.
divine will also have the right, but not the obligation, to acquire all
outstanding Exchangeable Shares (other than those held by divine and its
Affiliates) for an equal number of shares of divine Common Stock and an amount
equal to all declared and unpaid dividends on the outstanding Exchangeable
Shares in the event of a change in Canadian federal and Ontario tax legislation
that allows holders of Exchangeable Shares who are Canadian residents to
exchange such shares for shares of divine Common Stock on a tax deferred basis.
See "Description of Exchangeable Shares -- Mandatory Redemption by Delano and
divine Call Right".
The Combination Agreement also provides that if, in the opinion of counsel
to Delano, a change in tax law is enacted and becomes effective prior to the
Effective Date pursuant to which beneficial holders of Delano Common Shares who
are Canadian residents and who hold their shares as capital property for
purposes of the Income Tax Act (Canada) (and any applicable Ontario provincial
legislation) may exchange their Delano Common Shares for shares of divine Common
Stock on a tax-deferred basis for purposes of the Income Tax Act (Canada) (and
any applicable Ontario provincial legislation) then, at the option of divine, no
Exchangeable Shares will be issued and the Plan of Arrangement will be amended
accordingly.
Delano shareholders who properly exercise their dissent rights will be
entitled to be paid fair value for their Delano Common Shares by Delano. See
"Dissenting Shareholder Rights".
BACKGROUND OF THE TRANSACTION
In the fall of 2000, in the face of an increasingly competitive environment
in the technology industry, Delano's board of directors determined that Delano
was a company with a strong foundation but the board of directors acknowledged
that Delano could not continue to be successful without a change in its
corporate strategy. The board of directors decided to engage Broadview in order
to explore alternatives for Delano. On November 20, 2000 Delano executed an
engagement letter with Broadview and during the next few months a strategy was
developed by Broadview pursuant to which Broadview would contact a select group
of industry participants who could provide Delano with a strong distribution
channel or would be able to leverage its application development platform.
Commencing in January 2001, Broadview began contacting parties on behalf of
Delano regarding various alternatives for Delano including strategic alliances,
financing opportunities, broadening the company's shareholder base and the
possible sale or acquisition through merger, exchange or sale of all or
substantially all of the assets, business or securities of Delano. Broadview
engaged in discussions with several potential strategic investors, acquirers and
merger partners during 2001 and early 2002 but no definitive agreements were
entered into.
26
Broadview initially approached divine on June 8, 2001. Between June 8, 2001
and January 21, 2002, divine and Delano and their respective financial advisors
engaged in discussions. On January 22, 2002, Delano and divine executed a
confidentiality and non-disclosure agreement. The transactions contemplated by
the Combination Agreement were first proposed by divine on January 21, 2002.
Since that time, the parties and their respective advisors have engaged in
extensive negotiations and discussions with respect to the structure of the
proposed transaction. divine, Delano and their respective advisors conducted
extensive financial, legal and management due diligence on the other's business.
On March 1, 2002 the board of directors of divine, and on March 12, 2002, the
board of directors of Delano, approved the Combination Agreement and the
transactions contemplated thereunder. Delano and divine jointly announced the
transaction on March 13, 2002.
RECOMMENDATION OF DELANO'S BOARD OF DIRECTORS
IN APPROVING THE EXECUTION OF THE COMBINATION AGREEMENT, THE DELANO BOARD
OF DIRECTORS DETERMINED UNANIMOUSLY THAT THE TERMS OF THE ARRANGEMENT ARE FAIR
TO DELANO'S SHAREHOLDERS AND IN THE BEST INTERESTS OF DELANO AND ITS
SHAREHOLDERS. ACCORDINGLY, THE DELANO BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE COMBINATION AGREEMENT AND RECOMMENDS THAT DELANO'S SHAREHOLDERS
VOTE FOR THE ARRANGEMENT RESOLUTION.
Each of the directors of Delano has advised Delano that he will vote the
Delano Common Shares held by him, directly or indirectly, in favour of the
Arrangement Resolution approving the Arrangement.
REASONS FOR THE TRANSACTION
The following discussion of Delano's reasons for the Arrangement contains a
number of forward-looking statements that reflect the current views of Delano
with respect to future events that may have an effect on the combined company's
future financial performance. Forward-looking statements are subject to risks
and uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Cautionary
statements that identify important factors that could cause or contribute to
differences in results and outcomes include those discussed in the sections of
this document entitled "Cautionary Statements Regarding Forward-Looking
Statements in this Document" and "Risk Factors".
The board of directors of Delano approved the Combination Agreement and the
transactions contemplated by the Combination Agreement because it determined
that the combined company would have the potential to realize a stronger
competitive position and improved long-term operating and financial results.
In approving the Combination Agreement, the Delano board of directors
considered a number of factors, including:
o the fairness opinion of Delano's financial advisor, Broadview, to the
effect that, as of March 12, 2002, the Exchange Ratio was fair, from a
financial point of view, to Delano shareholders;
o historical information concerning the businesses, prospects, financial
performance and condition, operations, technology, management and
competitive position of Delano and divine and industry trends;
o the anticipated financial condition, results of operations and
businesses of Delano and divine after giving effect to the
transaction;
o the current financial market conditions and historical market prices,
volatility and trading information with respect to Delano Common
Shares;
o the possible effect of the Arrangement on Delano's employees and
customers;
o the opportunity afforded by the Arrangement for Delano to combine its
operations with the operations of divine to become part of an entity
with greater financial and business resources than Delano alone, which
should enhance the competitive position of the combined businesses and
increase its ability to create value;
o the current economic, industry and market trends affecting Delano;
o the risks associated with, as an alternative to the Arrangement,
continuing to execute Delano's strategic plan as an independent entity
operating in a highly competitive environment;
27
o the fact that Delano shareholders will receive shares of divine Common
Stock that are more liquid than their Delano Common Shares under the
Arrangement, given the larger market capitalization and liquidity of
divine Common Stock;
o the historical trading prices of the divine Common Stock and the
Delano Common Shares;
o the structure of the Arrangement, which effectively permits certain
Delano shareholders to receive Exchangeable Shares (and certain
ancillary rights), generally without realizing a gain for Canadian
federal income tax purposes at the time of the Arrangement;
o the amount of the termination fee and the circumstances in which it is
payable pursuant to the terms of the Combination Agreement;
o the approval process for the Arrangement, including the requirement
for necessary approvals by the shareholders of Delano and the
requirement for the Court to approve the Arrangement and to issue the
Final Order in connection therewith; and
o other factors that the Delano board of directors deemed relevant in
order to make its decision.
In considering the Arrangement, the Delano board of directors recognized
that there were certain risks associated with the Arrangement, including the
risks that the potential benefits set forth above may not be realized and that
there may be higher than anticipated costs associated with realizing such
benefits. The Delano board of directors also considered the factors set forth in
this document under the heading "Risk Factors" and considered the advice of its
legal and financial advisors and had discussions with the management of Delano
and representatives of Broadview. Finally, the board of directors considered
that divine had entered into the Shareholder Voting Agreement with certain
Delano shareholders to vote approximately 14% of the outstanding Delano Common
Shares in favour of the Arrangement.
The foregoing discussion of the information and factors considered by
Delano's board of directors, while not exhaustive, includes the material factors
considered by the Delano board of directors.
CONCLUSION OF DELANO'S BOARD OF DIRECTORS
The board of directors of Delano, after an extensive review and thorough
discussion of a number of facts and issues (as set out under "The Transaction --
Background of the Transaction" and "Reasons for the Transaction") and relying on
the fairness opinion of Broadview for purposes of evaluating the fairness of the
Exchange Ratio from a financial point of view, unanimously concluded that the
Arrangement was fair, from a financial point of view, to the shareholders of
Delano and was in Delano's best interest.
In reaching its conclusion, the board of directors did not find it
practical to and did not assign any relative or specific weight to the foregoing
factors which were considered, and individual members of the board of directors
may have given differing weight to different factors.
OPINION OF DELANO'S FINANCIAL ADVISOR
Delano retained Broadview to act as its financial advisor in connection
with a proposed transaction involving business opportunities acceptable to
Delano whereby Delano may be combined with divine. Broadview is a nationally
recognized investment banking firm in the United States. Broadview and its
predecessor firms have been actively involved in the securities industry for
many years. Broadview focuses on providing merger and acquisition advisory
services to information technology, communications and media companies.
Broadview regularly provides valuations and fairness opinions with respect to
proposed transactions and has been involved in a number of transactions
involving fairness opinions and valuations of private and publicly traded
companies.
Delano selected Broadview to act as its financial advisor on the basis of
Broadview's experience and expertise in transactions similar to the Arrangement
and its reputation in the information technology industry and investment
community.
On March 12, 2002, Broadview delivered its written opinion to Delano's
board of directors that, based upon and subject to the various assumptions and
limitations set forth therein, the Exchange Ratio under the Combination
Agreement was fair from a financial point of view to Delano's shareholders as of
that date. The
28
Exchange Ratio was determined by negotiations between Delano and divine and was
not based on recommendations from Broadview. In rendering its opinion, Broadview
assumed that neither Delano nor divine was, as of the date of the opinion,
involved in any material transaction, other than the Arrangement, that was not
publicly announced prior to the delivery of the opinion. In particular,
Broadview's opinion did not take into account the impact of the proposed
acquisition by divine of Viant Corporation or the private placement of divine
Series B convertible preferred stock with Oak Investment Partners and certain of
its affiliates on the financial performance or stock price of divine as the
terms of such transactions had not been determined as of the date Broadview
delivered its opinion.
THE FULL TEXT OF BROADVIEW'S WRITTEN OPINION TO DELANO'S BOARD OF
DIRECTORS, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, INFORMATION
REVIEWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN BY BROADVIEW IN RENDERING ITS OPINION, IS ATTACHED TO THIS DOCUMENT
AS ANNEX G, WHICH IS INCORPORATED INTO THIS DOCUMENT IN ITS ENTIRETY. YOU SHOULD
READ THIS OPINION CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS
DOCUMENT. HOWEVER, THE SUMMARY SET FORTH HEREIN OF BROADVIEW'S OPINION HAS ALSO
BEEN INCLUDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE OPINION.
BROADVIEW'S OPINION IS DIRECTED TO DELANO'S BOARD OF DIRECTORS. IT DOES NOT
CONSTITUTE A RECOMMENDATION TO SHAREHOLDERS OF DELANO ON HOW TO VOTE WITH
RESPECT TO THE ARRANGEMENT RESOLUTION. THE OPINION ADDRESSES ONLY THE FAIRNESS
OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO DELANO SHAREHOLDERS AS
OF THE DATE OF THE OPINION. THE OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF
THE ARRANGEMENT OR ANY ALTERNATIVES TO THE ARRANGEMENT, THE UNDERLYING DECISION
OF DELANO'S BOARD OF DIRECTORS TO PROCEED WITH OR EFFECT THE ARRANGEMENT OR ANY
OTHER ASPECT OF THE ARRANGEMENT. IN RENDERING THAT OPINION, BROADVIEW ASSUMED,
WITH THE PERMISSION OF DELANO'S BOARD OF DIRECTORS, THAT DIVINE COMMON STOCK AND
EXCHANGEABLE SHARES ARE IDENTICAL IN ALL MATERIAL RESPECTS AND THEREFORE, THE
OPINION OF BROADVIEW EXPRESSES NO OPINION AS TO THE FAIRNESS OF ANY PARTICULAR
FORM OF CONSIDERATION AVAILABLE TO DELANO SHAREHOLDERS.
The opinion of Broadview was rendered on the basis of market, economic,
financial and other conditions as they existed as of the date the opinion was
rendered. Subsequent developments would require a re-evaluation of the opinion,
and Broadview does not have any obligation to update, revise, or reaffirm its
opinion.
Pursuant to its letter agreement with Broadview, Delano has agreed to pay
Broadview a fee for rendering its financing advisory services, a portion of
which is contingent upon consummation of the Arrangement. Delano has also agreed
to indemnify Broadview and certain related persons against certain liabilities
in connection with the engagement of Broadview, including certain liabilities
under securities legislation.
Broadview relied upon the completeness, accuracy and fair presentation of
all the financial and other information, data, advice, opinions or
representations obtained by it from public sources or provided by Delano, divine
and their respective agents and advisors (collectively, the "Material"). The
opinion is conditional upon the completeness, accuracy and fair presentation of
the Material. Except as expressly described in the opinion, Broadview did not
independently verify the completeness, accuracy or fair presentation of any of
the Material.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of Delano's board of directors with
respect to the transaction, you should be aware that some of the directors and
executive officers of Delano have interests in the transaction and participate
in arrangements that may present them with actual or potential conflicts of
interest in connection with the transaction. The Delano board of directors was
aware of these interests and considered them, among other matters, when it
approved the Arrangement. These interests include the following:
o as of the close of business on June 14, 2002, directors and officers
of Delano (and their respective Affiliates) collectively owned or
exercised control over approximately 15% of the outstanding Delano
Common Shares entitled to vote at the Special Meeting. This does not
include 2,089,237 Delano Common Shares underlying presently
exercisable options which these directors and officers beneficially
own. If all of these stock options had been exercised prior to June
14, 2002, the directors and officers of Delano (and their respective
Affiliates) would collectively own or exercise control over
approximately 19% of the outstanding Delano Common Shares entitled to
vote at the Special Meeting;
29
o Delano has purchased directors' and officers' liability insurance
covering liability, including defense costs, of directors and officers
of Delano incurred as a result of acting as such directors or
officers, provided they acted honestly and in good faith with the view
to the best interests of Delano;
o officers and directors of Delano are indemnified by Delano to the
fullest extent permitted by the OBCA;
o Certain employees of Delano have entered into letter agreements with
Delano providing for benefits to be paid upon termination of
employment. In addition, the vesting schedule of options granted to
these persons may be accelerated in certain circumstances, including
in the event of termination without cause following completion of the
Arrangement;
o On October 5, 2001, Vikas Kapoor, President and Chief Executive
Officer of Delano, was granted 4,230,000 Delano Common Shares,
pursuant to his employment arrangement with Delano. Under the terms of
Mr. Kapoor's employment arrangement, Mr. Kapoor's ability to dispose
of those shares is restricted, which restrictions are removed on an
incremental basis over time. As of June 1, 2002, 2,585,000 of those
Delano Common Shares remain subject to these restrictions. Under the
terms of Mr. Kapoor's employment arrangement, upon the consummation of
the transactions contemplated by the Combination Agreement, all
restrictions on the disposition of these shares will be terminated;
o a covenant by divine to grant options to purchase an aggregate of
110,000 shares of divine Common Stock to employees of Delano who
remain employees of Delano after the Effective Date;
o the Combination Agreement provides that all rights to indemnification
for officers and directors of Delano as provided in agreements, the
articles of incorporation of Delano, the bylaws of Delano or the
articles and bylaws of any successor of Delano, in effect on the
effective date of the Arrangement, will survive the Arrangement for a
period not less than six years from the Effective Date of the
Arrangement. The Combination Agreement also provides that divine will
purchase a directors' and officers' liability insurance policy for a
six-year period covering those persons whom are currently covered by
Delano's directors' and officers' liability insurance policy on terms
comparable to those currently applicable to the directors and officers
of Delano; provided, however, that in no event will divine or Delano,
as a surviving subsidiary of divine, be required to expend in the
aggregate in excess of $1 million for such coverage and, if such
amount is not sufficient to purchase such coverage, divine will
purchase the maximum amount of insurance coverage for six years as is
available for such amount; and
o on May 21, 2002, Opera Ventures, LLC, a limited liability company
entirely owned by Vikas Kapoor, Chief Executive Officer of Delano,
entered into an Advisory Agreement with divine pursuant to which Mr.
Kapoor will provide divine certain advisory services after the
Effective Time. Under the terms of such agreement, which is contingent
upon the closing of the Arrangement, Opera Ventures will receive up to
$500,000 for one year of service.
SHAREHOLDER VOTING AGREEMENT
divine has entered into the Shareholder Voting Agreement with each of Vikas
Kapoor, Dennis Bennie and Bahman Koohestani (or their respective related
entities), pursuant to which each such shareholder has irrevocably agreed (i) to
vote that shareholder's Delano Common Shares in favour of the Arrangement
Resolution; (ii) not to vote any Delano Common Shares in favour of certain
matters including any action that is inconsistent with the Combination Agreement
or Arrangement, or that is intended, or could be reasonably expected, to impede,
interfere with, delay, postpone, discourage or adversely affect the Arrangement,
the Plan of Arrangement or any of the other transactions contemplated by the
Combination Agreement or the Shareholder Voting Agreement; and (iii) not to sell
or otherwise transfer any of its Delano Common Shares until the termination of
the Shareholder Voting Agreement with divine. Approximately 14% of the
outstanding Delano Common Shares are subject to the Shareholder Voting
Agreement.
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE TRANSACTION
Under the OBCA, the Arrangement requires Court approval. Prior to the
mailing of this document, Delano obtained the Interim Order from the Court
providing for the calling and holding of the Special Meeting and
30
other procedural matters. A copy of each of the Interim Order and the notice of
application for the Final Order is attached hereto as Annex B.
Subject to the approval of the Arrangement Resolution by the Delano
shareholders at the Special Meeting, the hearing in respect of the Final Order
is expected to take place on or about July 30, 2002 at 10:00 a.m. (Toronto time)
at the Toronto courthouse at 393 University Avenue, Toronto, Ontario.
Any Delano shareholder who wishes to appear or be represented and to
present evidence or arguments must serve and file a notice of appearance as set
out in the notice of application for the Final Order and satisfy any other
requirements of the Court. The Court will consider, among other things, the
fairness and reasonableness of the Arrangement. The Court may approve the
Arrangement in any manner the Court may direct, subject to compliance with such
terms and conditions, if any, as the Court deems fit.
Assuming the Final Order is granted and the other conditions to closing
contained in the Combination Agreement are satisfied or waived, it is
anticipated that the following will occur substantially simultaneously:
o Articles of Arrangement for Delano will be filed with the director
under the OBCA to give effect to the Arrangement;
o the Voting and Exchange Trust Agreement and the Exchangeable Share
Support Agreement (attached hereto as Annex E and Annex D,
respectively) will be executed and delivered; and
o the various other documents necessary to consummate the transactions
contemplated under the Combination Agreement will be executed and
delivered.
Subject to the foregoing, it is expected that the Effective Time will occur
as soon as practicable after the requisite Delano shareholder approval has been
obtained.
STOCK EXCHANGE LISTINGS
divine has agreed, as a condition to closing of the Arrangement, to:
o cause the shares of divine Common Stock to be issued on the
Arrangement to be approved for listing on NASDAQ before the completion
of the Arrangement, subject to official notice of issuance; and
o cause the shares of divine Common Stock to be issued upon exchange of
the Exchangeable Shares and upon exercise of Replacement Options to be
approved for listing on NASDAQ before completion of the Arrangement,
subject to official notice of issuance.
divine has also expressed its intention to cause the shares of divine
Common Stock to be issued upon the exercise of the Revised Warrants to be
approved for listing on NASDAQ before completion of the Arrangement.
The divine Common Stock will be listed on NASDAQ under the symbol "DVIN"
however, as a result of divine's recently implemented reverse stock split,
divine's common stock will be quoted under the trading symbol "DVIND" through
June 25, 2002. See "Transaction Mechanics -- Reverse Stock Split of divine
Common Stock". The Exchangeable Shares will not be listed or quoted on any stock
exchange.
REGULATORY MATTERS
Except as described in this document, neither divine nor Delano is aware of
any material approval or other action by any federal, provincial, state or
foreign government or any administrative or regulatory agency that would be
required to be obtained prior to completion of the transaction other than
compliance with the applicable corporate laws of Delaware and Ontario.
RESALE OF EXCHANGEABLE SHARES AND SHARES OF DIVINE COMMON STOCK
United States
The shares of divine Common Stock and Exchangeable Shares to be issued in
connection with the transaction will be issued pursuant to the exemption from
the registration requirements of Section 5 of the 1933 Act set forth in Section
3(a)(10) of the 1933 Act. Section 3(a)(10) exempts securities issued in exchange
for one
31
or more bona fide outstanding securities where the terms and conditions of the
issuance and exchange have been approved by a court of competent jurisdiction,
after a hearing upon the fairness of the terms and conditions at which all
persons to whom such securities will be issued have the right to appear. The
Court is authorized to conduct a hearing to determine the fairness of the terms
and conditions of the Arrangement, including the proposed issuance of shares of
divine Common Stock or Exchangeable Shares in exchange for Delano Common Shares.
The Court entered an Interim Order on April 22, 2002 and, subject to the
approval of the Arrangement Resolution by the Delano shareholders, the Court
will hold a hearing on the fairness of the Arrangement on or about July 30,
2002. See "The Transaction -- Court Approval of the Arrangement and Completion
of the Transaction". While Delano and divine believe that the exemption set
forth in Section 3(a)(10) applies to the Arrangement, if an exemption from
registration is not available at the Effective Time, divine has agreed to
prepare and file a registration statement on Form S-4 with the SEC to register
the shares of divine Common Stock to be issued pursuant to the Arrangement.
The shares of divine Common Stock and Exchangeable Shares will be freely
transferable under the 1933 Act, except for shares of divine Common Stock issued
to any person who is an "affiliate" (as defined in Rule 405 promulgated under
the 1933 Act) of Delano or who becomes an "affiliate" of divine. Persons who are
affiliates include individuals or entities that directly, or indirectly through
one or more intermediaries, control, are controlled by, or are under common
control of Delano and may include some of the officers and directors of Delano,
as well as Delano's principal shareholders. Affiliates may not sell their shares
of divine Common Stock acquired in the transaction except pursuant to:
o an effective registration statement under the 1933 Act covering the
resale of those shares;
o paragraph (d) of Rule 145 under the 1933 Act; or
o any other applicable exemption under the 1933 Act.
The shares of divine Common Stock to be issued upon exchange of the
Exchangeable Shares will be registered under the 1933 Act pursuant to a
registration statement on Form S-3 to be filed with the SEC. Prior to the
Effective Time, divine will file a pre-effective amendment to the Form S-3 with
the SEC to cause the Form S-3 to become effective immediately after the
Effective Time. The shares of divine Common Stock to be issued upon exchange of
the Exchangeable Shares will be freely transferable under the 1933 Act, except
that the same restrictions that apply to affiliates of divine or Delano who
receive shares of divine Common Stock or Exchangeable Shares in the transaction
will apply to the shares of divine Common Stock received by affiliates of divine
or Delano on exchange of Exchangeable Shares.
The shares of divine Common Stock to be issued from time to time after the
Effective Time upon exercise of the Replacement Options will be registered under
the 1933 Act on Form S-8. divine has agreed to file the Form S-8 with the SEC
within 30 days after the Effective Time.
Holders of Delano Warrants do not have any registration rights; therefore,
any shares of divine Common Stock issued upon exercise of the Revised Warrants
will be restricted shares under U.S. securities laws. Accordingly, such shares
will not be freely tradable unless they have been held for the requisite holding
period under, and have otherwise been sold in compliance with the requirements
of, Rule 144 promulgated under the 1933 Act.
Delano has agreed to use its reasonable best efforts to cause those persons
whom Delano reasonably believes may be deemed to be "affiliates" of Delano
within the meaning of Rule 405 promulgated under the 1933 Act (for purposes of
Rule 145 promulgated under the 1933 Act) to enter into affiliate agreements with
divine. Under the terms of the affiliate agreements, divine will be entitled to
place appropriate legends on the certificates evidencing any divine Common Stock
or Exchangeable Shares to be received by these persons. Additionally, these
persons will acknowledge the resale restrictions imposed by Rule 145 under the
1933 Act on shares of divine Common Stock and Exchangeable Shares to be received
by them in the transaction and on shares of divine Common Stock to be received
upon exchange of Exchangeable Shares.
32
Canada
divine applied on April 11, 2002, for a ruling of securities regulatory
authorities in Canada that the issuance of the Exchangeable Shares and the
shares of divine Common Stock issuable under the Arrangement, upon exchange of
Exchangeable Shares, upon exercise of Replacement Options and upon exercise of
Revised Warrants be exempted from otherwise applicable prospectus and
registration requirements. Application has also been made to permit resale of
those shares in various jurisdictions without restriction by persons other than
a "control person", subject to other customary qualifications for such orders,
including that no unusual effort is made to prepare the market for any such
resale or to create a demand for the securities which are the subject of any
such resale, no extraordinary commission or consideration is paid in respect
thereof and that any resale of divine Common Stock is made through the
facilities of a stock exchange or market outside of Canada. The consummation of
the Arrangement is conditional upon receipt of these rulings or orders.
DELISTING AND DEREGISTRATION OF DELANO COMMON SHARES AFTER THE TRANSACTION
When the Arrangement is completed, Delano Common Shares will be delisted
from the TSE and NASDAQ and will be deregistered under the 1934 Act. Upon the
application for deregistration and approval by the SEC, Delano will no longer
have any reporting obligation under the 1934 Act.
ONGOING CANADIAN REPORTING OBLIGATIONS
Upon completion of the Arrangement, Delano will continue to be a reporting
issuer in certain of the Canadian provinces. Application has been made for
certain exemptions from the Canadian statutory financial and reporting
requirements relating to timely disclosure, filing and sending of financial
statements, the preparation and sending of management information circulars, the
preparation of an annual information form and from the insider trading reporting
requirements. The exemptions are expected to be conditional upon, among other
things, divine filing with the relevant Canadian securities regulatory
authorities copies of all documents required to be filed with the SEC, holders
of Exchangeable Shares receiving all disclosure materials furnished to holders
of divine Common Stock under the laws of the United States, including copies of
its annual financial statements and all proxy solicitation materials, divine
complying with NASDAQ timely disclosure requirements and divine disseminating
relevant press releases in Canada.
If these exemptions are obtained, after the completion of the Arrangement
holders of Exchangeable Shares will receive annual financial statements of
divine prepared in accordance with U.S. GAAP, and any interim financial
statements of divine prepared in accordance with U.S. GAAP that are provided to
holders of divine Common Stock.
TREATMENT OF STOCK OPTIONS AND WARRANTS
On June 14, 2002, there were outstanding options to purchase Delano Common
Shares which, when vested, would be exercisable to acquire a total of
approximately 6,500,000 Delano Common Shares at prices between $0.11 to $17.00
with various expiration dates to 2006.
At the Effective Time each In-the-Money Option that has not been cancelled,
terminated or duly exercised will be exchanged for a Replacement Option. Each
Replacement Option will constitute an option to purchase a number of shares of
divine Common Stock equal to the product of the Exchange Ratio and the number of
Delano Common Shares subject to that Delano Option. Each Replacement Option will
provide for an exercise price per share of divine Common Stock equal to the
exercise price per Delano Common Share of the Delano Option immediately prior to
the Effective Time divided by the Exchange Ratio. If the foregoing calculation
results in a holder's total Replacement Options being exercisable for a total
number of shares of divine Common Stock that includes a fraction of a share of
divine Common Stock, then the total number of shares of divine Common Stock
subject to a particular holder's total Replacement Options shall be rounded down
to the next whole number of shares of divine Common Stock and the total exercise
price for such Replacement Options will be reduced by the exercise price of the
fractional share of divine Common Stock rounded up to the nearest cent. The term
to expiration, conditions to and manner of exercising and all other terms and
conditions of Replacement Options will otherwise be unchanged from those of the
Delano Options for which they were exchanged. Any document or agreement
previously evidencing Delano Options shall thereafter evidence and be
33
deemed to evidence Replacement Options. Each unexercised Delano Option that
remains outstanding and is not an In-the-Money Option will be terminated
immediately prior to the Effective Time.
divine has agreed to file a registration statement on Form S-8 within 30
days after the Effective Time for the shares of divine Common Stock issuable
upon the exercise of the Replacement Options.
At the Effective Time each Delano Warrant will be amended to become a
Revised Warrant. Each Revised Warrant will provide for the purchase of the
number of shares of divine Common Stock equal to the product of the Exchange
Ratio multiplied by the number of Delano Common Shares subject to such Delano
Warrant. Each Revised Warrant shall provide for an exercise price per share of
divine Common Stock equal to the exercise price per Delano Common Share of the
Delano Warrant immediately prior to the Effective Time divided by the Exchange
Ratio. If the foregoing calculation results in the total Revised Warrants of a
particular holder being exercisable for a total number of shares of divine
Common Stock that includes a fraction of a share of divine Common Stock, then
the total number of shares of divine Common Stock subject to such holder's total
Revised Warrants shall be rounded down to the next whole number of shares of
divine Common Stock and the total exercise price for such Revised Warrants shall
be reduced by the exercise price of the fractional share of divine Common Stock
rounded up to the nearest cent. The term to expiry, conditions to and manner of
exercising and all other terms and conditions of a Revised Warrant will be the
same as they were prior to the Effective Time, and any document or agreement
previously evidencing a Delano Warrant shall thereafter evidence and be deemed
to evidence such Revised Warrant.
Pursuant to the Plan of Arrangement, the Exchange Ratio has been adjusted
to reflect fully the reverse stock split of the shares of divine Common Stock at
a ratio of 1-for-25. Furthermore, the Plan of Arrangement and the Exchangeable
Share Support Agreement will provide that so long as any Exchangeable Shares not
owned by divine or any of its Affiliates are outstanding, divine will not,
without the prior approval of Delano and the holders of Exchangeable Shares,
effect a transaction such as the reverse stock split described above, unless the
same or an economically equivalent change shall simultaneously be made to, or
in, the rights of the holders of Exchangeable Shares.
FUTURE ISSUANCES OF SHARES
Prior to the Effective Time the articles of incorporation of Delano will be
amended to authorize the issuance of an unlimited number of Exchangeable Shares.
The Exchangeable Shares may be issued, without approval of holders of
Exchangeable Shares, at such time or times, to such persons and for such
consideration as Delano may determine, except as may otherwise be required by
applicable laws or regulations, and subject to all dividends on the outstanding
Exchangeable Shares corresponding to dividends declared and paid on the
outstanding shares of divine Common Stock having been declared and paid at the
relevant times.
FURTHER ISSUANCES OF OPTIONS
After the Effective Time, divine will make available options to purchase up
to 110,000 shares of divine Common Stock to employees of Delano who remain as
employees of Delano after the Effective Time. The exercise price of such options
will be equal to the closing price of shares of divine Common Stock on the day
immediately preceding the Effective Time. Such options will vest according to
divine's option plans under which such options will be granted.
EXPENSES
The combined estimated fees, costs and expenses of divine and Delano in
connection with the transaction including, without limitation, financial
advisors' fees, filing fees, legal and accounting fees and printing and mailing
costs are anticipated to be approximately $1.75 million.
34
COMPILATION REPORT
The Board of Directors
divine, inc.:
We have compiled the accompanying unaudited pro forma condensed combined
balance sheet of divine, inc. and subsidiaries as at March 31, 2002 and the
unaudited pro forma condensed combined statements of operations of divine, inc.
and subsidiaries for the year ended December 31, 2001 and the three months ended
March 31, 2002. These unaudited pro forma condensed combined financial
statements have been prepared for inclusion in this management information
circular relating to the consummated and proposed transactions described in the
notes thereto. In our opinion, the unaudited pro forma condensed combined
balance sheet and the unaudited pro forma condensed combined statement of
operations have been properly compiled to give effect to the consummated and
proposed transactions and assumptions described in the notes thereto.
/s/ KPMG LLP
Chicago, Illinois
June 14, 2002
COMMENTS FOR UNITED STATES READERS ON DIFFERENCES BETWEEN CANADIAN AND UNITED
STATES REPORTING STANDARDS
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the pro
forma financial statements requires an examination or review substantially
greater in scope than the review we have conducted. Consequently, we are unable
to express any opinion in accordance with standards of reporting generally
accepted in the United States with respect to the compilation of the
accompanying unaudited pro forma financial information.
/s/ KPMG LLP
Chicago, Illinois
June 14, 2002
35
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
describe the pro forma effect of divine's pending acquisition of Delano on the:
o statements of operations for the year ended December 31, 2001 and the
three months ended March 31, 2002 of divine; and
o balance sheet as of March 31, 2002 of divine.
The following unaudited pro forma condensed combined financial statements
also describe the pro forma effect of divine's acquisition of RoweCom Inc., a
Delaware corporation ("RoweCom"), divine's pending acquisition of Viant
Corporation, a Delaware corporation ("Viant"), and divine's announced equity
financing from a group of investors led by Oak Investment Partners ("Oak"), as
described below.
On November 6, 2001, divine completed its acquisition of RoweCom, a leading
global provider of sophisticated tools and client services for managing the
acquisition of magazines, newspapers, journals and e-journals, books, and other
knowledge resources. On April 5, 2002, divine announced its intent to acquire
Viant, a professional services organization providing digital business
solutions. In May and June 2002, divine received approximately $22.9 million in
the first of two rounds of a $61.6 million private placement of series B
convertible preferred stock from a group of investors led by Oak. The investors
have agreed to purchase an additional $38.7 million in series B convertible
preferred stock in the second round of the private placement. The receipt of the
$38.7 million is subject to a number of customary closing conditions, including
approval of divine stockholders, all of which may be waived by the investors.
Because the RoweCom acquisition occurred during 2001, the assets and
liabilities of RoweCom are already included in divine's historical balance sheet
at March 31, 2002, and the results of operations of RoweCom are already included
in divine's historical statement of operations for the three months ended March
31, 2002. As such, RoweCom is not included separately in the unaudited pro forma
condensed combined balance sheet as of March 31, 2002 or the unaudited pro forma
condensed combined statement of operations for the three months ended March 31,
2002. Additionally, in the pro forma condensed combined statement of operations
for the year ended December 31, 2001, the historical financial data presented
within the separate column for RoweCom reflects the operating activity of
RoweCom for the period from January 1, 2001 through the acquisition date because
activity subsequent to that date is reflected in divine's historical statement
of operations for the year ended December 31, 2001.
Delano's fiscal year end is March 31. The latest Delano financial
statements that have been publicly filed are those contained within Delano's
Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2001.
Consequently, the unaudited pro forma condensed combined balance sheet as of
March 31, 2002 reflects Delano's unaudited historical balance sheet as of
December 31, 2001. Similarly, the unaudited pro forma condensed combined
statement of operations for the three months ended March 31, 2002 reflects
Delano's unaudited historical statement of operations for the three months ended
December 31, 2001.
The operating results for Delano, as reflected in the unaudited pro forma
condensed combined statement of operations for the year ended December 31, 2001,
represent the twelve-month period ended December 31, 2001, and were derived from
the financial statements contained within Delano's Annual Report on Form 10-K
for the year ended March 31, 2001 and Delano's Quarterly Report on Form 10-Q for
the three- and nine-month periods ended December 31, 2001 and 2000.
divine has prepared the unaudited pro forma condensed combined financial
statements using the purchase method of accounting for all of these
transactions. The unaudited pro forma condensed combined financial statements
have been prepared to present all companies on a U.S. GAAP basis and in U.S.
dollars. Historical information of divine, Delano, RoweCom and Viant for these
purposes was prepared using U.S. GAAP and in U.S. dollars. Because the unaudited
pro forma condensed combined financial statements are based upon the financial
condition and operating results, as applicable, of RoweCom, Delano, and Viant
during periods when they were not under the control, influence or management of
divine, the information presented may not be indicative of the results that
would have actually occurred had the acquisitions been completed as of the
respective periods presented, nor is it indicative of future financial or
operating results. divine has incurred, and expects to incur reorganization and
integration expenses as well as potential operating efficiencies as a result of
the acquisition of RoweCom. divine expects to also incur reorganization and
integration expenses and potential operating efficiencies as a result of the
acquisitions of Delano and Viant. The unaudited pro forma condensed combined
financial statements do not give effect to any synergies that may occur due to
the integration of RoweCom, Delano, and Viant with divine.
36
In May 2002, divine effected a 1 for 25 reverse stock split. All references
in the unaudited pro forma condensed combined financial statements and the notes
thereto to divine per share amounts, the number of divine shares outstanding or
issuable, and exchange ratios applicable to acquisitions give effect to the
reverse stock split.
Certain assets and liabilities in the consolidated balance sheets of Delano
and Viant have been reclassified to conform to the divine line item presentation
in the unaudited pro forma condensed combined balance sheet. Certain expenses in
the consolidated statements of operations of RoweCom, Delano, and Viant have
been reclassified to conform to the divine line item presentation in the
unaudited pro forma condensed combined statement of operations, as applicable.
The unaudited pro forma condensed combined financial statements should be read
along with the historical financial statements of divine and the related notes,
included in Annex I and Annex T to this document, the historical financial
statements of Delano and the related notes, included in Annex J and Annex M to
this document, the historical financial statements of Viant and the related
notes, included in Annex R to this document, and the historical financial
statements of RoweCom and the related notes, included in Annex S to this
document.
37
DIVINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2002
(IN THOUSANDS)
DELANO PRO FORMA
DIVINE OAK DELANO ADJUSTMENTS
----------- ----------- ----------- ----------------
ASSETS
Current assets
Cash, cash equivalents, and
short-term investments ............... $ 39,960 $ 61,400(a) $ 11,205 $ (1,750)(b)
Restricted cash ....................... 38,130 -- -- --
Accounts receivable, net .............. 122,071 -- 4,132 --
Available-for-sale securities ......... 2,577 -- 1,427 --
Note receivable ....................... 308 -- -- --
Prepaid expenses ...................... 13,336 -- 842 --
Deferred publisher costs .............. 227,544 -- -- --
Other current assets .................. 5,941 -- -- --
----------- ----------- ----------- -----------
Total current assets ................ 449,867 61,400 17,606 (1,750)
Property and equipment, net ........... 50,295 -- 2,867 --
Goodwill and other intangible
assets, net .......................... 283,059 -- -- 21,254(b)
Restricted cash ....................... -- -- -- --
Other non-current assets .............. 13,504 -- 263 --
----------- ----------- ----------- -----------
TOTAL ASSETS .......................... $ 796,725 $ 61,400 $ 20,736 $ 19,504
=========== =========== =========== ===========
LIABILITIES
Current liabilities
Accounts payable ...................... 20,216 -- 2,030 --
Publisher payables .................... 40,797 --
Accrued payroll expenses .............. 14,457 -- 623 --
Accrued professional fees ............. 3,053 -- 25 --
Current portion of facilities
impairment .......................... 7,801 -- 1,737 --
Current portion of capital leases ..... 15,407 -- 89 --
Deferred revenue ...................... 288,357 -- 801 --
Notes payable and current portion of
long-term debt ...................... 15,798 -- -- --
Other accrued expenses and current
liabilities ......................... 49,032 -- 1,134 --
----------- ----------- ----------- -----------
Total current liabilities ........... 454,918 -- 6,439 --
Long-term debt ........................ 62,378 -- -- --
Long-term facilities impairment ....... 22,546 -- -- --
Capital leases ........................ 6,625 -- -- --
Other non-current liabilities ......... 15,381 -- -- --
Redeemable preferred stock ............ -- 61,400(a) -- --
STOCKHOLDERS' EQUITY
Common stock .......................... 19 -- -- 2(b)
Additional paid-in capital ............ 1,229,020 -- -- 32,836(b)
1,030(b)
Unearned stock-based compensation ..... (15,230) -- -- (67)(b)
Accumulated other comprehensive loss .. (4,785) -- -- --
Treasury stock, at cost ............... (12,945) -- -- --
Accumulated deficit ................... (961,202) -- -- --
Acquired company equity ............... -- -- 14,297 (14,297)(b)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............. 234,877 -- 14,297 19,504
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ............................... $ 796,725 $ 61,400 $ 20,736 $ 19,504
=========== =========== =========== ===========
VIANT DIVINE/OAK/DELANO/
DIVINE/OAK/DELANO PRO FORMA VIANT PRO FORMA
PRO FORMA COMBINED VIANT ADJUSTMENTS COMBINED
------------------ ----------- ----------- ------------------
ASSETS
Current assets
Cash, cash equivalents, and
short-term investments ............... $ 110,815 $ 114,102 $ (1,750)(c) $ 199,167
(24,000)(c)
Restricted cash ....................... 38,130 1,955 -- 40,085
Accounts receivable, net .............. 126,203 4,149 -- 130,352
Available-for-sale securities ......... 4,004 -- -- 4,004
Note receivable ....................... 308 400 -- 708
Prepaid expenses ...................... 14,178 -- -- 14,178
Deferred publisher costs .............. 227,544 -- -- 227,544
Other current assets .................. 5,941 474 -- 6,415
----------- ----------- ----------- -----------
Total current assets .................. 527,123 121,080 (25,750) 622,453
Property and equipment, net ........... 53,162 6,763 -- 59,925
Goodwill and other intangible
assets, net .......................... 304,313 -- 2,952(c) 307,265
Restricted cash ....................... -- -- -- --
Other non-current assets .............. 13,767 4,092 -- 17,859
----------- ----------- ----------- -----------
TOTAL ASSETS .......................... $ 898,365 $ 131,935 $ (22,798) $ 1,007,502
=========== =========== =========== ===========
LIABILITIES
Current liabilities
Accounts payable ...................... 22,246 1,597 -- 23,843
Publisher payables .................... 40,797 -- -- 40,797
Accrued payroll expenses .............. 15,080 1,219 -- 16,299
Accrued professional fees ............. 3,078 759 -- 3,837
Current portion of facilities
impairment .......................... 9,538 4,218 -- 13,756
Current portion of capital leases ..... 15,496 625 -- 16,121
Deferred revenue ...................... 289,158 912 -- 290,070
Notes payable and current portion of
long-term debt ...................... 15,798 -- -- 15,798
Other accrued expenses and current
liabilities ......................... 50,166 1,129 -- 51,295
----------- ----------- ----------- -----------
Total current liabilities ............. 461,357 10,459 -- 471,816
Long-term debt ........................ 62,378 -- -- 62,378
Long-term facilities impairment ....... 22,546 3,039 -- 25,585
Capital leases ........................ 6,625 49 -- 6,674
Other non-current liabilities ......... 15,381 -- -- 15,381
Redeemable preferred stock ............ 61,400 -- -- 61,400
STOCKHOLDERS' EQUITY
Common stock .......................... 21 -- 8(c) 29
Additional paid-in capital ............ 1,262,886 -- 84,875(c) 1,358,468
10,707(c)
Unearned stock-based compensation ..... (15,297) -- -- (15,297)
Accumulated other comprehensive loss .. (4,785) -- -- (4,785)
Treasury stock, at cost ............... (12,945) -- -- (12,945)
Accumulated deficit ................... (961,202) -- -- (961,202)
Acquired company equity ............... -- 118,388 (118,388)(c) --
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............. 268,678 118,388 (22,798) 364,268
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ............................... $ 898,365 $ 131,935 $ (22,798) $ 1,007,502
=========== =========== =========== ===========
38
DIVINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ROWECOM DIVINE/ROWECOM
PRO FORMA PRO FORMA
DIVINE ROWECOM ADJUSTMENTS COMBINED DELANO
--------- ----------- ----------- -------------- -----------
Revenues ..................................... $ 199,598 $ 336,329 $ -- $ 535,927 $ 18,209
Operating expenses:
Cost of revenues ............................ 179,853 306,806 -- 486,659 6,095
Selling, general and administrative ......... 176,649 39,621 -- 216,270 29,487
Research and development .................... 37,004 -- -- 37,004 12,335
Acquired technology-in process research
and development ........................... 13,741 -- -- 13,741 --
Bad debt expense ............................ 23,379 -- -- 23,379 --
Amortization of intangible assets ........... 16,091 3,799 (3,799)(d) 16,091 6,205
Impairment of intangible and other assets ... 37,864 -- -- 37,864 110,233
Impairment of prepaid co-location and
bandwidth services ........................ 25,000 -- -- 25,000 --
Impairment of facilities .................... 12,022 -- -- 12,022 --
Restructuring charges ....................... -- -- -- -- 15,058
Amortization of stock-based compensation .... 9,667 -- -- 9,667 (1,812)
----------- ----------- ----------- ----------- -----------
Total operating expenses .................. 531,270 350,226 (3,799) 877,697 177,601
----------- ----------- ----------- ----------- -----------
Operating loss ............................ (331,672) (13,897) 3,799 (341,770) (159,392)
Other income (expense):
Interest income ............................. 8,932 552 -- 9,484 1,048
Interest expense ............................ (3,681) (6,455) -- (10,136) (54)
Other income (loss), net .................... (4,135) 2 -- (4,133) 145
----------- ----------- ----------- ----------- -----------
Total other income (expense) ............... 1,116 (5,901) -- (4,785) 1,139
----------- ----------- ----------- ----------- -----------
Loss before minority interest, net gain
of stock transactions of associated
companies, equity in losses of associated
companies, and impairment of
investment in equity method and
cost method associated companies ........... (330,556) (19,798) 3,799 (346,555) (158,253)
Minority interest ............................ 4,270 -- -- 4,270 --
Net gain of stock transactions of
associated companies ....................... 667 -- -- 667 --
Equity in losses of associated companies ..... (19,604) -- -- (19,604) (424)
Impairment of investment in equity method
and cost method associated companies ....... (36,633) -- -- (36,633) --
----------- ----------- ----------- ----------- -----------
Income (Loss) before income taxes ............ (381,856) (19,798) 3,799 (397,855) (158,677)
Income tax (benefit) provision ............... -- (921) 921(d) -- --
----------- ----------- ----------- ----------- -----------
Net loss from continuing operations ........ $ (381,856) $ (18,877) $ 2,878 $ (397,855) $ (158,677)
----------- ----------- ----------- ----------- -----------
Basic and diluted net loss per share
from continuing operations ................. $ (53.26) $ (52.95)
Shares used in computing basic and
diluted net loss per share ................. 7,168,989 7,514,097
=========== ===========
DIVINE/ROWECOM DIVINE
DELANO DELANO DELANO/VIANT
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED VIANT COMBINED
------------ -------------- ------------ ------------
Revenues ..................................... $ -- $ 554,136 $ 34,606 $ 588,742
Operating expenses:
Cost of revenues ............................ -- 492,754 35,755 528,509
Selling, general and administrative ......... -- 245,757 43,041 288,798
Research and development .................... -- 49,339 1,631 50,970
Acquired technology-in process research
and development ........................... -- 13,741 -- 13,741
Bad debt expense ............................ -- 23,379 -- 23,379
Amortization of intangible assets ........... (891)(e) 21,405 -- 21,405
Impairment of intangible and other assets ... -- 148,097 -- 148,097
Impairment of prepaid co-location and
bandwidth services ........................ -- 25,000 -- 25,000
Impairment of facilities .................... -- 12,022 23,900 35,922
Restructuring charges ....................... -- 15,058 7,115 22,173
Amortization of stock-based compensation .... 22(f) 7,877 -- 7,877
------------ ------------ ------------ ------------
Total operating expenses .................. (869) 1,054,429 111,442 1,165,871
------------ ------------ ------------ ------------
Operating loss ............................ 869 (500,293) (76,836) (577,129)
Other income (expense):
Interest income ............................. -- 10,532 6,757 17,289
Interest expense ............................ -- (10,190) (139) (10,329)
Other income (loss), net .................... -- (3,988) (1,774) (5,762)
------------ ------------ ------------ ------------
Total other income (expense) ............... -- (3,646) 4,844 1,198
------------ ------------ ------------ ------------
Loss before minority interest, net gain
of stock transactions of associated
companies, equity in losses of associated
companies, and impairment of
investment in equity method and
cost method associated companies ........... 869 (503,939) (71,992) (575,931)
Minority interest ............................ -- 4,270 -- 4,270
Net gain of stock transactions of
associated companies ....................... -- 667 -- 667
Equity in losses of associated companies ..... -- (20,028) -- (20,028)
Impairment of investment in equity method\
and cost method associated companies ...... -- (36,633) -- (36,633)
------------ ------------ ------------ ------------
Income (Loss) before income taxes ............ 869 (555,663) (71,992) (627,655)
Income tax (benefit) provision ............... -- -- -- --
------------ ------------ ------------ ------------
Net loss from continuing operations .......... $ 869 $ (555,663) $ (71,992) $ (627,655)
------------ ------------ ------------ ------------
Basic and diluted net loss per share
from continuing operations ................. $ (58.03) $ (36.12)
Shares used in computing basic and
diluted net loss per share ................. 9,576,139 17,375,070
============ ============
39
DIVINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DELANO DIVINE/DELANO VIANT
PRO FORMA PRO FORMA PRO FORMA
DIVINE, INC. DELANO ADJUSTMENTS COMBINED VIANT COMBINED
------------ ---------- ----------- ------------- ---------- -------------
Revenues ............................. $ 146,329 $ 4,160 $ -- $ 150,489 $ 5,354 $ 155,843
Operating expenses:
Cost of revenues .................... 124,702 1,151 -- 125,853 4,785 130,638
Selling, general and administrative . 56,223 2,767 -- 58,990 7,191 66,181
Research and development ............ 30,541 1,007 -- 31,548 -- 31,548
Acquired technology-in process
research and development .......... -- -- -- -- -- --
Bad debt expense .................... (675) -- -- (675) -- (675)
Amortization of intangible assets ... 3,792 -- 1,328(e) 5,120 -- 5,120
Impairment of intangible and other
assets ............................ 250 603 -- 853 -- 853
Impairment of prepaid co-location
and bandwidth services ............ -- -- -- -- -- --
Impairment of facilities ............ -- -- -- -- -- --
Restructuring charges ............... -- (2,094) -- (2,094) -- (2,094)
Amortization of stock-based
compensation ....................... 1,876 399 6(f) 2,281 -- 2,281
----------- ---------- ---------- ------------ ---------- ------------
Total operating expenses ........... 216,709 3,833 1,334 221,876 11,976 233,852
----------- ---------- ---------- ------------ ---------- ------------
Operating loss ..................... (70,380) 327 (1,334) (71,387) (6,622) (78,009)
Other income (expense):
Interest income ..................... 253 35 -- 288 659 947
Interest expense .................... (2,194) -- -- (2,194) (27) (2,221)
Other income (loss), net ............ 467 -- 467 15 482
----------- ---------- ---------- ------------ ---------- ------------
Total other income (expense) ....... (1,474) 35 -- (1,439) 647 (792)
----------- ---------- ---------- ------------ ---------- ------------
Loss before minority interest, net
gain of stock transactions of
associated companies, equity in
losses of associated companies, and
impairment of investment in
equity method and cost method
associated companies .............. (71,854) 362 (1,334) (72,826) (5,975) (78,801)
Minority interest .................... -- -- -- -- -- --
Net gain of stock transactions of
associated companies ............... -- -- -- -- -- --
Equity in losses of associated
companies .......................... -- -- -- -- -- --
Impairment of investment in equity
method and cost method associated
companies .......................... (1,461) -- -- (1,461) -- (1,461)
----------- ---------- ---------- ------------ ---------- ------------
Net loss from continuing operations . $ (73,315) $ 362 $ (1,334) $ (74,287) $ (5,975) $ (80,262)
----------- ---------- ---------- ------------ ---------- ------------
Basic and diluted net loss per share
from continuing operations ......... $ (4.09) $ (3.72) $ (2.89)
Shares used in computing basic
and diluted net loss per share ..... 17,913,939 19,975,981 27,774,912
40
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet as of March 31,
2002 gives effect to the pending acquisitions of Delano and Viant as if
they occurred on that date. Because RoweCom was acquired by divine in 2001,
the assets and liabilities of RoweCom are already included in divine's
historical balance sheet as of March 31, 2002. As such, RoweCom is not
included separately in the unaudited pro forma condensed combined balance
sheet as of March 31, 2002. The unaudited pro forma condensed combined
statements of operations for the year ended December 31, 2001 and the three
months ended March 31, 2002 give effect to the pending acquisitions of
Delano and Viant as if they occurred on January 1, 2001. Because RoweCom's
operations are already included in divine's historical statement of
operations for the three months ended March 31, 2002, RoweCom is not
included separately in the unaudited pro forma condensed combined statement
of operations for the three months ended March 31, 2002. The operating
activity of RoweCom from divine's acquisition date through December 31,
2001 is reflected in divine's historical statement of operations for the
year ended December 31, 2001. Therefore, the historical financial data for
RoweCom as set forth in the pro forma condensed combined statement of
operations for the year ended December 31, 2001 reflects the operating
activity of RoweCom for the period from January 1, 2001 through divine's
acquisition date, in order that the statement of operations gives effect to
the RoweCom acquisition as if it occurred on January 1, 2001.
Delano's fiscal year end is March 31. The latest Delano financial
statements that have been publicly filed are those contained within
Delano's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2001. Consequently, the unaudited pro forma condensed combined
balance sheet as of March 31, 2002 reflects Delano's unaudited historical
balance sheet as of December 31, 2001. Similarly, the unaudited pro forma
condensed combined statement of operations for the three months ended March
31, 2002 reflects Delano's unaudited historical statement of operations for
the three months ended December 31, 2001.
The operating results for Delano, as reflected in the unaudited pro forma
condensed combined statement of operations for the year ended December 31,
2001, represent the twelve-month period ended December 31, 2001, and were
derived from the financial statements contained within Delano's Annual
Report on Form 10-K for the year ended March 31, 2001 and Delano's
Quarterly Report on Form 10-Q for the three- and nine-month periods ended
December 31, 2001 and 2000.
The following table summarizes information concerning the estimated
purchase price allocation for the pending acquisitions of Delano and Viant
as if they had occurred on March 31, 2002.
FAIR VALUE UNEARNED GOODWILL AND
PURCHASE OF TANGIBLE STOCK BASED OTHER INTANGIBLE
COMPANY PRICE NET ASSETS COMPENSATION ASSETS
----------- ----------- ------------ ----------------
Delano .. $35,618,000 $14,297,000 $ 67,000 $21,254,000
Viant ... 97,339,000 94,387,000 -- 2,952,000
The purchase prices of both Delano and Viant include estimated acquisition
costs of $1,750,000.
In the Delano acquisition, divine expects to issue approximately 2,062,000
shares of its class A common stock. Additionally, divine expects to issue
options to purchase approximately 70,000 shares of its class A common
stock, with exercise prices ranging from $2.32 to $2.95 per share, based on
the closing price of divine's class A common stock on June 12, 2002. divine
also expects to issue warrants to purchase approximately 1,000 shares of
its class A common stock, with exercise prices ranging from $126.25 to
$131.75 per share. For purposes of the unaudited pro forma condensed
combined financial statements, the assumed fair value of divine common
stock issued in the Delano acquisition for purchase accounting purposes is
$15.93 per share, which represents the average of the closing price of
divine's common stock on the first day the agreed upon terms of the Delano
acquisition were announced by divine (March 13, 2002) and the three
business days before and after the announcement date.
In the Viant acquisition, divine expects to issue approximately 7,823,000
shares of its class A common stock. Additionally, divine expects to issue
options to purchase approximately 1,374,000 shares of its class A common
stock, with exercise prices ranging from $0.13 to $237.52 per share. For
purposes of the unaudited pro forma condensed combined financial
statements, the assumed fair value of divine common stock issued in the
Viant acquisition for purchase accounting purposes is $10.85 per share,
which represents the average of the closing price of divine's common stock
on the first day the agreed upon terms of the Viant acquisition were
announced by divine (April 5, 2002) and the three business days before and
after the announcement date.
The effects of the Delano and Viant acquisitions have been presented using
the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon
management's best preliminary estimates of fair value with any excess
purchase price being allocated to goodwill or other intangibles. The
preliminary allocation of the purchase price for Delano and Viant may be
subject to further adjustments, as divine finalizes its allocation of
purchase price in accordance with U.S. generally accepted accounting
principles. The pro forma adjustments related to the purchase price
allocation of the acquisitions represent management's best estimate of the
effects of these transactions.
41
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
2. PRO FORMA BALANCE SHEET ADJUSTMENTS
a) Reflects the assumed issuance of 61,600 shares of divine's series B
convertible preferred stock and warrants to purchase 9,667 shares of
divine's series B convertible preferred stock to the investment group
led by Oak in exchange for $61,400,000, net of assumed offering costs
of $200,000. Based on the closing price of divine common stock on June
14, 2002, there is no beneficial conversion feature associated with
the series B convertible preferred stock or the warrants issued in the
Oak transaction.
b) Reflects the assumed issuance of 2,062,042 shares of divine common
stock and the elimination of Delano's equity in consolidation. Also
reflects the estimated acquisition costs of $1,750,000 for the Delano
acquisition. Also reflects the assumed issuance of options and
warrants to purchase 69,888 and 1,469 shares, respectively, of divine
common stock. The Black-Scholes fair value of these options and
warrants is $1,030,000 and has been included as part of the purchase
price. Also reflects the establishment by divine of goodwill and other
intangible assets of $21,254,000, which represents the fair value of
divine's consideration given in excess of the assumed fair value of
Delano's tangible net assets as of March 31, 2002. Based on the number
and intrinsic value of "in-the-money" unvested Delano options as of
June 12, 2002, $67,000 of the purchase price has been reflected as
unearned stock-based compensation.
c) Reflects the assumed issuance of 7,823,283 shares of divine common
stock and the elimination of Viant's equity in consolidation. Also
reflects the assumed issuance of options to purchase 1,373,546 shares
of divine common stock. The Black-Scholes fair value of these options
is $10,707,000 and has been included as part of the purchase price.
Also reflects reductions of cash resulting from a $24,000,000
distribution payable by Viant to its stockholders prior to the
acquisition date and an estimated $1,750,000 of acquisition costs for
the Viant acquisition. Also reflects the establishment by divine of
goodwill of $2,952,000, which represents the fair value of divine's
consideration given in excess of the assumed fair value of Viant's
tangible net assets as of March 31, 2002. Based on the number and
intrinsic value of "in-the-money" unvested Viant options as of June
12, 2002, none of the purchase price has been reflected as unearned
stock-based compensation.
3. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
d) Reflects the removal of RoweCom's historical amortization of
intangible assets and its income tax benefit, neither of which would
have been recorded had the acquisition occurred on January 1, 2001.
e) Amortization of intangible assets has been adjusted to reflect the
amortization of goodwill and other intangible assets associated with
the Delano acquisition over an estimated useful life of four years,
and to eliminate the historical amortization of goodwill and other
intangible assets recorded by Delano. Under the provisions of SFAS No.
142, Goodwill and Other Intangible Assets, goodwill acquired in
transactions completed after June 30, 2001 is not amortized. As such,
the unaudited pro forma condensed combined statement of operations
does not reflect any goodwill amortization expense related to the
Delano acquisition. The excess purchase price over the adjusted fair
value of Delano tangible net assets has not yet been allocated between
in-process research and development charges, goodwill, and other
intangible assets. For purposes of the unaudited pro forma condensed
combined statement of operations, the entire excess purchase price for
Delano is considered to be allocated to amortizable intangible assets
with a useful life of four years.
The entire excess purchase price over the adjusted fair value of Viant
tangible net assets is expected to be classified as goodwill. As such,
under the provisions of SFAS No. 142, there is no amortization of
intangible assets related to the Viant acquisition reflected in the
unaudited pro forma condensed combined statements of operations for
the year ended December 31, 2001 and for the three months ended March
31, 2002.
f) Reflects the amortization of unearned stock-based compensation
recorded for the Delano acquisition over an estimated remaining
vesting period of three years as of January 1, 2001.
42
CAPITALIZATION AND PRO FORMA CAPITALIZATION OF DIVINE
The following table sets forth the capitalization of divine as at March 31,
2002, on the basis of the assumptions set forth in the divine unaudited pro
forma financial statements. This table should be read in conjunction with the
divine unaudited pro forma financial statements included elsewhere herein.
PRO FORMA CAPITALIZATION OF DIVINE
(unaudited)
DIVINE/OAK/DELANO DIVINE/OAK/DELANO/VIANT
DIVINE AS OF PRO FORMA AS OF PRO FORMA AS OF
MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2002
-------------- ----------------- -----------------------
(in thousands)
Current portion of long term debt ............... 2,640 2,640 2,640
Long term debt .................................. 62,378 62,378 62,378
Redeemable Preferred Stock (0; 61,600; and 61,600
shares outstanding) ........................... -- 61,400 61,400
Stockholders' Equity
Common stock (18,507,012; 20,569,054; and
28,367,985 shares outstanding) ................ 19 21 29
Additional paid-in capital ...................... 1,229,020 1,262,886 1,358,468
Unearned stock-based compensation ............... (15,230) (15,297) (15,297)
Accumulated other comprehensive loss ............ (4,785) (4,785) (4,785)
Treasury stock (356,706 shares) ................. (12,945) (12,945) (12,945)
Accumulated deficit ............................. (961,202) (961,202) (961,202)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........................ $ 234,877 $ 268,678 $ 364,268
=========== =========== ===========
TOTAL CAPITALIZATION .............................. $ 299,895 $ 395,096 $ 490,686
=========== =========== ===========
43
THE COMBINATION AGREEMENT
The following summary of the Combination Agreement is qualified by
reference to the complete text of the Combination Agreement. The Combination
Agreement is incorporated by reference into this document and attached as Annex
A. Certain Exhibits to the Combination Agreement are attached separately as
Annex A-1, Annex B, Annex C, Annex D, Annex E and Annex F.
STRUCTURE OF THE ARRANGEMENT
Under the terms of the Combination Agreement, Delano will enter into a Plan
of Arrangement under the OBCA, as a result of which Delano will become a
subsidiary of divine.
COMPLETION AND EFFECTIVENESS OF THE ARRANGEMENT
divine and Delano will complete the transaction after all of the conditions
to completion of the Arrangement contained in the Combination Agreement have
been satisfied or waived. The Arrangement will become effective upon the
issuance of a certificate of Arrangement, issued pursuant to subsection 183(2)
of the OBCA after the Articles of Arrangement have been filed. divine and Delano
are working toward satisfying the conditions and completing the Arrangement as
quickly as possible.
divine and Delano currently plan to complete the Arrangement during July
2002. Because the combination is subject to regulatory approvals and other
conditions, some of which are beyond divine and Delano's control, the exact
timing cannot be predicted.
EXCHANGE OF SHARES ON THE ARRANGEMENT
Under the Arrangement, divine will become the owner of all of the Delano
Common Shares outstanding immediately following the Arrangement. A Delano
shareholder (other than divine or its Affiliates and a Delano shareholder who
has properly exercised its dissent rights and is paid fair value by Delano) will
receive either a number of shares of divine Common Stock equal to the Exchange
Ratio multiplied by the number of Delano Common Shares held by such holder or,
at the option of a validly-electing Delano shareholder who is either, (i) a
Canadian resident for the purposes of the Income Tax Act (Canada) not exempt
from tax under Part I of the Income Tax Act (Canada) holding Delano Common
Shares on its own behalf or (ii) a person who holds Delano Common Shares on
behalf of one or more Canadian residents for the purposes of the Income Tax Act
(Canada) not exempt from tax under Part I of the Income Tax Act (Canada), a
number of Exchangeable Shares (and certain ancillary rights) equal to the
Exchange Ratio multiplied by the number of Delano Common Shares held by such
holder. The Exchangeable Shares will be securities issued by Delano exchangeable
on a one-for-one basis for shares of divine Common Stock. Holders of the
Exchangeable Shares will be entitled to dividend and other rights that are
substantially economically equivalent to those of the holders of divine Common
Stock. Through the Voting and Exchange Trust Agreement, holders of the
Exchangeable Shares will be entitled to vote at meetings of divine shareholders.
In accordance with the Combination Agreement, the Exchange Ratio was
adjusted to reflect fully the 1-for-25 reverse stock split implemented by divine
on May 29, 2002. See "Transaction Mechanics -- Reverse Stock Split of divine
Common Stock". Furthermore, the Plan of Arrangement and the Exchangeable Share
Support Agreement provide that so long as any Exchangeable Shares not owned by
divine or any of its Affiliates are outstanding, divine will not, without the
prior approval of Delano and the holders of the Exchangeable Shares, effect a
transaction such as the reverse stock split described above, unless the same or
an economically equivalent change shall simultaneously be made to, or in, the
rights of the holders of Exchangeable Shares.
The Combination Agreement also provides that if, in the opinion of counsel
to Delano, a change in tax law is enacted and becomes effective prior to the
Effective Date pursuant to which beneficial holders of Delano Common Shares who
are Canadian residents and who hold their shares as capital property for
purposes of the Income Tax Act (Canada) (and equivalent Ontario law) may
exchange their Delano Common Shares for shares of divine Common Stock on a tax
deferred basis for purposes of the Income Tax Act (Canada) (and equivalent
Ontario law) then, at the option of divine, no Exchangeable Shares will be
issued and the Plan of Arrangement will be amended accordingly.
44
FRACTIONAL SHARES
No certificates representing fractional Exchangeable Shares or fractional
shares of divine Common Stock shall be issued upon the surrender for exchange of
certificates representing Delano Common Shares. In lieu of any such fractional
securities, each person otherwise entitled to a fractional interest in a
Exchangeable Share or share of divine Common Stock will be entitled to receive a
cash payment based on such person's pro rata portion of the net proceeds after
expenses received by the Depositary upon the sale of whole shares representing
an accumulation of all fractional interests in shares of divine Common Stock, to
which all such persons would otherwise be entitled either directly or through
the exchange of Exchangeable Shares.
DELANO'S REPRESENTATIONS AND WARRANTIES
Delano made a number of customary representations and warranties to divine
in the Combination Agreement regarding aspects of its business, financial
condition, structure and other facts pertinent to the combination.
These representations and warranties include representations as to:
o the corporate organization and qualification to do business of Delano
and its subsidiaries;
o the articles of incorporation and bylaws of Delano and its
subsidiaries;
o Delano's and its subsidiaries' capitalization;
o authorization of the Combination Agreement by Delano;
o the absence of certain conflicts in connection with Delano's and its
subsidiaries' performance under the Combination Agreement;
o regulatory approvals required by Delano to complete the Arrangement;
o the filing and consent obligations of Delano and its subsidiaries
under applicable laws in connection with the Arrangement;
o compliance with applicable laws and certain contracts by Delano and
its subsidiaries;
o the absence of government investigation or review of Delano or its
subsidiaries;
o Delano's and its subsidiaries' filings and reports with Canadian and
U.S. securities regulatory authorities, the TSE and NASDAQ;
o Delano's and its subsidiaries' financial statements;
o Delano's and its subsidiaries' books and records;
o Delano's and its subsidiaries' liabilities;
o changes in Delano's business, including its subsidiaries, since
December 31, 2001, and actions taken by Delano or its subsidiaries
since December 31, 2001;
o litigation involving Delano or its subsidiaries;
o Delano's and its subsidiaries' employee benefit plans;
o Delano's and its subsidiaries' labour relations, including compliance
with all applicable laws;
o title to the properties Delano and its subsidiaries own and validity
of Delano's and its subsidiaries' leases;
o tax matters pertaining to Delano and its subsidiaries;
o environmental matters pertaining to Delano and its subsidiaries;
o payments required to be made by Delano to brokers and agents in
connection with the Arrangement;
o intellectual property matters pertaining to Delano and its
subsidiaries;
o Delano's and its subsidiaries' agreements, contracts and commitments;
o Delano's and its subsidiaries' insurance coverage and claims;
45
o the opinion of Delano's financial advisor that as at the date of the
Combination Agreement the Exchange Ratio is fair from a financial
point of view to Delano shareholders;
o the approval of Delano's board of directors as to the Combination
Agreement, the transactions contemplated by the Combination Agreement,
the best interests of the shareholders, the recommendation of the
Arrangement to the shareholders, and the intent of board members to
vote their individual shares in favour of the Arrangement;
o the vote required to approve the Combination Agreement and
contemplated transactions;
o the Exchangeable Shares, which shall be duly and validly issued;
o the absence of the unlawful use of funds by Delano, its subsidiaries
or any of their respective directors, officers, employees or agents;
o neither the Company nor any of its subsidiaries being an "interested
shareholder" of divine;
o the absence of undisclosed non-arm's length transactions; and
o the absence of engagement by Delano and its affiliates in certain
cultural business referred to in Schedule IV of the Regulations
Respecting Investment in Canada made under the Investment Canada Act
or in section 14.1(5) of such statute.
Many of the representations and warranties are qualified by thresholds of
materiality or to a level of a Material Adverse Effect, and all such
representations and warranties expire upon completion of the Arrangement.
The representations and warranties contained in the Combination Agreement
are complicated and not easily summarized. You are urged to carefully read
Article III of the Combination Agreement entitled "Representations and
Warranties of Company".
REPRESENTATIONS AND WARRANTIES OF DIVINE
divine has made a number of customary representations and warranties to
Delano in the Combination Agreement regarding aspects of divine's business,
financial condition, structure and other facts pertinent to the Arrangement.
These representations and warranties include representations as to:
o the corporate organization and qualification to do business of divine
and its subsidiaries;
o the certificate of incorporation and bylaws of divine and its material
subsidiaries;
o divine's capitalization;
o authorization of the Combination Agreement, the Exchangeable Share
Support Agreement and the Voting and Exchange Trust Agreement by
divine;
o the absence of conflicts in connection with divine's obligations under
the Combination Agreement, the Exchangeable Share Support Agreement
and the Voting and Exchange Trust Agreement;
o the filing and consent obligations of divine under applicable laws and
certain contracts in connection with the combination;
o regulatory and third party approvals required by divine and its
material subsidiaries to complete the combination;
o compliance with applicable laws and certain contracts by divine and
claims against divine and its material subsidiaries;
o regulatory and third party approvals required by divine and its
material subsidiaries to complete the combination;
o divine's and its subsidiaries' filings and reports with the Securities
and Exchange Commission;
o divine's and its subsidiaries' financial statements;
46
o divine's and its subsidiaries' liabilities;
o changes in divine's or its material subsidiaries' business since
September 30, 2001, and actions taken by divine or its material
subsidiaries since September 30, 2001;
o litigation involving divine and its material subsidiaries;
o intellectual property matters pertaining to divine and its
subsidiaries;
o payments required to be made by divine to brokers and agents in
connection with the Arrangement;
o approval by divine's board of directors in connection with the
Arrangement;
o divine's issuance of common stock in connection with the Arrangement;
o divine's ownership of shares in Delano;
o the absence of any unlawful use of funds by divine, any of its
subsidiaries, or any of their respective directors, officers,
employees or agents;
o the value of divine's Canadian assets and revenues;
o divine's material contracts and commitments; and
o tax matters pertaining to divine and its subsidiaries.
Many of the representations and warranties are qualified by thresholds of
materiality or to a level of a Material Adverse Effect, and all such
representations and warranties expire upon completion of the Arrangement.
The representations and warranties contained in the Combination Agreement
are complicated and not easily summarized. You are urged to carefully read
Article IV of the Combination Agreement entitled "Representations and Warranties
of Parent".
DELANO'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE ARRANGEMENT
Under the terms of the Combination Agreement, Delano agreed that, until the
earlier of the completion of the Arrangement or termination of the Combination
Agreement, each of Delano and its subsidiaries, except to the extent divine
consents in writing, will:
o carry on its business in the ordinary course, consistent with past
practice and in compliance with applicable laws in all material
respects;
o pay or perform its material obligations when due; and
o make all reasonable efforts consistent with past practices and
policies to:
- preserve intact its present business organization;
- keep available the services of its present officers and
employees; and
- preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others with which it has
significant business dealings.
Under the terms of the Combination Agreement, Delano also agreed that,
subject to certain exceptions, until the earlier of the completion of the
Arrangement or termination of the Combination Agreement, or unless divine
consents in writing, Delano will comply with certain specific restrictions
relating to the operation of its business, including restrictions relating to
the following:
o waiving any stock repurchase rights or repricing options under any
employee, director or other stock plans or authorizing cash payments
in exchange for any options granted under any of such plans;
o granting or amending severance and termination payments;
o declaring or paying dividends or other distributions on shares of
Delano;
o purchasing, redeeming or otherwise acquiring shares of Delano;
o issuing shares of Delano or securities convertible into shares of
Delano;
47
o modifying the articles of incorporation or by-laws of Delano or its
subsidiaries;
o reorganizing, amalgamating or merging Delano or its subsidiaries,
other than in connection with the Combination Agreement;
o acquiring other business entities;
o entering into joint ventures, strategic partnerships or alliances;
o selling, leasing, licensing or disposing of material assets other than
in the ordinary course of business;
o transferring, licensing or selling, or otherwise extending, amending
or modifying any rights to the proprietary rights of Delano or
entering into any grants to future patent rights, other than on
standard company forms, providing for a non-exclusive license entered
into in the ordinary course of business;
o granting loans or purchasing equity interests in other persons other
than in the ordinary course of business;
o incurring material indebtedness other than in the ordinary course of
business;
o adopting or amending employee benefit plans;
o entering into material employment contracts or collective bargaining
agreements, paying special bonuses or materially increasing
compensation rates;
o paying or settling material litigation or liabilities;
o knowingly modifying, terminating or releasing any person from, or
knowingly failing to enforce any confidentiality agreement to which
Delano or any of its subsidiaries is a party or a beneficiary;
o modifying material contracts or waiving material rights under material
contracts other than in the ordinary course of business;
o changing accounting policies and procedures;
o commencing any material litigation, subject to certain exceptions;
o making certain tax elections;
o releasing or permitting the release of any person from any
confidentiality, "standstill" or similar agreements;
o requesting from any person that has executed, within 12 months prior
to the date of the Combination Agreement, a confidentiality agreement
in connection with a possible acquisition by that person of Delano,
the return of all confidential information furnished to such person;
o purchasing or renewing any of the insurance policies in place except
in compliance with the provisions of the Combination Agreement; and
o agreeing in writing or otherwise taking any actions described in the
above terms which would be reasonably likely to cause any of the
conditions to the agreement set forth in the Combination Agreement not
to be satisfied.
The agreements related to the conduct of Delano's business in the
Combination Agreement are complicated and not easily summarized. You are urged
to carefully read Article V of the Combination Agreement entitled "Conduct Prior
to the Effective Time".
DIVINE'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE ARRANGEMENT
Under the terms of the Combination Agreement, divine agreed that, until the
earlier of the completion of the Arrangement or termination of the Combination
Agreement, or unless Delano consents in writing, divine will comply with certain
specific restrictions relating to the operation of its business, including
restrictions relating to the following:
o proposing or adopting a plan of complete or partial liquidation or
dissolution;
o declaring, setting aside or paying any dividends or other
distributions on divine capital stock; and
48
o taking or agreeing in writing to take any actions described above that
would cause the conditions in the Combination Agreement not to be
satisfied.
The agreements related to the conduct of divine's business in the
Combination Agreement are complicated and not easily summarized. You are urged
to carefully read Article V of the Combination Agreement entitled "Conduct Prior
to the Effective Time".
MATERIAL COVENANTS
Solicitations by Delano; Withdrawal of Recommendation by Delano Board of
Directors
Under the terms of the Combination Agreement, Delano agreed to cease and
terminate, as of the date of the Combination Agreement, any and all existing
discussions with any parties other than divine with respect to any Acquisition
Proposal.
Until the combination is completed or the Combination Agreement is
terminated, Delano further agreed that neither it nor any of its subsidiaries
will (nor will they authorize or permit any of their respective officers,
directors or employees, or any of their investment bankers, attorneys or other
advisors or representatives to):
o solicit, initiate, knowingly encourage or otherwise knowingly
facilitate any Acquisition Proposal or any inquiries or proposals
relating to an Acquisition Proposal;
o subject to certain limited exceptions applicable upon receipt of a
Superior Proposal, as described below, engage in any discussions or
negotiations regarding, or furnish non-public information or afford
access to the properties, books or records of Delano or its
subsidiaries to any party other than divine with respect to, any
Acquisition Proposal;
o subject to certain limited exceptions in the event of a Superior
Proposal, as discussed below, withhold, withdraw or modify, or
publicly propose to do so, in a manner adverse to divine, or fail to
make its recommendation to vote in favour of the Arrangement or
approve, endorse or recommend any Acquisition Proposal; or
o subject to certain limited exceptions in the event of a Superior
Proposal, as discussed below, accept or enter into, or publicly
propose to accept or enter into, any letter of intent or similar
document relating to any Acquisition Proposal.
Delano also agreed that it will be responsible for any breach of these
provisions by Delano and its subsidiaries and any of their respective officers,
directors or employees, or any investment banker, attorney or other advisor or
representative retained by any of them.
Under the terms of the Combination Agreement, Delano has agreed that after
receipt of any Acquisition Proposal, it will promptly provide divine with a copy
of any written Acquisition Proposal and the identity of the person making such
Acquisition Proposal, and a written statement with respect to any non-written
Acquisition Proposal received, which would include the identity of the person or
entity making such Acquisition Proposal and a detailed description of the
material terms. Delano also agreed that it will not release or permit the
release of any person from, or waive or permit the waiver of any provision of,
any confidentiality, "standstill" or similar agreement (other than as required
pursuant to the terms of such agreement as in effect on March 12, 2002) under
which Delano or any of its subsidiaries has any rights, or fail to use
reasonable best efforts to enforce or cause to be enforced each such agreement
at the request of divine. Delano further agreed to use reasonable efforts to
keep divine informed of material modifications or proposed modifications of any
Acquisition Proposal.
Under the terms of the Combination Agreement, divine shall be released from
any "standstill" obligation under its confidentiality agreement with Delano
dated January 22, 2002 (i) to the extent that Delano or any of its subsidiaries
releases any third party from its "standstill" obligations or (ii) if the
Combination Agreement is terminated as a result of a Triggering Event (as
defined below) having occurred, solely to the extent necessary for divine to
make an offer on substantially similar or superior economic terms to any
Superior Proposal.
In response to a Superior Proposal submitted by a person, and not
withdrawn, Delano and its directors, officers, employees, investment bankers,
attorneys and other advisors and representatives may furnish non-public
information regarding Delano and its subsidiaries; participate in negotiations
regarding such Superior Proposal; enter into discussions or negotiations with
such person or group; withhold, withdraw, modify
49
or change in a manner adverse to divine, or fail to make, its recommendation to
vote in favour of the Arrangement; or approve, endorse or recommend such
Superior Proposal, if all of the following conditions are met:
o after March 12, 2002 and prior to the date of any shareholder approval
of the Arrangement Resolution, an unsolicited, bona fide written
Acquisition Proposal is made to Delano and not withdrawn;
o the board of directors of Delano reasonably believes in good faith,
after consultation with its financial advisor, that the Acquisition
Proposal, if consummated as proposed, constitutes a Superior Proposal;
o the board of directors of Delano reasonably believes in good faith,
after consultation with its outside legal counsel, that Delano's board
of directors is required to take such actions in order to properly
discharge its fiduciary duties;
o prior to furnishing any non-public information to any person, Delano
receives from such person an executed confidentiality agreement
(including "standstill" provisions) no less favourable to Delano than
the confidentiality agreement it entered into with divine on January
22, 2002; and
o contemporaneously with or prior to furnishing any non-public
information to the person, Delano furnishes the same non-public
information to divine, to the extent such non-public information has
not been previously furnished by Delano to divine.
EMPLOYEE MATTERS
Under the terms of the Combination Agreement, divine agreed that for a
period of one year from the completion of the Arrangement it will, in its sole
discretion:
o maintain Delano's employment, severance or similar contracts or
Arrangements or any plans, policies, funds, programs or contracts as
specified in the Combination Agreement to provide Delano employees who
remain after the completion of the Arrangement with substantially the
same types and levels of benefits they received prior to the closing
of the Arrangement;
o arrange for Delano employees who remain after the completion of the
Arrangement to participate in any similar plans of divine on terms no
less favourable than those offered to similarly situated divine
employees; or
o a combination of the above.
divine further agreed that each Delano employee who remains with Delano
after the completion of the Arrangement, to the extent permitted by law and
applicable tax qualification requirements, and subject to any generally
applicable break in service or similar rule, will receive full credit for
purposes of eligibility to participate in, vesting, severance and vacation under
divine's benefit plans for years of service with Delano or its subsidiaries
prior to the completion of the Arrangement.
OTHER COVENANTS
Under the terms of the Combination Agreement, each of divine and Delano
have agreed to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective as soon as reasonably practicable the
Arrangement and transactions contemplated by the Combination Agreement.
Delano has agreed that it and its subsidiaries will perform all obligations
under the Combination Agreement, cooperate with divine and do all things
necessary or desirable to consummate and make effective the Arrangement and the
transactions contemplated in the Combination Agreement, as soon as reasonably
practicable, and will:
o use all reasonable efforts to obtain the requisite approvals of Delano
shareholders with respect to the Arrangement Resolution, unless
Delano's board of directors has properly withdrawn, modified or
qualified its recommendation to Delano shareholders;
o advise divine, upon reasonable request, of the aggregate tally of the
proxies and votes and matters to be considered at the Special Meeting
at which the Arrangement Resolution will be considered;
50
o use all reasonable efforts to obtain any regulatory approvals relating
to Delano or its subsidiaries and keep divine informed of the status
of proceedings;
o use all reasonable efforts to effect all necessary registrations,
filings and submissions of information required by governmental
entities relating to the Arrangement;
o use all reasonable efforts to obtain all necessary waivers, consents
and approvals required in connection with the Arrangement from other
parties to any material loan agreements, leases or other material
contracts;
o carry out the terms of the Interim Order and the Final Order and use
all reasonable efforts to comply with all requirements of applicable
laws imposed on Delano or its subsidiaries relating to the
Arrangement;
o provide divine with a copy of any purported exercise of dissent rights
and written communications regarding the same, and not settle or
compromise any claim of present, former or purported holders of Delano
securities in connection with the Arrangement;
o cause all Delano Options other than In-the-Money Options to vest prior
to the Effective Time (subject to Delano's right to retract such
acceleration if the Combination Agreement terminates for any reason)
such that all such Delano Options are exercisable and may be
conditionally exercised prior to the Effective Time, and immediately
prior to the Effective Time such options that have not been exercised
shall terminate and expire; and
o promptly notify divine orally and, if requested, in writing, of:
- any event occurring subsequent to the date of the Combination
Agreement (i) that would render any representation or warranty of
Delano contained in the Combination Agreement untrue or
inaccurate in any material respect at the time it was made; or
(ii) that would not reasonably be expected to be cured prior to
the Effective Time and would render any representation or
warranty of Delano contained in the Combination Agreement untrue
or inaccurate in any material respect at the Effective Time;
- any Material Adverse Effect on Delano; and
- any material breach of any covenant or agreement by Delano
contained in the Combination Agreement.
divine has agreed to perform all obligations under the Combination
Agreement, cooperate with Delano and do all things necessary or desirable to
consummate and make effective the Arrangement and the transactions contemplated
in the Combination Agreement, as soon as reasonably practicable, and to:
o apply for and use its reasonable best efforts to obtain any regulatory
approvals relating to divine and to keep Delano informed of the status
of proceedings including providing Delano with copies of all
applications and other related documents in order for Delano to
provide its reasonable comments;
o use all reasonable efforts to effect all necessary registrations,
filings and submissions of information required by governmental
entities from divine relating to the Arrangement;
o carry out the terms of the Interim Order and the Final Order and use
all reasonable efforts to comply with all requirements of applicable
laws imposed on divine or its subsidiaries relating to the
Arrangement; and
o promptly advise Delano orally and, if requested, in writing, of:
- any event occurring subsequent to the date of the Combination
Agreement that would (i) render any representation or warranty of
divine contained in the Combination Agreement untrue or
inaccurate in any material respect at the time it was made or
(ii) that would not reasonably be expected to be cured prior to
the Effective Time and would render any representation or
warranty of divine contained in the Combination Agreement untrue
or inaccurate in any material respect at the Effective Time;
- any Material Adverse Effect on divine; and
51
- any material breach of any covenant or agreement by divine
contained in the Combination Agreement.
divine has agreed to use its reasonable best efforts to:
o cause the listing on NASDAQ of shares of divine Common Stock to be
issued upon the closing of the Arrangement, upon exchange of the
Exchangeable Shares and upon exercise of the Replacement Options; and
o maintain the listing of shares of divine Common Stock on NASDAQ and,
if divine receives notice of delisting, submit a plan to Nasdaq to
maintain its listing, keep Delano generally informed of divine's
efforts and plans with respect to maintaining such listing and provide
copies to Delano of any correspondence sent or received from Nasdaq.
divine has agreed to purchase, prior to closing, a directors' and officers'
liability insurance policy for a 6 year period covering those persons who are
currently covered by Delano's directors' and officers' liability insurance
policy on terms comparable to those applicable to the current directors and
officers of Delano covering the period prior to the effective time of the
Arrangement; provided, however, that in no event will divine or Delano be
required to expend in the aggregate in excess of $1,000,000 for such coverage
and, if such amount is not sufficient to purchase such coverage, divine will
purchase the maximum amount of coverage for 6 years as is available for such
amount.
Delano and divine have also agreed to promptly notify each other of any
actions, suits, claims, investigations or proceedings commenced or, to either
party's knowledge, threatened against, relating to or involving or otherwise
affecting such party or any of its subsidiaries which relate to the consummation
of the transactions contemplated by the Combination Agreement.
Delano and divine also agreed to enter into a Software Distribution
(Reseller) Agreement in the form attached as Exhibit G to the Combination
Agreement (which agreement was entered into on March 12, 2002).
The agreements related to the conduct of Delano and divine prior to the
completion of the Arrangement are complicated and not easily summarized. You are
urged to carefully read Article VI of the Combination Agreement entitled
"Additional Agreements".
CONDITIONS TO COMPLETION OF THE ARRANGEMENT
The obligations of divine and Delano to complete the Arrangement and the
other transactions contemplated by the Combination Agreement are subject to the
satisfaction of each of the following conditions:
o the Arrangement must have been approved by the requisite vote of
holders of Delano Common Shares;
o the Interim Order and the Final Order shall each have been obtained in
form and on terms satisfactory to Delano and divine;
o the requisite orders of the Canadian securities regulatory authorities
shall have been obtained;
o either (i) following a hearing upon the fairness of the terms and
conditions of the Arrangement, all applicable requirements have been
met with respect to the relevant securities exemption in the United
States; or (ii) a Form S-4 registration statement shall have been
declared effective by the SEC, and no stop order suspending its
effectiveness or proceeding seeking a stop order shall have been
issued by the SEC and the registration statement shall remain
effective;
o divine's Form S-3 with respect to the registration of the divine
Common Stock to be issued upon exchange of the Exchangeable Shares
shall have become effective in accordance with the provisions of the
1933 Act and the Form S-3 shall have been declared effective by the
SEC and shall not be the subject of any stop order or proceeding
seeking a stop order;
o there shall not be in force any final and non-appealable, order,
decree, or injunction restraining or enjoining the consummation of the
transactions contemplated by the Combination Agreement and there shall
be no proceeding in progress or threatened that would, if successful,
result in an order or ruling that would preclude completion of the
transactions contemplated by the Combination Agreement or would
otherwise be inconsistent with the regulatory approvals obtained;
52
o divine and Delano and their respective subsidiaries shall have
obtained all approvals, waivers and consents from each governmental
entity, the failure of which would cause consummation of the
Arrangement to be prohibited; and
o the shares of divine Common Stock to be issued pursuant to the
Arrangement shall have been approved for quotation on NASDAQ, subject
to notice of issuance.
Delano's obligations to complete the Arrangement and the other transactions
contemplated by the Combination Agreement are subject to the satisfaction or
waiver, in writing, of each of the following additional conditions:
o each of divine's representations and warranties shall have been true
and correct as of the date of the Combination Agreement and shall
continue to be true and correct on and as of the date the Arrangement
is to be completed as if made on such date (except to the extent
expressly made as of a particular date, in which case as of such
date), (it being understood that for purposes of determining the
accuracy of such representations and warranties, any update or
modification to divine's disclosure schedule made or purported to have
been made without Delano's written consent thereto shall be
disregarded) and Delano shall have received a certificate with respect
to the foregoing signed on behalf of divine by an authorized officer
of divine;
o divine shall have performed or complied in all material respects with
all of its agreements and covenants required by the Combination
Agreement to be performed or complied with by divine; and
o the board of directors of divine shall have taken all necessary
corporate action to permit the consummation of the Arrangement and the
issuance of the divine Common Stock pursuant to the Arrangement.
divine's obligations to complete the Arrangement and the other transactions
contemplated by the Combination Agreement are subject to the satisfaction or
waiver, in writing, of each of the following additional conditions:
o each of Delano's representations and warranties shall have been true
and correct as of the date of the Combination Agreement and shall
continue to be true and correct on and as of the date the Arrangement
is to be completed as if made on such date (except to the extent made
only as of a particular date, in which case they must be true and
correct only as of that date), (it being understood that for purposes
of determining the accuracy of such representations and warranties,
any update or modification to Delano's disclosure schedule made or
purported to have been made without divine's written consent thereto
shall be disregarded) and divine shall have received a certificate
with respect to the foregoing signed on behalf of Delano by an
authorized officer of Delano;
o Delano shall have performed or complied in all material respects with
all of its agreements and covenants required by the Combination
Agreement to be performed or complied with by Delano;
o the board of directors of Delano shall have taken all necessary
corporate action to permit the consummation of the Arrangement and
shall have made and not modified or amended in any material respect,
prior to the Special Meeting, an affirmative recommendation that the
holders of Delano Common Shares approve the Arrangement Resolution;
and
o the holders of no more than 5% of the issued and outstanding Delano
Common Shares shall have exercised and not withdrawn their dissent
rights with respect to the Arrangement.
TERMINATION OF THE COMBINATION AGREEMENT
The Combination Agreement may be terminated at any time prior to completion
of the Arrangement, whether before or after the requisite approval of the
shareholders of Delano:
o by mutual written consent duly authorized by the boards of directors
of divine and Delano;
53
o by either divine or Delano, if the Arrangement is not completed before
August 15, 2002, except that:
- if the Arrangement is not completed before August 15, 2002 due to
the failure to obtain any approval, waiver or consent from a
governmental entity necessary for consummation of the
Arrangement, then such date shall be extended to September 15,
2002; and
- either party's right to terminate the Combination Agreement under
this provision will not be available to any party whose action or
failure to act has been a principal cause of or resulted in the
failure of the Arrangement to occur on or before such date, and
such action or failure to act constitutes a breach of the
Combination Agreement;
o by either divine or Delano, if any law has been passed that makes the
Arrangement illegal or otherwise prohibited or if a governmental
authority has issued an order, decree or ruling or taken any other
action, which permanently restrains, enjoins or otherwise prohibits
the Arrangement and which is final and non-appealable;
o by either divine or Delano, if Delano's shareholders fail to approve
the Arrangement Resolution at the Special Meeting or at any
adjournment or postponement of that meeting, except that such right to
terminate the Combination Agreement shall not be available to Delano
where the failure to obtain shareholder approval was caused by
Delano's action or failure to act which constitutes a breach by Delano
of the Combination Agreement;
o by Delano, upon a breach of any representation, warranty, covenant or
agreement on the part of divine in the Combination Agreement, or if
any of divine's representations or warranties become untrue such that
the condition to Delano's obligation to complete the Arrangement
relating to the continued accuracy of divine's representations and
warranties would not be satisfied. However, if the breach or
inaccuracy is curable by divine through the exercise of its reasonable
efforts, and divine continues to exercise such reasonable efforts to
cure the breach, Delano may not terminate the Combination Agreement
for 20 days after delivery of written notice to divine of the breach.
If the breach or inaccuracy is cured during those 20 days, Delano may
not terminate the Combination Agreement under this provision;
o by divine, upon a breach of any representation, warranty, covenant or
agreement on the part of Delano set forth in the Combination
Agreement, or if any of Delano's representations or warranties become
untrue such that the condition to divine's obligation to complete the
Arrangement relating to the continued accuracy of Delano's
representations and warranties would not be satisfied. However, if the
breach or inaccuracy is curable by Delano through the exercise of its
reasonable efforts, and Delano continues to exercise such reasonable
efforts to cure the breach, divine may not terminate the Combination
Agreement for 20 days after delivery of written notice to Delano of
the breach. If the breach or inaccuracy is cured during those 20 days,
divine may not terminate the Combination Agreement under this
provision; and
o by divine, if any of the following events shall have occurred:
- Delano's board of directors (or any committee thereof) withholds,
withdraws, amends, modifies or changes in a manner adverse to
divine, its recommendation to Delano shareholders in favour of
the adoption and approval of the Combination Agreement or the
approval of the transactions contemplated by the Combination
Agreement;
- Delano's board of directors (or any committee thereof) approves
or recommends any Acquisition Proposal (other than the
Combination Agreement);
- Delano shall have breached the non-solicitation covenant
contained in the Combination Agreement, including by entering
into any letter of intent or similar document or any agreement,
contract or commitment (other than a confidentiality or
standstill agreement) with respect to any Acquisition Proposal;
or
- a tender or exchange offer relating to the securities of Delano
is commenced by a person unaffiliated with divine, and Delano
does not send to its shareholders within fifteen calendar days
after such tender or exchange offer is first published, sent or
given, a statement disclosing that Delano recommends rejection of
such tender or exchange offer.
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PAYMENT OF TERMINATION FEES AND EXPENSES
Under the terms of the Combination Agreement, Delano must pay divine a
termination fee of $1,000,000 and must reimburse divine for up to $500,000 in
documented expenses incurred by divine before termination within one Business
Day after demand by divine, if the Combination Agreement is terminated by divine
upon the occurrence of a Triggering Event or in the event of a breach by Delano
of any representation, warranty, covenant or agreement or if any of them become
untrue and are not cured within 20 days.
Delano must reimburse divine for up to $500,000 in documented expenses
incurred by divine before termination in the event the Combination Agreement is
terminated because the approval of Delano shareholders is not obtained because
of a failure to obtain the required vote at the Special Meeting duly convened
for that purpose or any adjournment thereof.
Further, under the terms of the Combination Agreement, Delano must pay to
divine a termination fee of $1,000,000 and up to $500,000 in documented expenses
upon consummation of any Company Acquisition if:
o the Combination Agreement is terminated by divine or Delano, as
applicable, because (i) the Arrangement was not completed by August
15, 2002 or September 15, 2002, as applicable; or (ii) the Combination
Agreement is terminated because the approval of Delano shareholders is
not obtained because of a failure to obtain the required vote at the
Special Meeting duly convened for that purpose or any adjournment
thereof;
o after the date of the Combination Agreement and prior to the
termination of the Combination Agreement, an Acquisition Proposal
shall have been publicly announced or generally disclosed by Delano or
by the relevant third party making such Acquisition Proposal to the
shareholders of Delano; or
o within six months following the termination of the Combination
Agreement a Company Acquisition is consummated or Delano enters into
an agreement or letter of intent providing for a Company Acquisition,
in either case, with any party.
Under the terms of the Combination Agreement, divine must pay Delano a fee
of $2,000,000 and reimburse Delano for up to $500,000 in documented expenses
incurred by Delano before termination within one Business Day after demand by
Delano, if the Combination Agreement is terminated by Delano in the event of a
breach by divine of any representation, warranty, covenant or agreement or if
any of them become untrue and are not cured within 20 days.
EXTENSION, WAIVER AND AMENDMENT OF THE COMBINATION AGREEMENT
divine and Delano may amend the Combination Agreement before completion of
the Arrangement by mutual written consent.
Prior to the completion of the Arrangement, either divine or Delano may
extend the other party's time for the performance of any of the obligations or
other acts under the Combination Agreement, waive any inaccuracies in the
other's representations and warranties and waive compliance by the other party
with any of the agreements or conditions contained in the Combination Agreement.
Such extensions and waivers must be set forth in a written instrument signed by
the party granting such extension or waiver.
After the execution and delivery of the Combination Agreement, divine has
given its consent to a number of actions taken by Delano, including the payment
of certain fees to Broadview, payments relating to the cancellation of certain
agreements associated with Delano's previous restructuring and certain personnel
changes.
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TRANSACTION MECHANICS
The following is a summary of the Plan of Arrangement. Delano shareholders
are urged to read the Plan of Arrangement in its entirety. The Plan of
Arrangement is attached hereto as Annex C.
THE ARRANGEMENT
Pursuant to the terms of the Plan of Arrangement, commencing at the
Effective Time, the following events will occur:
1. Each outstanding Delano Common Share held by a Delano shareholder
other than:
o Delano Common Shares in respect of which the holder has exercised
dissent rights and is ultimately entitled to be paid the fair
value thereof;
o Delano Common Shares held by divine or an Affiliate of divine;
and
o Delano Common Shares held by a shareholder of Delano who is
either, (i) a Canadian resident for purposes of the Income Tax
Act (Canada) not exempt from tax under Part I of the Income Tax
Act (Canada) holding Delano Common Shares on its own behalf or
(ii) a person who holds Delano Common Shares on behalf of one or
more Canadian residents for purposes of the Income Tax Act
(Canada), not exempt from tax under Part I of the Income Tax Act
(Canada), and who (in either case) has validly elected to receive
Exchangeable Shares:
shall be transferred to divine in exchange for a number of shares of
divine Common Stock equal to the Exchange Ratio multiplied by the
number of Delano Common Shares held by such holder.
2. Delano shall reorganize its share capital by (i) creating as a class
of shares in the capital of Delano an unlimited number of Exchangeable
Shares; and (ii) eliminating as a class of shares in the capital of
Delano the Class "A" preferred shares, Class "B" preferred shares and
Class "C" preferred shares, none of which are outstanding, so that
immediately thereafter, the authorized share capital of Delano shall
consist of an unlimited number of Exchangeable Shares and an unlimited
number of Delano Common Shares.
3. Delano Common Shares held by a shareholder of Delano who is either,
(i) a Canadian resident for purposes of the Income Tax Act (Canada)
not exempt from tax under Part I of the Income Tax Act (Canada)
holding Delano Common Shares on its own behalf or (ii) a person who
holds Delano Common Shares on behalf of one or more Canadian residents
for purposes of the Income Tax Act (Canada) not exempt from tax under
Part I of the Income Tax Act (Canada), and who, in either case,
validly elects to receive Exchangeable Shares shall be exchanged,
without any further act or formality, for a number of Exchangeable
Shares equal to the Exchange Ratio multiplied by the number of Delano
Common Shares held by such holder.
4. Coincident with the share exchange set out in item 3 above, divine and
Delano shall execute the Exchangeable Share Support Agreement and
divine and Delano and the Trustee shall execute the Voting and
Exchange Trust Agreement and divine shall issue to and deposit with
the Trustee the Special Voting Share and all rights of holders of
Exchangeable Shares under the Voting and Exchange Trust Agreement
shall be received by them as part of the property receivable by them
under item 3 above in exchange for their Delano Common Shares
exchanged for Exchangeable Shares.
5. Each In-The-Money Option that has not been cancelled, terminated or
duly exercised prior to the Effective Time will be exchanged for a
Replacement Option to purchase a number of shares of divine Common
Stock equal to the product of the Exchange Ratio multiplied by the
number of Delano Common Shares subject to such In-The-Money Option.
The Replacement Option will provide for an exercise price per share of
divine Common Stock equal to the exercise price per share of such
In-The-Money Option immediately prior to the Effective Time divided by
the Exchange Ratio. Delano Options that are not In-The-Money Options
and not exercised prior to the Effective Time will be terminated under
the Combination Agreement immediately prior to the Effective Time.
Except for the accelerated vesting of options granted to certain
officers of Delano in the event of termination of their employment
following the completion of the Arrangement, all other terms of each
Delano Option will remain unchanged by the Arrangement.
56
6. Each Delano Warrant will be amended to provide for the purchase of a
number of shares of divine Common Stock equal to the product of the
Exchange Ratio multiplied by the number of Delano Common Shares
subject to such Delano Warrant and at an exercise price per share of
divine Common Stock equal to the exercise price per Delano Common
Share of such Delano Warrant immediately prior to the Effective Time
divided by the Exchange Ratio.
Employees of Delano who participate in the Delano ESPP will be permitted to
use funds already deposited under the ESPP to purchase Delano Common Shares
before the Election Deadline in order to be able to participate in the
Arrangement. Any remaining funds which have been deposited pursuant to the
Delano ESPP shall be remitted by Delano to the appropriate employees.
THE RIGHT TO ELECT TO RECEIVE EXCHANGEABLE SHARES WILL BE AVAILABLE ONLY TO
REGISTERED HOLDERS OF DELANO COMMON SHARES WHO ARE EITHER, (I) CANADIAN
RESIDENTS FOR PURPOSES OF THE INCOME TAX ACT (CANADA) NOT EXEMPT FROM TAX UNDER
PART I OF THE INCOME TAX ACT (CANADA) HOLDING DELANO COMMON SHARES ON THEIR OWN
BEHALF OR (II) PERSONS WHO HOLD DELANO COMMON SHARES ON BEHALF OF ONE OR MORE
CANADIAN RESIDENTS FOR PURPOSES OF THE INCOME TAX ACT (CANADA) NOT EXEMPT FROM
TAX UNDER PART I OF THE INCOME TAX ACT (CANADA). AS A RESULT, DELANO
SHAREHOLDERS THAT ARE TRUSTS GOVERNED BY RRSPS, RRIFS, DPSPS OR RESPS WILL NOT
BE ELIGIBLE TO RECEIVE EXCHANGEABLE SHARES. TO EXERCISE THIS RIGHT, SUCH HOLDER
MUST SUBMIT THE APPROPRIATE LETTER OF TRANSMITTAL AND ELECTION FORM (PRINTED ON
BLUE PAPER), PROPERLY COMPLETED AND DULY EXECUTED, AND ALL OTHER REQUIRED
DOCUMENTS, TO THE DEPOSITARY AT THE APPROPRIATE ADDRESS LISTED IN THE LETTER OF
TRANSMITTAL AND ELECTION FORM BEFORE 4:00 P.M., TORONTO TIME, ON JULY 23, 2002,
THE DATE THAT IS TWO BUSINESS DAYS BEFORE THE DATE OF THE SPECIAL MEETING.
Any Canadian resident Delano shareholder whose shares are registered in the
name of a broker, investment dealer, bank, trust company or other intermediary
and who is eligible to and wishes to receive Exchangeable Shares, should contact
that intermediary for instruction and assistance in making an election and in
delivering share certificates representing those Delano Common Shares.
Assuming all Delano Common Shares are exchanged for shares of divine Common
Stock and that none of the Delano Options are exercised prior to the completion
of the Arrangement and based upon the number of Delano Common Shares and shares
of divine Common Stock outstanding as of June 14, 2002, immediately following
completion of the Arrangement, existing Delano shareholders would hold
approximately 2,062,042 shares of divine Common Stock representing approximately
10% of the outstanding shares of divine Common Stock after the Arrangement and
approximately 5% of the outstanding shares of divine Common Stock after the
proposed acquisition by divine of Viant Corporation and the private placement of
divine Series B convertible preferred stock with Oak Investment Partners and
certain of its affiliates (assuming all of the preferred stock and warrants
issued and, pending divine stockholder approval, to be issued, pursuant to the
private placement are converted or exercised). See "Business of divine --
Proposed Acquisition of Viant Corporation" and "Business of divine -- Private
Placement with Oak Investment Partners".
SHARE CERTIFICATES
At or promptly after the Effective Time, divine shall deposit with the
Depositary, for the benefit of Delano shareholders who will receive divine
Common Stock in connection with the Arrangement, certificates representing the
shares of divine Common Stock issued pursuant to the Plan of Arrangement in
exchange for the Delano Common Shares of such Delano shareholders. Upon
surrender for cancellation to the Depositary of a certificate which, immediately
prior to the Effective Time, represented one or more Delano Common Shares that
were exchanged for divine Common Stock under the Arrangement, together with
other required documents, a Delano shareholder will be entitled to receive a
certificate representing that number of shares of divine Common Stock which such
Delano shareholder has the right to receive.
At or promptly after the Effective Time, Delano shall deposit with the
Depositary, for the benefit of Delano shareholders who have made a valid
election to receive Exchangeable Shares in connection with the Arrangement,
certificates representing the Exchangeable Shares issued pursuant to the Plan of
Arrangement in exchange for the Delano Common Shares of such Delano
shareholders. Upon surrender for cancellation to Depositary of a certificate
which, immediately prior to the Effective Time, represented one or more Delano
Common Shares that were exchanged for Exchangeable Shares under the Arrangement,
together with other required documents, a Delano shareholder will be entitled to
receive a certificate representing that number of Exchangeable Shares which such
Delano shareholder has the right to receive.
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PROCEDURES FOR EXCHANGE OF SHARE CERTIFICATES BY SHAREHOLDERS
DELANO SHAREHOLDERS WHOSE DELANO COMMON SHARES ARE REGISTERED IN THE NAME
OF A BROKER, INVESTMENT DEALER, BANK, TRUST COMPANY OR OTHER NOMINEE SHOULD
CONTACT THAT NOMINEE FOR INSTRUCTIONS AND ASSISTANCE IN DELIVERING THOSE DELANO
COMMON SHARES.
Enclosed with the Circular is a letter of transmittal and election form
which is being delivered to Delano shareholders (printed on blue paper). The
letter of transmittal and election form, when properly completed, duly executed
and returned to Computershare Trust Company of New York together with a
certificate or certificates for Delano Common Shares and all other required
documents, will enable each Delano shareholder to obtain certificate(s) for that
number of shares of divine Common Stock or (in the case of eligible and validly
electing Delano shareholders) Exchangeable Shares (together with certain
ancillary rights) equal to the number of Delano Common Shares held by such
Delano shareholder multiplied by the Exchange Ratio (subject to adjustment for
fractional shares, as discussed below). See "Description of Exchangeable
Shares". The letter of transmittal and election form and the share certificate
or certificates for Delano Common Shares must be sent to Computershare Trust
Company of New York at its offices in New York, New York, U.S.A. A pre-addressed
envelope is included for your convenience. Only the completed proxy (printed on
yellow paper) is to be sent (in the enclosed postage pre-paid within Canada
envelope marked "For Proxy Only") to Computershare Trust Company of Canada at
its offices in Toronto, Ontario, Canada.
THE RIGHT TO ELECT TO RECEIVE EXCHANGEABLE SHARES WILL BE AVAILABLE ONLY TO
REGISTERED HOLDERS OF DELANO COMMON SHARES WHO ARE EITHER, (I) CANADIAN
RESIDENTS FOR PURPOSES OF THE INCOME TAX ACT (CANADA) NOT EXEMPT FROM TAX UNDER
PART I OF THE INCOME TAX ACT (CANADA) HOLDING DELANO COMMON SHARES ON THEIR OWN
BEHALF OR (II) PERSONS WHO HOLD DELANO COMMON SHARES ON BEHALF OF ONE OR MORE
CANADIAN RESIDENTS FOR PURPOSES OF THE INCOME TAX ACT (CANADA) NOT EXEMPT FROM
TAX UNDER PART I OF THE INCOME TAX ACT (CANADA). TO EXERCISE THIS RIGHT, SUCH
HOLDERS MUST SUBMIT THE APPROPRIATE LETTER OF TRANSMITTAL AND ELECTION FORM,
PROPERLY COMPLETED AND DULY EXECUTED, AND ALL OTHER REQUIRED DOCUMENTS, TO THE
DEPOSITARY AT THE APPROPRIATE ADDRESS LISTED IN THE LETTER OF TRANSMITTAL AND
ELECTION FORM (PRINTED ON BLUE PAPER) BEFORE THE ELECTION DEADLINE, BEING 4:00
P.M., TORONTO TIME, ON JULY 23, 2002, THE DATE THAT IS TWO BUSINESS DAYS BEFORE
THE DATE OF THE SPECIAL MEETING. IF AN ELIGIBLE HOLDER ELECTS TO RECEIVE
EXCHANGEABLE SHARES, SUCH A HOLDER MUST EXERCISE THIS RIGHT WITH RESPECT TO ALL
OF THE HOLDER'S DELANO COMMON SHARES.
IF THE DEPOSITARY DOES NOT RECEIVE A PROPERLY COMPLETED LETTER OF
TRANSMITTAL AND ELECTION FORM FROM A DELANO SHAREHOLDER BEFORE THE ELECTION
DEADLINE, OR IF THE DELANO SHAREHOLDER IS NEITHER, (I) A CANADIAN RESIDENT FOR
THE PURPOSES OF THE INCOME TAX ACT (CANADA) WHO HOLDS DELANO COMMON SHARES ON
ITS OWN BEHALF AND IS NOT EXEMPT FROM TAX UNDER PART I OF THE INCOME TAX ACT
(CANADA), NOR (II) A PERSON WHO HOLDS DELANO COMMON SHARES ON BEHALF OF ONE OR
MORE CANADIAN RESIDENTS FOR PURPOSES OF THE INCOME TAX ACT (CANADA) WHO ARE NOT
EXEMPT FROM TAX UNDER PART I OF THE INCOME TAX ACT (CANADA), THE DELANO
SHAREHOLDER WILL RECEIVE SHARES OF DIVINE COMMON STOCK FOR ALL OF SUCH DELANO
SHAREHOLDER'S DELANO COMMON SHARES. DELANO SHAREHOLDERS WHO DO NOT FORWARD TO
THE DEPOSITARY BOTH A PROPERLY COMPLETED LETTER OF TRANSMITTAL AND ELECTION FORM
AND CERTIFICATES REPRESENTING THEIR DELANO COMMON SHARES WILL NOT RECEIVE THE
CERTIFICATES REPRESENTING SHARES OF DIVINE COMMON STOCK OR EXCHANGEABLE SHARES
TO WHICH THEY ARE OTHERWISE ENTITLED UNTIL PROPER DELIVERY IS MADE.
Any use of the mail to transmit a certificate for Delano Common Shares or a
letter of transmittal and election form is at the risk of the Delano
shareholder. If these documents are mailed, it is recommended that registered
mail, with return receipt requested, properly insured, be used.
Certificates representing the appropriate number of Exchangeable Shares or
shares of divine Common Stock issuable to a former Delano shareholder who has
complied with the procedures set out above, together with a cheque in the
amount, if any, payable in lieu of fractional Exchangeable Shares or fractional
shares of divine Common Stock will, as soon as practicable after the Effective
Date (i) be forwarded to the former Delano shareholder at the address specified
in the letter of transmittal and election form by insured first class mail or
(ii) if so requested in the letter of transmittal and election form, be made
available at the offices of Computershare Trust Company of New York, 88 Pine
Street, 19th Floor, New York, New York, 10005, for pick up by the holder.
Where a certificate for Delano Common Shares has been destroyed, lost or
misplaced, the registered Delano shareholder of that certificate should
immediately complete the letter of transmittal and election form
58
for the Delano shareholders as fully as possible and return it, together with a
letter describing the loss, to the Depositary in accordance with the
instructions in the letter of transmittal and election form for the Delano
shareholders. The Depositary will respond with replacement requirements.
FRACTIONAL SHARES
No certificates representing fractional Delano Exchangeable Shares or
fractional shares of divine Common Stock shall be issued upon the surrender for
exchange of certificates representing Delano Common Shares. In lieu of any such
fractional securities, each person otherwise entitled to a fractional interest
in a Delano Exchangeable Share or share of divine Common Stock will be entitled
to receive a cash payment based on such person's pro rata portion of the net
proceeds after expenses received by the Depositary, upon the sale of whole
shares representing an accumulation of all fractional interests in shares of
divine Common Stock to which all such persons would otherwise be entitled either
directly or upon the exchange of Exchangeable Shares.
REVERSE STOCK SPLIT OF DIVINE COMMON STOCK
In response to a Nasdaq Staff Determination letter indicating that divine
Common Stock was subject to delisting from NASDAQ for failing to comply with the
$1.00 minimum bid price requirement, divine implemented a 1-for-25 reverse stock
split of divine Common Stock on May 29, 2002. The reverse stock split reduced
the number of outstanding shares of divine Common Stock from approximately
478,000,000 to approximately 19,000,000 but did not increase the par value of
divine Common Stock, and did not change the number of authorized shares of
divine Common Stock. divine has since received confirmation from the Nasdaq
Listing Qualifications department that divine Common Stock satisfies the minimum
bid requirement and all other requirements for continued listing on NASDAQ.
There can be no assurance, however, that divine Common Stock will comply with
the listing requirements of NASDAQ in the future or that divine Common Stock
will not be delisted from NASDAQ for other reasons. In accordance with the terms
of the Combination Agreement, the Exchange Ratio was adjusted from 1.1870 to
0.04748 in order to fully reflect the 1-for-25 reverse stock split implemented
by divine. Furthermore, the Plan of Arrangement and the Exchangeable Share
Support Agreement provide that so long as any Exchangeable Shares not owned by
divine or any of its Affiliates are outstanding, divine will not, without the
prior approval of Delano and the holders of Exchangeable Shares, effect a
transaction such as the reverse stock split described above, unless the same or
an economically equivalent change shall simultaneously be made to, or in, the
rights of the holders of Exchangeable Shares.
DESCRIPTION OF EXCHANGEABLE SHARES
The following is a summary of the Exchangeable Share Provisions and certain
provisions of the Exchangeable Share Support Agreement and the Voting and
Exchange Trust Agreement, all of which Delano shareholders are urged to read in
their entirety. The Exchangeable Share provisions are attached to this document
as Appendix 1 to the Plan of Arrangement, which is found at Annex C of this
document. The Exchangeable Share Support Agreement and the Voting and Exchange
Trust Agreement are attached to this document as Annex D and Annex E,
respectively. ONLY CERTAIN DELANO SHAREHOLDERS ARE ELIGIBLE TO RECEIVE
EXCHANGEABLE SHARES. See "Transaction Mechanics -- The Arrangement".
GENERAL
The Exchangeable Shares will be issued by Delano. Holders of Exchangeable
Shares will have certain ancillary rights which consist of the Exchange Right,
the Automatic Exchange Rights and the Voting Rights. The Exchangeable Shares
(together with the ancillary rights) will be substantially economically
equivalent to shares of divine Common Stock. The Exchangeable Shares will be
exchangeable at any time at the option of the holder on a one-for-one basis for
shares of divine Common Stock. On the Effective Date, divine, Delano and the
Trustee will enter into the Voting and Exchange Trust Agreement. By furnishing
instructions to the Trustee under the Voting and Exchange Trust Agreement,
holders of the Exchangeable Shares will be able to exercise essentially the same
voting rights with respect to divine as they would have if they had exchanged
their Exchangeable Shares for shares of divine Common Stock. Holders of
Exchangeable Shares will also be entitled to receive from Delano dividends
payable in U.S. dollars or Canadian dollars that are economically equivalent to
any cash dividends paid on divine Common Stock. The Exchangeable Shares are
subject to adjustment or
59
modification in the event of a stock split or other change to the capital
structure of divine so as to maintain the initial one-to-one relationship
between the Exchangeable Shares and the divine Common Stock.
VOTING, DIVIDEND AND LIQUIDATION RIGHTS
Voting Rights with respect to Delano
Except as required by law or under the Exchangeable Share Support
Agreement, the terms of the Exchangeable Share Provisions or the Voting and
Exchange Trust Agreement, the holders of Exchangeable Shares are not entitled as
such to receive notice of or to attend any meeting of shareholders of Delano or
to vote at any such meeting.
Voting Rights with respect to divine
Pursuant to the Voting and Exchange Trust Agreement, divine will issue the
Special Voting Share to the Trustee for the benefit of the holders (other than
divine and its Affiliates) of the Exchangeable Shares. The Special Voting Share
will have a number of votes, which may be cast at any meeting at which divine
shareholders are entitled to vote, equal to the number of votes that the holders
of Exchangeable Shares outstanding from time to time (other than Exchangeable
Shares held by divine and its Affiliates) would be entitled to if all such
Exchangeable Shares were exchanged by the holders thereof for divine Common
Stock pursuant to the terms of the Exchangeable Shares.
Each holder of an Exchangeable Share (other than divine and its Affiliates)
on the record date for any meeting at which divine shareholders are entitled to
vote will be entitled to instruct the Trustee to exercise that number of the
votes attached to the Special Voting Share represented by the Exchangeable
Shares held by such holder. The Trustee will exercise each vote attached to the
Special Voting Share only as directed by the relevant holder and, in the absence
of instructions from a holder as to voting, will not exercise such votes. A
holder may, upon instructing the Trustee, obtain a proxy from the Trustee
entitling the holder to vote directly at the relevant meeting the votes attached
to the Special Voting Share to which the holder is entitled. In connection with
each meeting, to the extent that the Trustee has not, upon such instructions,
signed and delivered to holders proxies as aforesaid, the Trustee shall exercise
its voting rights as holder of the Special Voting Share either by proxy or in
person.
The Trustee will send to the holders of Exchangeable Shares the notice of
each meeting at which the divine shareholders are entitled to vote, together
with the related meeting materials and a statement as to the manner in which the
holder may instruct the Trustee to exercise his or her portion of the votes
attaching to the Special Voting Share. Such mailing by the Trustee shall
commence on the same day as divine sends such notice and materials to the divine
shareholders. The Trustee will also send to the holders of Exchangeable Shares
copies of all information statements, interim and annual financial statements,
reports and other materials sent by divine to the divine shareholders at the
same time as such materials are sent to the divine shareholders. To the extent
such materials are provided to the Trustee by divine, the Trustee will also send
to the holders all materials sent by third parties to divine shareholders,
including dissident proxy circulars and take-over bid and exchange offer
circulars, as soon as reasonably practicable after such materials are delivered
to the Trustee.
All rights of a holder of Exchangeable Shares to instruct the Trustee to
exercise votes attached to the Special Voting Share will cease upon the exchange
(whether by redemption, retraction or liquidation, or through the exercise of
the call rights) of all of such holder's Exchangeable Shares for divine Common
Stock.
In accordance with the terms of the Exchangeable Share Support Agreement,
divine and its Affiliates will not exercise any voting rights with respect to
any Exchangeable Shares held by it or its Affiliates, although it will appoint
proxyholders with respect to such Exchangeable Shares for the sole purpose of
attending meetings of the holders of Exchangeable Shares in order to be counted
as part of the quorum for such meetings.
Dividend Rights
Holders of Exchangeable Shares will be entitled to receive, subject to
applicable law, dividends:
o in the case of a cash dividend declared on the divine Common Stock, in
an amount in cash for each Exchangeable Share corresponding to the
cash dividend declared on each share of divine Common Stock;
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o in the case of a stock dividend declared on the divine Common Stock to
be paid in shares of divine Common Stock, in such number of
Exchangeable Shares for each Exchangeable Share as is equal to the
number of shares of divine Common Stock to be paid on each share of
divine Common Stock unless, in lieu of such stock dividend, Delano
elects to effect a corresponding and contemporaneous and economically
equivalent subdivision of the Exchangeable Shares; or
o in the case of a dividend declared on the divine Common Stock in
property other than cash or shares of divine Common Stock, in such
type and amount of property as is the same as, or economically
equivalent to, the type and amount of property declared as a dividend
on each share of divine Common Stock.
These dividends are the only dividends to which holders of Exchangeable
Shares will be entitled. The declaration date, record date and payment date for
dividends on the Exchangeable Shares will be the same as the relevant date for
the corresponding dividends on the divine Common Stock. Cash dividends on the
Exchangeable Shares are payable in U.S. dollars or the Canadian dollar
equivalent thereof, as determined in accordance with the Exchangeable Share
provisions at the option of Delano.
Liquidation Rights with respect to Delano
In the event of the liquidation, dissolution or winding-up of Delano or any
other distribution of the assets of Delano among its shareholders for the
purpose of winding-up its affairs, holders of Exchangeable Shares will have,
subject to applicable law, preferential rights to receive from Delano for each
Exchangeable Share held one share of divine Common Stock and an amount in cash
equal to the declared and unpaid dividends on one Exchangeable Share. Upon the
occurrence of such liquidation, dissolution, winding-up of Delano or other
distribution of the assets of Delano for the purpose of winding-up its affairs,
divine will have an overriding liquidation call right to purchase all of the
outstanding Exchangeable Shares (other than Exchangeable Shares held by divine
and its Affiliates) from the holders thereof for consideration per Exchangeable
Share consisting of one share of divine Common Stock and an amount in cash equal
to the declared and unpaid dividends on one Exchangeable Share.
If Delano institutes, consents to or fails to contest in good faith within
30 days any bankruptcy, insolvency or winding-up proceedings, admits in writing
its inability to pay its debts generally as they become due, takes certain other
actions indicating insolvency or fails for solvency reasons to redeem
Exchangeable Shares upon being required to redeem such shares by the holder,
then each holder of Exchangeable Shares (other than divine and its Affiliates)
will be entitled to instruct the Trustee under the Voting and Exchange Trust
Agreement to require divine to purchase from the holder any or all of the
Exchangeable Shares held by such holder for consideration per Exchangeable Share
consisting of one share of divine Common Stock and (to the extent not paid by
Delano on the designated payment date) an amount in cash equal to the declared
and unpaid dividends on one Exchangeable Share. As soon as practicable following
the occurrence of one of the insolvency events described in the preceding
sentence, or any event which may, with the passage of time and/or the giving of
notice, become such an insolvency event, Delano or divine will give written
notice thereof to the Trustee. As soon as practicable thereafter, the Trustee
will then notify each holder of Exchangeable Shares of such event or potential
event and will advise the holder of its rights described in this paragraph.
Liquidation Rights with respect to divine
In order for the holders of Exchangeable Shares to participate on a pro
rata basis with the holders of divine Common Stock, on the fifth Business Day
prior to the effective date of certain specified events relating to the
voluntary or involuntary liquidation, dissolution, winding-up or other
distribution of the assets of divine among its shareholders for the purpose of
winding-up its affairs, each Exchangeable Share (other than those held by divine
and its Affiliates) will automatically be exchanged for consideration per
Exchangeable Share consisting of one share of divine Common Stock and (to the
extent not paid by Delano on the designated payment date) an amount in cash
equal to the declared and unpaid dividends on one Exchangeable Share pursuant to
the Voting and Exchange Trust Agreement. Upon a holder's request and surrender
of Exchangeable Share certificates, duly endorsed in blank and accompanied by
such instruments of transfer as divine may reasonably require, divine will
deliver to such holder certificates representing an equivalent number of shares
of divine Common Stock. For a description of certain divine obligations with
respect to the dividend and liquidation rights of the holders of Exchangeable
Shares, see "Description of Exchangeable Shares -- divine Support Obligation"
below.
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OPTIONAL REDEMPTION BY HOLDERS
Holders of the Exchangeable Shares will be entitled at any time following
the Effective Time to retract (i.e., require Delano to redeem), subject to the
exercise by divine of its retraction call right, any or all of the Exchangeable
Shares held by such holder for consideration per Exchangeable Share equal to one
share of divine Common Stock and an amount in cash equal to the declared and
unpaid dividends on one Exchangeable Share. Holders of the Exchangeable Shares
may effect such retraction by presenting to Delano or the Transfer Agent:
o a certificate or certificates representing the number of Exchangeable
Shares the holder desires to retract;
o a duly executed retraction request indicating the number of
Exchangeable Shares the holder desires to retract and the retraction
date, and acknowledging the retraction call right; and
o such other documents as may be required to effect the retraction of
the retracted shares.
A holder making a retraction must specify a retraction date which is not
less than seven Business Days nor more than 10 Business Days after the date upon
which the retraction request is made by the holder. In the event that a holder
of Exchangeable Shares exercises the right to require Delano to redeem any of
its Exchangeable Shares, divine will have an overriding retraction call right to
purchase all but not less than all of those Exchangeable Shares, for
consideration per Exchangeable Share consisting of one share of divine Common
Stock and (to the extent not paid by Delano on the designated payment date) an
amount in cash equal to the declared and unpaid dividends on one Exchangeable
Share. Upon receipt of a retraction request, Delano will immediately notify
divine of the retraction request. divine must then advise Delano within five
Business Days as to whether the retraction call right will be exercised. If
divine does not so advise Delano, Delano will notify the holder as soon as
possible thereafter that divine will not exercise its overriding retraction call
right. If divine advises Delano that divine will exercise the retraction call
right within such five Business Day period, then provided the retraction request
is not revoked by the holder as described below, the retraction request shall be
considered only to be an offer by the holder to sell the Exchangeable Shares it
requested to have redeemed to divine, in accordance with its overriding
retraction call right.
A holder may revoke its retraction request, in writing, at any time prior
to the close of business on the Business Day preceding the retraction date, in
which case the relevant Exchangeable Shares will neither be purchased by divine
nor redeemed by Delano. If a holder does not revoke its retraction request, on
the contemplated date of retraction, the relevant Exchangeable Shares will be
purchased by divine or redeemed by Delano, as the case may be, in each case as
set out above.
If, as a result of solvency requirements or applicable law, Delano is not
permitted to redeem all of the Exchangeable Shares that the holder requires to
be redeemed, Delano will redeem only those Exchangeable Shares of the holder
(rounded down to a whole number of shares) as would not be contrary to such
provisions of applicable law. The Trustee, on behalf of the holder of any
Exchangeable Share not so redeemed by Delano and not purchased by divine through
the exercise of its retraction call right, will be entitled to require divine to
purchase such Exchangeable Shares not redeemed for the same consideration per
Exchangeable Share as described above under "Liquidation Rights with Respect to
Delano".
MANDATORY REDEMPTION BY DELANO AND DIVINE CALL RIGHT
The "redemption date" is the date established by the board of directors of
Delano for the redemption by Delano of all of the outstanding Exchangeable
Shares, which will not be earlier than the third anniversary of the Effective
Date unless:
o at any time after the first anniversary of the Effective Date, there
are then outstanding Exchangeable Shares constituting fewer than 30%
of the actual number of the Exchangeable Shares issuable as determined
at the Effective Date (other than Exchangeable Shares held by divine
and its Affiliates), provided that such number may be adjusted by the
board of directors of Delano in certain circumstances described in the
Exchangeable Share Provisions, in which case the board of directors of
Delano may accelerate the redemption date to an earlier date upon at
least 60 days prior notice to the holders of the Exchangeable Shares
and the Trustee under the Voting and Exchange Trust Agreement;
o at any time, there are then outstanding Exchangeable Shares
constituting fewer than 10% of the actual number of Exchangeable
Shares issuable as determined at the Effective Date (other than
Exchangeable Shares held by divine and its Affiliates), provided that
such number may be adjusted by the board of
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directors of Delano in certain circumstances described in the
exchangeable share provisions, in which case the board of directors of
Delano may accelerate the redemption date to an earlier date upon at
least 60 days prior notice to the holders of the Exchangeable Shares
and the Trustee under the Voting and Exchange Trust Agreement;
o upon the occurrence of any merger, amalgamation, arrangement, tender
offer, material sale of shares or rights or interests therein or
thereto or similar transactions involving divine, or any proposal to
do so, provided that the board of directors of Delano determines in
good faith and in its sole discretion such transaction involves a bona
fide third party, is not for the primary purpose of causing a
redemption date, and that the redemption of the Exchangeable Shares is
necessary to enable the completion of the transaction described in
this bullet point, in which case the redemption date will be such date
as determined by the board of directors of Delano;
o each of the following occurs: (1) a matter arises on which the holders
of Exchangeable Shares are entitled to vote as shareholders of Delano
(other than a matter described in the next bullet point); (2) the
board of directors of Delano has determined, in good faith and in its
sole discretion, that it is not reasonably practicable to accomplish
the business purpose intended by the matter (which business purpose
must be bona fide and not for the primary purpose of causing the
occurrence of the redemption date) in any other commercially
reasonable manner that does not result in the holders of Exchangeable
Shares being entitled to vote as shareholders of Delano and (3) the
holders of Exchangeable Shares fail to take the necessary action at a
meeting or other vote of the holders of Exchangeable Shares to approve
or disapprove, as applicable, the matter, in which case the redemption
date will be the Business Day following the date on which the holders
of Exchangeable Shares failed to take the necessary action; or
o each of the following occurs: (1) a matter arises on which the holders
of Exchangeable Shares are entitled to vote as shareholders of Delano
in order to approve any change to or in the rights of the holders of
the Exchangeable Shares; (2) the change is necessary to maintain the
economic equivalence of the Exchangeable Shares and the divine Common
Stock; and (3) the holders of Exchangeable Shares fail to take the
necessary action at a meeting or other vote of the holders of
Exchangeable Shares to approve or disapprove, as applicable, the
change, in which case the redemption date will be the Business Day
following the date on which the holders of Exchangeable Shares failed
to take the necessary action.
On the redemption date, and subject to applicable law and the overriding
redemption call right, as discussed below, Delano will redeem all but not less
than all of the then outstanding Exchangeable Shares (other than those held by
divine or its Affiliates) for consideration per Exchangeable Share consisting of
one share of divine Common Stock and an amount in cash equal to the declared and
unpaid dividends on one Exchangeable Share. Delano will, at least 60 days prior
to the redemption date, or such number of days as the board of directors of
Delano may determine to be reasonably practicable under the circumstances in
respect of a redemption date arising in connection with, among other events, the
events described in the third, fourth and fifth bullet points above, provide the
registered holders of the Exchangeable Shares with written notice of the
proposed redemption of the Exchangeable Shares by Delano or the purchase of the
Exchangeable Shares by divine pursuant to the redemption call right described
below.
divine will have an overriding redemption call right to purchase on the
redemption date all but not less than all of the Exchangeable Shares then
outstanding (other than Exchangeable Shares held by divine and its Affiliates)
for consideration per Exchangeable Share consisting of one share of divine
Common Stock and an amount in cash equal to the declared and unpaid dividends on
one Exchangeable Share. Upon the exercise of such overriding redemption call
right, holders will be obligated to sell their Exchangeable Shares to divine. If
divine exercises the redemption call right, Delano's right and obligation to
redeem the Exchangeable Shares on such redemption date will terminate.
In the event of certain changes in Canadian federal and Ontario tax law,
divine will have the right to purchase all of the Exchangeable Shares then
outstanding (other than Exchangeable Shares held by divine and its Affiliates)
prior to the third anniversary of the Effective Date for consideration per
Exchangeable Share consisting of one share of divine Common Stock and an amount
in cash equal to the declared and unpaid dividends on one Exchangeable Share.
divine may exercise this call right if it notifies the Depositary and Delano of
its intention to exercise the call right at least 45 days before the Business
Day on which the purchase of such Exchangeable Shares shall occur. divine shall
deliver to the Trustee a written opinion of Canadian counsel
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(which counsel shall be acceptable to the Trustee) stating that there has been a
change to the Income Tax Act (Canada) and applicable Ontario provincial income
tax legislation to the effect that a sale to divine pursuant to divine's call
right by beneficial owners of Exchangeable Shares (other than divine and its
Affiliates) who are Canadian residents and hold their Exchangeable Shares as
capital property for the purpose of the Income Tax Act (Canada) and any
corresponding Ontario legislation will qualify as a tax-deferred transaction for
purposes of the Income Tax Act (Canada) and applicable Ontario provincial income
tax legislation.
RANKING
The Exchangeable Shares will be entitled to a preference over the common
shares of Delano, and any other shares ranking junior to the Exchangeable Shares
with respect to the payment of dividends payable on Exchangeable Shares and the
distribution of assets in the event of a liquidation, dissolution or winding-up
of Delano, whether voluntary or involuntary, or any other distribution of the
assets of Delano among its shareholders for the purpose of winding-up its
affairs.
CERTAIN RESTRICTIONS
Without the approval of the holders of the Exchangeable Shares as set
forth below under "Description of Exchangeable Shares -- Amendment and
Approval", Delano will not:
o pay any dividends on the Delano Common Shares, or any other shares
ranking junior to the Exchangeable Shares, other than stock dividends
payable in Delano Common Shares, or any such other shares ranking
junior to the Exchangeable Shares, as the case may be;
o redeem, purchase or make any capital distribution in respect of Delano
Common Shares, or any other shares ranking junior to the Exchangeable
Shares;
o redeem or purchase any other shares of Delano ranking equally with the
Exchangeable Shares with respect to the payment of dividends or on any
liquidation distribution; or
o issue any Exchangeable Shares, or any shares of Delano ranking equally
with, or superior to, the Exchangeable Shares, other than (i) pursuant
to any shareholder rights plan adopted by Delano, or (ii) by way of
stock dividend to the holders of Exchangeable Shares.
These restrictions will not apply if all dividends on the outstanding
Exchangeable Shares corresponding to dividends declared and paid on the divine
Common Stock have been declared and paid in full on the Exchangeable Shares.
AMENDMENT AND APPROVAL
The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed only with the approval
of the holders thereof. Any such approval or any other approval or consent to be
given by the holders of the Exchangeable Shares will be deemed to have been
sufficiently given if given in accordance with applicable law subject to a
minimum requirement that such approval or consent be evidenced by a resolution
passed by not less than two-thirds of the votes cast on such resolution at a
meeting of the holders of Exchangeable Shares duly called and held at which
holders of at least 10% of the then outstanding Exchangeable Shares are present
or represented by proxy. In the event that no such quorum is present at such
meeting within one-half hour after the time appointed therefor, then the meeting
will be adjourned to such place and time (not less than five days later) as may
be designated by the Chairman of such meeting. At such adjourned meeting, the
holders of Exchangeable Shares present or represented by proxy may transact the
business for which the meeting was originally called and a resolution passed
thereat by the affirmative vote of not less than two-thirds of the votes cast on
such resolution will constitute the approval or consent of the holders of the
Exchangeable Shares.
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DIVINE SUPPORT OBLIGATION
Pursuant to the Exchangeable Share Support Agreement, divine will make
the following covenants to Delano for so long as any Exchangeable Shares (other
than Exchangeable Shares owned by divine or its Affiliates) remain outstanding:
o divine will not declare or pay dividends on the divine Common Stock
unless Delano is able to declare and pay and simultaneously declares
or pays, as the case may be, an equivalent dividend on the
Exchangeable Shares (or if the dividend is a stock dividend, in lieu
thereof Delano effects an economically equivalent subdivision of the
outstanding Exchangeable Shares);
o divine will advise Delano in advance of the declaration of any
dividend on the divine Common Stock and ensure that the declaration
date, record date and payment date for dividends on the Exchangeable
Shares are the same as those for the corresponding dividend on the
divine Common Stock;
o divine will ensure that the record date for any dividend declared on
the divine Common Stock is not less than ten Business Days after the
declaration date of such dividend;
o divine will take all actions and do all things reasonably necessary or
desirable to enable and permit Delano, in accordance with applicable
law, to perform its obligations arising upon the liquidation,
dissolution or winding-up of Delano or any other distribution of the
assets of Delano among its shareholders for the purpose of winding up
its affairs, in the event of a retraction demand by a holder of
Exchangeable Shares or a redemption of Exchangeable Shares on the
redemption date, as the case may be, including all actions and things
as are reasonably necessary or desirable to enable and permit Delano
to deliver divine Common Stock to the holders of Exchangeable Shares
and cash in respect of declared and unpaid dividends;
o divine will take all actions and do all things reasonably necessary or
desirable to perform its obligations upon exercise of the right of
divine to purchase the Exchangeable Shares, including its overriding
call rights and including all such actions and things as are
reasonably necessary or desirable to deliver divine Common Stock to
the holders of Exchangeable Shares and cash in respect of declared and
unpaid dividends where obligated to do so; and
o divine will not exercise its vote as a shareholder to initiate the
voluntary liquidation, dissolution or winding-up of Delano nor take
any action or omit to take any action that is designed to result in
the liquidation, dissolution or winding-up of Delano.
The Exchangeable Share Support Agreement and the Exchangeable Share
provisions provide that, without the prior approval of Delano and the holders of
the Exchangeable Shares given in the manner set forth above under "Description
of Exchangeable Shares -- Amendment and Approval", divine will not issue or
distribute additional divine Common Stock, securities exchangeable for or
convertible into or carrying rights to acquire divine Common Stock, rights,
options or warrants to subscribe therefor, evidences of indebtedness or other
assets, to all or substantially all holders of divine Common Stock, nor shall
divine change the divine Common Stock, unless the same or an economically
equivalent distribution on or change to the Exchangeable Shares (or in the
rights of the holders thereof) is made simultaneously. The Delano board of
directors will determine in good faith and in its sole discretion whether any
corresponding distribution on or change to the Exchangeable Shares is the same
as or economically equivalent to any proposed distribution on or change to the
divine Common Stock and its determination is conclusive and binding. In the
event of any proposed tender offer, share exchange offer, issuer bid, take-over
bid or similar transaction with respect to the divine Common Stock which is
recommended by the divine board of directors and in connection with which the
Exchangeable Shares are not redeemed by Delano or purchased by divine pursuant
to its overriding redemption call right, divine will use reasonable efforts to
take all actions necessary or desirable to enable holders of Exchangeable Shares
to participate in such transaction to the same extent and on an economically
equivalent basis as the holders of divine Common Stock.
In order to assist divine to comply with its obligations under the
Exchangeable Share Support Agreement and exercise its overriding call rights,
Delano is required to notify divine of the occurrence of certain events, such as
the liquidation, dissolution or winding-up of Delano, and Delano's receipt of a
retraction request from a holder of Exchangeable Shares.
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Under the Exchangeable Share Support Agreement, divine has agreed not to
exercise any voting rights attached to the Exchangeable Shares owned by it or
any of its Affiliates on any matter considered at meetings of holders of
Exchangeable Shares.
With the exception of administrative changes for the purpose of adding
covenants of any or all parties, making certain necessary amendments or curing
ambiguities or clerical errors (in each case provided that the board of
directors of each of divine and Delano are of the opinion that such amendments
are not prejudicial to the interests of the holders of the Exchangeable Shares),
the Exchangeable Share Support Agreement may not be amended without the approval
of the holders of the Exchangeable Shares given in the manner set forth above
under "Description of Exchangeable Shares -- Amendment and Approval".
WITHHOLDING
Delano, divine, the Depositary, the Transfer Agent and the Trustee shall be
entitled to deduct and withhold from any dividend or consideration otherwise
payable to any holder of Delano Common Shares, divine Common Stock or
Exchangeable Shares such amounts as Delano, divine, the Depositary, the Transfer
Agent or the Trustee (i) is required to deduct and withhold with respect to such
payment under the Income Tax Act (Canada), the United States Internal Revenue
Code of 1986 or any provision of federal, provincial, territorial, state, local
or foreign tax law, in each case, as amended or succeeded; (ii) may be liable to
pay in accordance with section 116 of the Income Tax Act (Canada) or any
corresponding provisions of provincial law; or (iii) may reasonably incur as
costs or expenses in connection with such withholding. To the extent that
amounts are so withheld, such withheld amounts shall be treated for all purposes
as having been paid to the holder of the shares in respect of which such
deduction and withholding was made, provided (in the case of amounts withheld
under (i) or (ii) above) that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount to be withheld
hereunder from any payment to a holder exceeds the cash portion of the
consideration otherwise payable to the holder, Delano, divine, the Depositary,
the Transfer Agent and the Trustee are hereby authorized to sell or otherwise
dispose of such portion of the consideration as is necessary to provide
sufficient funds to Delano, divine, the Depositary, the Transfer Agent or the
Trustee, as the case may be, to enable it to effect such withholding in cash,
and Delano, divine, the Depositary, the Transfer Agent or the Trustee shall
notify the holder thereof and remit to such holder any unapplied balance of the
net proceeds of such sale.
DISCLOSURE OF INTEREST IN EXCHANGEABLE SHARES
Delano and the Trustee will be entitled to require any holder of
Exchangeable Shares or any person whom Delano or the Trustee knows or has
reasonable cause to believe holds any interest in an Exchangeable Share to
confirm that fact or to give such details as to whom has an interest in the
Exchangeable Shares as would be required if the Exchangeable Shares were a class
of "equity shares" of Delano under Section 101 of the Securities Act (Ontario)
or as would be required under the articles of divine or any laws or regulations,
or pursuant to the rules or regulations of any regulatory authority of the
United States, if the Exchangeable Shares were shares of divine Common Stock.
Any holder of Exchangeable Shares who is or (after acquiring such shares)
becomes a non-resident of Canada for the purposes of the Income Tax Act (Canada)
shall be required to so notify Delano in writing as soon practicable.
DIVINE CAPITAL STOCK
GENERAL
divine's certificate of incorporation authorizes two classes of common
stock: 2,500,000,000 shares of Class A common stock, 100,000,000 shares of Class
C common stock and 50,000,000 shares of preferred stock, 2,000,000 of which have
been designated as Series A junior participating preferred stock and 100,000 of
which have been designated as Series B convertible preferred stock. As of June
11, 2002, divine had issued and outstanding 18,973,847 shares of Class A common
stock, no shares of Class C common stock and 22,941 shares of Series B
convertible preferred stock. In connection with the Arrangement, divine will
designate one share of its preferred stock as the Special Voting Share.
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VOTING, CONVERSION, DIVIDEND, REDEMPTION, LIQUIDATION AND APPOINTMENT RIGHTS
Holders of divine Common Stock are entitled to one vote per share. Holders
of divine Class C common stock are not entitled to vote. Holders of divine
Series B convertible preferred stock are entitled to vote with the divine Common
Stock on an as-converted basis on all matters submitted for a vote of the
holders of divine Common Stock (until divine stockholder approval is obtained,
the aggregate voting power of the holders of Series B convertible preferred
stock shall not be greater than 19.99%). Under certain circumstances, the vote
of a majority of the total number of shares of Series B convertible preferred
stock then outstanding, voting as a single class, is required to amend, alter,
or repeal divine's certificate of incorporation, bylaws, or any certificate of
designation.
The divine Common Stock has no conversion rights. A holder of Class C
common stock is able to convert its Class C common stock into divine Common
Stock, in whole or in part, at any time and from time to time on a
share-for-share basis. A holder of Series B convertible preferred stock is able
to convert its Series B convertible preferred stock into that number of shares
of divine Common Stock equal to $1,000 divided by the conversion price then in
effect, based on an initial conversion price of $6.00, subject to adjustment for
certain antidilution events. Once divine stockholder approval is obtained, there
will be no limit on the aggregate number of shares of divine Common Stock that
could be issued upon conversion of the Series B convertible preferred stock
(until divine stockholder approval is obtained, the shares of Series B
convertible preferred stock may not be converted into more than 3,823,500 shares
of divine Common Stock).
In the case of any dividend paid in stock, holders of divine Common Stock
will be entitled to receive the same percentage dividend payable in shares of
divine Common Stock that the holders of Class C common stock receive payable in
shares of Class C common stock. Holders of Series B convertible preferred stock
are entitled to receive any dividend or distribution (payable in cash or
property other than dividends payable solely in shares of divine Common Stock)
declared on the divine Common Stock as if such shares of Series B convertible
preferred stock were converted into divine Common Stock.
Holders of divine Common Stock and Class C common stock have no redemption
rights. Holders of Series B convertible preferred stock have the option to have
divine redeem their shares of Series B convertible preferred stock for a cash
purchase price of $1,000 per share upon certain events set forth in the
Securities Purchase Agreement with Oak Investment Partners.
In the event of liquidation, dissolution or winding up or upon a merger or
acquisition of divine, the holders of Series B convertible preferred stock will
be entitled to a liquidation preference, before any amounts are paid to the
holders of divine Common Stock or Class C common stock, equal to $1,000 per
share of Series B convertible preferred stock. Thereafter, the holders of Series
B convertible preferred stock will participate with the holders of Common Stock
and Class C common stock ratably on an as-converted basis until the holders of
Series B convertible preferred stock shall have received $3,000 with respect to
each share (inclusive of the $1,000 initial liquidation preference) per share of
Series B convertible preferred stock.
Oak Investment Partners is entitled to appoint a director to divine's board
of directors, and, if the second round of the private placement occurs, will be
entitled to appoint an additional member to divine's board of directors.
Except as described above, the relative powers, preferences and
participating, optional or other special rights, and the qualifications,
limitations or restrictions of the divine Common Stock, Class C common stock and
Series B convertible preferred stock are identical in all respects.
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STOCKHOLDER RIGHTS PLAN
In February 2001, divine's board of directors adopted a Stockholder Rights
Plan and declared a dividend of one right on each outstanding share of divine
Common Stock (the "Rights"). The dividend was payable to shareholders of record
on February 23, 2001.
Initially, no separate certificates were issued for the Rights; rather, the
Rights are evidenced by the certificates for divine Common Stock and trade
automatically with the divine Common Stock. The Rights are not exercisable
unless a person or group has acquired, or announces the intent to acquire, 15%
or more of the outstanding divine Common Stock (or 20% or more if such a person
or group owned 10% or more of the outstanding divine Common Stock at the time of
adoption of the Rights Plan). Thereafter, separate Rights certificates will be
distributed and each Right will entitle its holder to purchase one
one-thousandth of a share of Series A Junior Participating Preferred Stock at
US$15.00 per Right. The Rights are redeemable by divine's board of directors,
for U.S.$0.001 per Right, at any time prior to the exercisability of the Rights.
In the event a person or group acquires 15% (20% in certain circumstances)
or more of divine's Common Stock, each shareholder, other than the acquirer, is
entitled to purchase, for the exercise price of the Rights, the number of shares
of divine's Common Stock having a market value of two times the exercise price
of the Rights. In addition, divine's board of directors may then exchange the
Rights for divine Common Stock at a ratio of one share of divine Common Stock
per Right. Also, if the Rights have become exercisable and divine is acquired in
a merger or other business combination, or 50% or more of its assets, cash flow,
or earning power are sold, each Right will entitle the holder to purchase, at
the exercise price of the Right, that number of shares of common stock of the
acquiring company that, at the time of the transaction, will have a market value
of two times the exercise price of the Right.
On May 29, 2002, divine effected a 1-for-25 reverse stock split of the
divine Common Stock, whereby every 25 outstanding shares of divine Common Stock
were combined into one share of divine Common Stock. As a result of the reverse
stock split, holders of divine Common Stock are now entitled to 25 Rights for
each one share of divine Common Stock they own.
The Rights will expire on January 31, 2011, unless extended by divine's
board of directors.
DELANO SHARE CAPITAL PRIOR TO THE TRANSACTION
The following summary of certain provisions of Delano's share capital
before the Effective Date describes all material provisions of Delano's share
capital, but does not purport to be complete and is subject to, and qualified in
its entirety by, Delano's articles and by-laws and by the provisions of
applicable law.
Delano is authorized to issue an unlimited number of common shares and an
unlimited number of preference shares.
As of June 14, 2002, there are 43,429,694 Delano Common Shares and no
preference shares outstanding.
COMMON SHARES
Each holder of Delano Common Shares is entitled to receive notice of and to
attend all meetings of shareholders of Delano and to vote thereat, except
meetings at which only holders of a specified class of shares (other than common
shares) or specified series of shares are entitled to vote. At all meetings of
holders of Delano Common Shares, each holder of Delano Common Shares is entitled
to one vote in respect of each Common Share held by such holder. The Common
Shares are entitled, subject to the rights, privileges, restrictions and
conditions attaching to any other class of shares of Delano, to receive any
dividend declared by the board of directors of Delano.
In the event of any liquidation, dissolution or winding-up of Delano or
other distribution of Delano's assets among its shareholders for the purpose of
winding-up its affairs, subject to the rights, privileges, restrictions and
conditions attaching to any other class of shares of Delano, the assets and
funds of Delano available for distribution to shareholders shall be distributed
among the holders of the Common Shares, pro rata based on the number of Common
Shares held by each holder and any other participating outstanding series or
class of shares convertible into Common Shares.
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PREFERENCE SHARES
Preference shares may be issued in one or more series. Before such
issuance, the board of directors of Delano may fix the number of shares that is
to comprise each series and the designation, rights, privileges, restrictions
and conditions attaching to them, including but not limited to: the issue price
per share; the rate or amount of any dividends or the method of calculating any
dividends; the dates of payment thereof; any redemption, purchase and/or
conversion prices; and terms and conditions of any redemption purchase and/or
conversion, and any sinking fund or other provisions.
The preference shares of each series rank on a parity with the preference
shares of every other series and are entitled to a preference over the Delano
Common Shares, and over any other shares of Delano ranking junior to the
preference shares.
If any cumulative dividends are not paid in full in the event of the
liquidation, dissolution or winding-up of Delano, the shares of such series of
preference shares shall participate rateably with the shares of all other series
of preference shares in respect of all accumulated cumulative dividends and any
amounts payable.
The preference shares of any series may be made convertible into Delano
Common Shares but preference shares shall have no voting rights as a class.
DELANO SHARE CAPITAL AFTER THE TRANSACTION
The following summary of certain provisions of Delano's share capital after
the Effective Date describes all material provisions of Delano's share capital,
but does not purport to be complete and is subject to, and qualified in its
entirety by, Delano's articles and bylaws and by the provisions of applicable
law.
COMMON SHARES
Each holder of Delano Common Shares is entitled to receive notice of and to
attend all meetings of shareholders of Delano and to vote thereat, except
meetings at which only holders of a specified class of shares (other than common
shares) or specified series of shares are entitled to vote. At all meetings of
holders of Delano Common Shares, each holder of Delano Common Shares is entitled
to one vote in respect of each Common Share held by such holder. The Common
Shares are entitled, subject to the rights, privileges, restrictions and
conditions attaching to any other class of shares of Delano, to receive any
dividend declared by the board of directors of Delano.
In the event of any liquidation, dissolution or winding-up of Delano or
other distribution of Delano's assets among its shareholders for the purpose of
winding-up its affairs, subject to the rights, privileges, restrictions and
conditions attaching to any other class of shares of Delano, the assets and
funds of Delano available for distribution to shareholders shall be distributed
among the holders of the Common Shares, pro rata based on the number of Common
Shares held by each holder and any other participating outstanding series or
class of shares convertible into Common Shares.
EXCHANGEABLE SHARES
See "Description of Exchangeable Shares" for a summary of certain
provisions of the Exchangeable Shares and see also the Exchangeable Share
provisions attached as Appendix 1 to the Plan of Arrangement, which is attached
to this document as Annex C.
BUSINESS OF DIVINE
OVERVIEW
divine, inc. was originally incorporated under Delaware law as divine
interVentures, inc. in June, 1999. In February, 2001 divine changed its name to
divine, inc.
divine is a service and software company focused on solutions for the
extended enterprise. divine helps its clients maximize profits through better
collaboration, interaction, and knowledge sharing throughout their entire value
chain, including suppliers, partners, employees, and customers. divine
facilitates its customers' integration
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of advanced enterprise Web solutions with their business strategies and existing
infrastructures by providing a combination of professional services, Web-based
technology, and managed applications capabilities. divine focuses its offerings
on Global 5000 and high-growth middle market firms and services over 20,000
customers through three principal business groups:
divine Professional Services combines divine's knowledge of how to design
and deploy software solutions with its expertise in technology, infrastructure,
and marketing services and offers services for legacy systems integration, brand
extension, call center automation, business process optimization, operational
strategy consulting, SAP installation, supply chain and customer management, and
technology infrastructure consulting.
divine Software Services deploys software solutions that focus on
collaboration, workflow, and relationship and content management such as
voice-based customer contact tools, auto-response applications, telephony
webinars (Web-based seminars), secured messaging, team interaction, content
acquisition, organization and management, content delivery, and training
programs.
divine Managed Services builds, hosts, manages, monitors, and secures
clients' critical applications by offering design and engineering of managed
hosting solutions; installation, configuration, and testing of hardware and
software systems; ongoing maintenance, back-ups, and upgrades; performance and
security monitoring; and technical support.
divine has forged strategic partnerships and alliances with a number of
leading organizations to strengthen the delivery of open and extensible
e-business solutions to its customers. divine's technology integrates with
leading server platforms such as BEA WebLogic, IBM WebSphere, Microsoft Windows
NT, and Sun Solaris. Additionally, divine has joined the alliance programs of
key vendors such as BEA, Hewlett-Packard, IBM, Microsoft, Computer Associates,
Netscape, Oracle, and Sun/iPlanet to extend support to mutual customers and
introduce divine solutions into new arenas. While these alliances add value to
all of divine's constituencies, they also provide divine and its partners with
additional technical, marketing, and sales resources to expedite the development
and delivery of complete e-business solutions.
Proposed Acquisition of Viant Corporation
On April 5, 2002, divine entered into an Agreement and Plan of Merger and
Reorganization with Viant Corporation ("Viant"). Viant is a professional
services firm that helps global companies identify and solve complex business
problems with digital solutions. Upon consummation of the contemplated merger
with Viant, each of the approximately 49 million outstanding shares of common
stock of Viant will be converted into the right to receive 0.15908 shares of
divine Common Stock and Viant will become a wholly-owned subsidiary of divine.
In connection with the Viant transaction, a payment of a cash dividend of $24
million, in the aggregate, will be made to the stockholders of Viant immediately
prior to consummation of the transaction. In addition, divine will assume each
outstanding option to purchase shares of common stock of Viant, which will
become and represent an option to purchase shares of divine Common Stock.
Consummation of the acquisition of Viant is subject to a number of conditions,
including (1) approval by the stockholders of Viant and (2) approval of the
issuance of the shares of divine Common Stock in connection with the transaction
by the stockholders of divine.
Private Placement with Oak Investment Partners
On May 31, 2002, divine announced that it had secured equity financing from
a group led by Oak Investment Partners. Under the terms of the proposed
investment, Oak Investment Partners and other investors have agreed to purchase
over $61 million of Series B convertible preferred shares of divine which are
convertible into shares of divine Common Stock at a conversion price of $6 per
share. Under the terms of the investment documents, the investors have agreed to
purchase approximately $22.9 million in Series B convertible preferred stock of
divine immediately, and have agreed to purchase approximately an additional
$38.7 million in Series B convertible preferred stock after divine's
stockholders approve the second purchase, which approval is expected to be
obtained prior to July 31, 2002. At the funding of the second purchase, the
investors will also receive warrants to purchase approximately $9.7 million in
Series B convertible preferred stock of divine. On a fully diluted basis, the
investors will acquire an aggregate of approximately 11,880,000 shares of divine
Common Stock. The Series B convertible preferred stock of divine held by
investors will vote as-if-converted with divine Common Stock. The investors have
agreed not to transfer shares of divine for one year after the investment.
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Under the terms of the investment, Oak Investment Partners will be entitled to
appoint one director to divine's board of directors after the initial investment
and, pending divine stockholder approval of the second investment, an additional
director after the second investment.
Options to Purchase Securities
The following table contains information regarding the options to acquire
shares of divine granted by divine that were outstanding as of May 31, 2002.
NUMBER OF SHARES
OF DIVINE MARKET PRICE WEIGHTED
COMMON STOCK MARKET PRICE ON ON MAY 31, AVERAGE YEARS
OPTION HOLDER UNDER OPTION EXERCISE PRICE DATE OF GRANT 2002 TO EXPIRATION
- ------------- ---------------- ----------------- --------------- ------------ -------------
Current and Past Directors and Executive
Officers of divine (41) ............... 299,062 $2.15-$337.50 $10.75-$900 $5.15 8.74
Current and Past Employees of divine
(3,130) ............................... 2,596,720 $0.25-$1,651.475 $10.75-$900 $5.15 9.29
Consultants of divine (3) ............... 80,000 $27.00 $27.00 $5.15 9.32
Others (5)(1) ........................... 3,154 $14.75-$34.00 $14.75-$34.00 $5.15 9.31
- -----------
(1) Represents options granted to a former director, a former consultant, and a
former employee of Emicom Group, Inc., a company acquired by divine during July
2001, and two former directors of Data Return Corporation, a company acquired by
divine during January 2002.
Prior Sales
Since December 31, 2001, and as adjusted for the 1-for-25 reverse stock
split divine implemented on May 29, 2002, a total of 349,777 shares of divine
Common Stock have been issued pursuant to the exercise of stock options, at
exercise prices ranging between $0.25 and $14.75, and a total of 43,168 shares
of divine Common Stock were purchased pursuant to divine's 2000 Employee Stock
Purchase Plan on February 28, 2002. Pursuant to the terms of such plan, the
price paid per share was $13.175, which equals 85% of the closing price of
divine Common Stock on February 28, 2002 of $15.50. On May 31, 2002, a total of
74,329 shares of divine Common Stock were purchased pursuant to divine's 2000
and 2002 Employee Stock Purchase Plans, at a price paid per share of $4.3775,
which equals 85% of the closing price of divine Common Stock on May 31, 2002 of
$5.15.
In January 2002, a total of 40,718, as adjusted to reflect the 1-for-25
reverse stock split implemented by divine on May 29, 2002 shares of divine
Common Stock were issued to certain former employees of Data Return Corporation
in settlement of certain of severance payments totalling $1,632,928, net of
applicable withholdings.
Additional Information Regarding Directors and Officers
The following information is provided in addition to the biographical
information regarding divine's officers and directors provided in the attached
divine Proxy Statement.
Andrew J. Filipowski, divine's Chairman of the Board and Chief Executive
Officer; Michael P. Cullinane, divine's Executive Vice President, Chief
Financial Officer and Treasurer; and Paul L. Humenansky, divine's President and
Chief Operating Officer; each served as a director of Platinum Entertainment,
Inc. through June 2000. On July 17, 2001, Platinum Entertainment, Inc. filed for
relief under Chapter 11 of the Federal Bankruptcy Code.
Michael H. Forster, a director of divine, served as a director of
eMarketword.com which declared bankruptcy in June 2001.
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For a more detailed description of divine's business, including a
description of the industry within which divine operates and its business
operations, please see the attached documents, each of which in its entirety is
incorporated into this Circular:
1. the divine Form 10-K for the fiscal year ended December 31, 2001, attached
hereto as Annex I;
2. the divine definitive Proxy Statement, for the Annual Meeting of
Stockholders held May 21, 2002, as filed with the SEC on April 24, 2002 is
attached as Annex P;
3. divine Form 8-K dated April 5, 2002, respecting the proposed merger
transaction with Viant Corporation, attached as Annex Q;
4. Historical Financial Statements of Viant Corporation, attached as Annex R;
5. Historical Financial Statements of RoweCom Inc., attached as Annex S;
6. divine Form 10-Q for the three-month period ended March 31, 2002, attached
as Annex T;
7. divine Form 8-K dated May 3, 2002, respecting the resignation of Thomas J.
Meredith from divine's board of directors, attached as Annex U; and
8. divine Form 8-K dated May 29, 2002, respecting the private placement with
Oak Investment Partners, attached as Annex V.
BUSINESS OF DELANO
OVERVIEW
Delano Technology Corporation was formed under the laws of Ontario, Canada
in May, 1998. Delano develops and markets customer relationship management (CRM)
software that incorporates advanced analytics with interaction capabilities on a
flexible and scalable technology platform. This technology enables companies to
understand, personalize and manage interactions with customers across multiple
communication channels. These interactions consist of both inbound and outbound
communications through email, company websites, and wireless devices. Companies
can use Delano software applications to gain in-depth customer knowledge by
creating a unified view of the customer across disparate data, and use the
customer insight to initiate marketing campaigns, and route, track and respond
to customer service inquiries. Delano focuses its sales efforts on businesses in
the following industries: financial services, retail, technology,
telecommunications, and transportation and logistics, as well as other
organizations engaged in, or focused on, business-to-business or
business-to-customer commercial opportunities using the internet. Delano is also
increasing its activity with channel partners to further its penetration of
target industries. Delano's professional services group can assist its client's
internal IT personnel to implement its products.
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EXECUTIVE COMPENSATION FOR THE FISCAL YEAR ENDED MARCH 31, 2002
The following table sets forth the actual compensation paid to Delano's
named executive officers for the year ended March 31, 2002 who consist of the
individuals who served as Delano's Chief Executive Officer during the fiscal
year ended March 31, 2002 and each of the four other most highly compensated
executive officers whose salary and bonus for the 2002 fiscal year exceeded
Cdn.$100,000. This information, as it relates to the fiscal years ended March
31, 2001 and March 31, 2000 is provided in Annex O attached to this Circular.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- ----------------------------------
AWARDS PAYOUTS
------------------------ -------
SECURITIES
UNDER RESTRICTED
OTHER OPTIONS/ SHARES OR
ANNUAL SARS RESTRICTED LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) (#) ($) ($)
- ------------------ ---- ------- ------- ------------ ---------- ----------- ------- ------------
Vikas Kapoor(1) 2002 208,333 -- -- -- 4,230,000 -- 325,000
Chief Executive
Officer
John Foresi 2002 301,118 -- -- -- -- -- --
Past-Chief
Executive Officer
Paul Morris 2002 174,375 16,984 -- 150,000 -- -- --
Vice-President,
Digital Archeology
Bahman 2002 127,755 -- 4,599 -- -- -- --
Koohestani
Executive Vice-
President, Products
and Chief
Technology Officer
Robert Lalonde 2002 115,778 31,939 4,599 300,000 -- -- --
Senior Vice-
President, Products
Barry Yates 2002 105,797 61,202 4,599 250,000 -- -- --
Senior Vice-
President,
Worldwide Sales
(1) Vikas Kapoor was appointed Chief Executive Officer of Delano on October 31,
2001.
OPTION GRANTS IN FISCAL 2002 AND YEAR END VALUES
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE PRICE
OPTIONS GRANTED EMPLOYEES IN PER SHARE MARKET VALUE EXPIRATION
NAME # FISCAL YEAR ($/SECURITY) ($/SECURITY) DATE
- ---- --------------- ------------- -------------- ------------ ----------
Paul Morris ..... 150,000 3.7% 0.23 0.23 07/17/05
Bahman Koohestani -- -- -- -- --
Robert Lalonde .. 100,000 2.5% 0.24 0.24 11/01/05
200,000 5.0% 0.23 0.23 07/17/05
Barry Yates ..... 100,000 2.5% 0.11 0.11 10/05/05
150,000 3.7% 0.23 0.23 07/17/05
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OPTION EXERCISES IN FISCAL 2002
# OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
NUMBER OF SHARES FISCAL YEAR END FISCAL YEAR END ($)
ACQUIRED ON VALUE ------------------------------ -----------------------------
NAME EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------------- ------------ ----------- ------------- ----------- -------------
John Foresi ..... 500,000 390,000 -- -- -- --
Paul Morris ..... -- -- -- 150,000 -- 49,500
Bahman Koohestani -- -- -- -- -- --
Robert Lalonde .. -- -- 45,000 300,000 20,250 98,000
Barry Yates ..... -- -- 185,000 250,000 83,250 94,500
COMPENSATION OF DIRECTORS
Effective July 2000, directors who are not employees of Delano are
compensated for serving on the board of directors at a rate of $2,500 per
quarter. In addition, the Chairman of each of the Audit and Compensation
Committees of Delano receives $2,500 per quarter and each member of the
committees receives $1,500 per quarter. Directors are also reimbursed for
out-of-pocket expenses for attending board and committee meetings.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The following is a brief description of the employment agreements entered
into between Delano or its subsidiaries and each of its officers for whom
compensation information is provided in this Circular.
Delano has entered into an agreement with Mr. Koohestani pursuant to which
he was hired as Delano's Executive Vice President, Products and Chief Technology
Officer effective January 4, 1999. Pursuant to this agreement, Mr. Koohestani
receives a salary of Cdn.$200,000 per annum, exclusive of bonuses, benefits and
other compensation. Mr. Koohestani also receives a yearly car allowance and
compensation for all expenses incurred from time to time in connection with the
carrying out of his duties.
Delano entered into an agreement with Mr. Foresi, pursuant to which he was
hired as Delano's President and Chief Executive Officer effective January 4,
1999. Pursuant to this agreement, Mr. Foresi received a salary of Cdn.$150,000
per annum, exclusive of bonuses, benefits and other compensation. Mr. Foresi was
also granted options to purchase 750,000 Delano Common Shares at a price of
$0.11 per share and a warrant to purchase an additional 394,737 Delano Common
Shares at a price of $0.44 per share. Mr. Foresi also received a yearly car
allowance and compensation for all expenses incurred from time to time in
connection with the carrying out of his duties.
Mr. Foresi resigned from his position as President and Chief Executive
Officer and as director of Delano effective July 3, 2001. Pursuant to a
severance agreement, Mr. Foresi received a lump sum payment of $427,100 (subject
to regular withholdings) and Delano paid legal and accounting expenses incurred
by Mr. Foresi up to a maximum of $5,000 upon presentation of invoices for such
expenses.
As of June 14, 2002 Mr. Foresi had exercised all of his options and
warrants to purchase Delano Common Shares. Mr. Foresi was also given certain
employee benefits through January 2, 2002.
Delano has entered into an agreement with Vikas Kapoor effective October 5,
2001 pursuant to which he was hired as the President and Chief Executive Officer
of Delano. Under his employment agreement, Mr. Kapoor is paid an annual salary
of $500,000 plus bonus and has also been granted 4,230,000 Delano Common Shares
which are subject to certain restrictions. See "The Transaction -- Interests of
Certain Persons in the Transaction".
Delano has also entered into separate employee confidentiality and
non-solicitation agreements with each of the named officers for whom
compensation information is provided in the Circular. Under these agreements,
each of them has agreed to keep in confidence all proprietary information of
Delano obtained during his employment with Delano for a period of three years
following the termination of his employment with Delano.
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OTHER INFORMATION CONCERNING DELANO
For a more detailed description of the business of Delano, including a
description of the industry within which Delano operates and its business
operations, please see the following attached documents, each of which in its
entirety is incorporated into this Circular:
1. the Delano Form 10-K for the fiscal year ended March 31, 2001 attached
hereto as Annex J;
2. Delano audited Annual Financial Statements for the fiscal years ended March
31, 2001, 2000 and 1999 in Canadian GAAP attached hereto as Annex K;
3. Delano Management's Discussion and Analysis for the fiscal years ended
March 31, 2001, 2000 and 1999 in Canadian GAAP attached hereto as Annex L;
4. the Delano Management Information Circular delivered to Delano shareholders
for the annual and special meeting of Delano shareholders held July 26,
2001 attached hereto as Annex O;
5. the Delano Form 10-Q for the three and nine-month periods ended December
31, 2001 attached hereto as Annex M; and
6. Delano Interim Financial Statements and Interim Management's Discussion and
Analysis for three and nine-month periods ended December 31, 2001 in
Canadian GAAP attached hereto as Annex N.
In addition to the information set out in the Annexes, Delano has been
advised that as of April 2002, Donald Woodley, a director of Delano, is a member
of the board of directors of each of Telus, Inc., DataMirror Corporation and Onx
Enterprise Solutions Inc. He is no longer a director of Star Data Systems Inc.
Mr. Woodley holds 4,000 Delano Common Shares. Albert Amato, also a director of
Delano, owns 277,444 Delano Common Shares and 75,000 Delano Options.
THE COMPANIES AFTER THE TRANSACTION
GENERAL
Upon completion of the transaction, Delano will continue to be a
corporation governed by the OBCA, and will become a subsidiary of divine. The
registered office of Delano will remain located at 302 Town Centre Boulevard,
Markham, Ontario, Canada L3R 0E8. divine will continue to be a corporation
incorporated under and governed by Delaware law. divine will continue to have
its principal place of business at 1301 North Elston Avenue, Chicago, Illinois,
USA 60622.
Following completion of the transaction, the business of Delano is expected
to be operated in combination with the existing business of divine's software
services unit.
PLANS AND PROPOSALS
Delano and divine believe that the Arrangement combines the complementary
strengths of each company, enabling the value of each company's assets to be
more fully realized. The board of directors of each company approved the
Combination Agreement and the transactions contemplated by the Combination
Agreement because they determined that the combined company would have the
potential to realize a stronger competitive position and improve long-term
operating and financial results.
DIRECTORS AND OFFICERS
Following the Effective Date, Delano's board of directors will be replaced
by one or more individuals, as determined by divine and subject to the OBCA.
SHARE CAPITAL MATTERS
The mechanics of the transaction will involve divine becoming the owner of
all of the Delano Common Shares outstanding immediately following the Effective
Time. Delano shareholders (other than divine and its Affiliates and those Delano
shareholders who exercise dissent rights and ultimately are entitled to receive
the fair value of their Delano Common Shares) will receive shares of divine
Common Stock or, at the option of
75
certain validly-electing Delano shareholders, Exchangeable Shares and certain
ancillary rights. The Exchangeable Shares will be securities issued by Delano.
Holders of the Exchangeable Shares will be entitled to dividend and other rights
that are substantially economically equivalent to those of holders of divine
Common Stock. Through the Voting and Exchange Trust Agreement, holders of
Exchangeable Shares will be entitled to vote at meetings of divine stockholders.
Exchangeable Shares will be exchangeable at the option of the holder at any time
and on a one-for-one basis for shares of divine Common Stock.
AUDITORS
KPMG LLP, the current auditors of Delano, are expected to be the auditors
of divine and its subsidiaries, including Delano, following the Effective Date.
TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for divine in the United States is and
after the Effective Date will remain Computershare Investor Services, LLC,
Chicago, Illinois, USA. The depositary for the Exchangeable Shares will be
Computershare Trust Company of New York at its principal stock transfer office
in New York, New York, USA. The transfer agent for the proxies for the Special
Meeting will be Computershare Trust Company of Canada, at its office in Toronto,
Ontario, Canada.
TAX CONSIDERATIONS FOR DELANO SHAREHOLDERS
CANADIAN TAX CONSIDERATIONS FOR DELANO SHAREHOLDERS
In the opinion of Goodmans LLP, Canadian legal counsel to Delano, the
following is a summary of the principal Canadian federal income tax consequences
which are generally applicable under the Income Tax Act (Canada) (the "Tax Act")
to a Delano shareholder who participates in the Arrangement and who holds Delano
Common Shares and will hold any Exchangeable Shares and shares of divine Common
Stock as capital property, and who deals at arm's length with, and is not and
will not be affiliated with, Delano or divine, in each case, within the meaning
of the Tax Act. Delano Common Shares, Exchangeable Shares and shares of divine
Common Stock will generally constitute capital property to a holder thereof
unless the holder owns such securities in the course of carrying on a business
or has acquired such securities in a transaction or transactions considered to
be an adventure or concern in the nature of trade.
This summary does not apply to a Delano shareholder in respect of whom
divine is or will be a "foreign affiliate" within the meaning of the Tax Act. It
is assumed for the purposes of this summary that Delano will be a "taxable
Canadian corporation" within the meaning of the Tax Act at all relevant times.
This summary also does not address the consequences to a holder of options or
warrants to acquire Delano Common Shares and such persons should consult their
own tax advisors.
This summary is based upon the current provisions of the Tax Act, the
regulations adopted thereunder and the counsel's understanding of the currently
available published administrative practices and policies of the Canada Customs
and Revenue Agency (the "Agency"), all in effect as of the date hereof and a
certificate of an officer of divine with respect to certain factual matters.
This summary also takes into account any proposed changes to the Tax Act and
regulations thereunder that have been publicly announced by the Minister of
Finance prior to the date hereof and assumes that all such changes will be
enacted substantially as proposed. However, no assurances can be given that any
such proposed changes to the Tax Act and regulations will be enacted as
proposed, or at all.
The Tax Act contains "mark-to-market" provisions relating to securities
held by certain financial institutions. This summary does not take into account
such mark-to-market rules. Delano shareholders that are "financial institutions"
for purposes of such rules should consult their own tax advisors.
76
This summary is not exhaustive of all possible Canadian federal income tax
considerations and, except for any proposed changes to the Tax Act and
regulations thereunder that are publicly announced by the Minister of Finance
prior to the date hereof, does not take into account or anticipate any changes
in law, whether by legislative, governmental or judicial decision or action, or
any changes in the administrative practices and policies of the Agency. This
summary does not take into account tax legislation of any province, territory or
foreign jurisdiction. Provisions of provincial income tax legislation vary from
province to province in Canada and may differ from federal income tax
legislation. No advance income tax ruling has been sought or obtained from the
Agency to confirm the tax consequences of any of the transactions herein
described.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
DELANO SHAREHOLDER. ACCORDINGLY, DELANO SHAREHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS FOR ADVICE WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO THEM OF
THE TRANSACTIONS DESCRIBED HEREIN HAVING REGARD TO THEIR OWN PARTICULAR
CIRCUMSTANCES.
For purposes of the Tax Act, all amounts must be expressed in Canadian
dollars; amounts denominated in United States dollars must be converted into
Canadian dollars based on the prevailing United States dollar exchange rate at
the time such amounts arise.
(I) DELANO SHAREHOLDERS RESIDENT IN CANADA
The following portion of this summary is applicable to a Delano shareholder
who, for purposes of the Tax Act and any applicable income tax treaty or
convention, at all relevant times, is or is deemed to be a resident of Canada
while holding Delano Common Shares and Exchangeable Shares or shares of divine
Common Stock.
Delano shareholders who are resident in Canada and whose Delano Common
Shares or Exchangeable Shares might not otherwise qualify as capital property
may be entitled to obtain such qualification by making the irrevocable election
provided for by subsection 39(4) of the Tax Act to have every "Canadian
security" (as defined in the Tax Act) owned by such shareholder in the taxation
year of the election and all subsequent taxation years deemed to be capital
property. Delano shareholders who do not hold their shares as capital property
should consult their own advisors regarding their particular circumstances.
(I) GRANT OF CALL RIGHTS
Delano's financial adviser, Broadview, is of the view that: (i) divine's
"liquidation call right" under the terms of the Arrangement to purchase each
outstanding Exchangeable Share from the holders thereof (other than divine and
its Affiliates) for one share of divine Common Stock per Exchangeable Share, as
described herein in "Description of Exchangeable Shares -- Voting, Dividend and
Liquidation Rights -- Liquidation Rights with respect to Delano"; (ii) divine's
"redemption call right" under the terms of the Arrangement to purchase, on the
redemption date, all of the Exchangeable Shares that are outstanding from the
holders thereof (other than divine and its Affiliates) for one share of divine
Common Stock per Exchangeable Share, as described herein under "Description of
Exchangeable Shares -- Mandatory Redemption by Delano and divine Call Right";
(iii) divine's "retraction call right" under the terms of the Arrangement to
purchase, from holders who elect to require Delano to redeem their Exchangeable
Shares, as described herein under "Description of Exchangeable Shares --
Optional Redemption by Holders"; and (iv) divine's "parent call right" under the
terms of the Arrangement to purchase, in the event of certain changes in
Canadian federal or Ontario tax law, all of the Exchangeable Shares that are
outstanding from the holders thereof (other than divine and its Affiliates) for
one share of divine Common Stock per Exchangeable Share, as described herein
under "Description of Exchangeable Shares -- Mandatory Redemption by Delano and
divine Call Right", have a nominal fair market value from a financial point of
view, to holders of Exchangeable Shares and that, accordingly, no amount should
be allocated to such rights.
Any such determination of value, however, is not binding upon the Agency.
Provided that the view with respect to the aforementioned rights is correct, the
granting of such rights will not result in any material adverse income tax
consequences to a Delano shareholder who receives Exchangeable Shares on the
Arrangement. However, should the Agency challenge this view and ultimately
succeed in establishing that these rights have a
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fair market value in excess of a nominal amount, Delano shareholders who receive
Exchangeable Shares on the Arrangement will realize a capital gain in an amount
equal to the fair market value of such rights. The general tax treatment of
capital gains and capital losses is discussed below under the heading "Taxation
of Capital Gain or Capital Loss".
(II) EXCHANGE OF DELANO COMMON SHARES FOR EXCHANGEABLE SHARES
The Arrangement provides that a Delano shareholder who is resident in
Canada and who is not exempt from tax under Part I of the Tax Act can elect to
receive Exchangeable Shares for their Delano Common Shares on the Effective
Date. The balance of this section of the summary addresses the consequences to a
Delano shareholder who so validly elects.
The Arrangement involves a reorganization of the capital of Delano to which
section 86 of the Tax Act will apply. Accordingly, so long as, at the Effective
Time, the aggregate adjusted cost base of a Delano shareholder's Delano Common
Shares exceeds the sum of (i) the amount of any cash received in respect of a
fractional Exchangeable Share and (ii) the fair market value of the ancillary
rights acquired by such Delano shareholder in connection with the exchange and
net of any reasonable costs of disposition, such Delano shareholder will not
realize a capital gain for purposes of the Tax Act on the exchange. To the
extent that such sum, net of any reasonable costs of disposition, exceeds the
aggregate adjusted cost base of such Delano shareholder's Delano Common Shares,
such Delano shareholder will realize a capital gain for purposes of the Tax Act.
The taxation of capital gains is described below under the heading "Taxation of
Capital Gain or Capital Loss".
Eligible Delano shareholders who validly elect to receive Exchangeable
Shares under the Arrangement will initially receive Exchangeable Shares and
certain ancillary rights. See "Description of Exchangeable Shares --General". On
the exchange a Delano shareholder will be deemed to have acquired:
o Exchangeable Shares for a cost equal to the amount, if any, by which
the adjusted cost base to such Delano shareholder of the Delano Common
Shares exchanged for Exchangeable Shares exceeds the sum of (i) the
amount of any cash received in respect of a fractional Exchangeable
Share and (ii) the fair market value of the ancillary rights; and
o the ancillary rights for a cost equal to their fair market value.
For these purposes, a Delano shareholder will be required to determine the
fair market value of the ancillary rights on a reasonable basis for purposes of
the Tax Act. Broadview is of the view that the ancillary rights have only a
nominal fair market value, from a financial point of view, to holders of
Exchangeable Shares. On this basis, a shareholder should not realize a capital
gain on the exchange of Delano Common Shares for Exchangeable Shares. Such
determination of value is not, however, binding on the Agency.
(III) EXCHANGE OF DELANO COMMON SHARES FOR SHARES OF DIVINE COMMON STOCK
A Delano shareholder who exchanges Delano Common Shares for shares of
divine Common Stock (including any related divine rights) will be considered to
have disposed of such Delano Common Shares for proceeds of disposition equal to
the sum of (i) the aggregate fair market value of the shares of divine Common
Stock (including any related divine rights) acquired by such Delano shareholder
on the exchange, and (ii) any cash received by such holder in respect of a
fractional share of divine Common Stock. Such Delano shareholder will realize a
capital gain (or capital loss) equal to the amount by which the proceeds of
disposition of such Delano Common Shares, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the Delano
shareholder of such Delano Common Shares immediately before the exchange (see
"Taxation of Capital Gain or Capital Loss" below). The cost to a Delano
shareholder of shares of divine Common Stock acquired on the exchange will be
equal to the fair market value of such shares of divine Common Stock at the time
of the acquisition, to be averaged at any given time with the adjusted cost base
of any other shares of divine Common Stock held by the Delano shareholder as
capital property for the purposes of determining the holder's adjusted cost base
of such shares of divine Common Stock.
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(IV) EXCHANGEABLE SHARES AND SHARES OF DIVINE COMMON STOCK
Dividends on Exchangeable Shares
In the case of a Delano shareholder who is an individual, dividends
received or deemed to be received on the Exchangeable Shares will be required to
be included in computing the Delano shareholder's income and will be subject to
the gross-up and dividend tax credit rules normally applicable to taxable
dividends received from a corporation resident in Canada.
The Exchangeable Shares will be "taxable preferred shares" and "short-term
preferred shares" for purposes of the Tax Act. Accordingly, Delano will be
subject to a 66-2/3% tax under Part VI.1 of the Tax Act on dividends (other than
excluded dividends) in excess of an annual dividend allowance paid or deemed to
be paid on the Exchangeable Shares. In certain circumstances, Delano will be
entitled to deductions under Part I of the Tax Act which may substantially
offset the impact of the Part VI.1 tax. Dividends received or deemed to be
received on the Exchangeable Shares will not be subject to the 10% tax under
Part IV.1 of the Tax Act.
Subject to the discussion in the following paragraph as to the denial of
the dividend deduction, in the case of a Delano shareholder that is a
corporation, other than a "specified financial institution" as defined in the
Tax Act, dividends received or deemed to be received on the Exchangeable Shares
will be included in computing the corporation's income and will generally be
deductible in computing its taxable income. As there is no intention to obtain a
stock exchange listing for the Exchangeable Shares, in the case of a Delano
shareholder that is a specified financial institution (and also subject to the
discussion in the following paragraph), such a dividend will be deductible in
computing its taxable income only if the specified financial institution did not
acquire the Exchangeable Shares in the ordinary course of the business carried
on by such institution.
If divine or any other person with whom divine does not deal at arm's
length, including Delano, is a specified financial institution under the Tax Act
at the time that dividends are paid on the Exchangeable Shares, dividends
received or deemed to be received by a Delano shareholder that is a corporation
will not be deductible in computing taxable income but will be fully includable
in taxable income under Part I of the Tax Act. A corporation will generally be a
specified financial institution for purposes of the Tax Act if it is a bank, a
trust company, a credit union, an insurance corporation or a corporation whose
principal business is the lending of money to persons with whom the corporation
is dealing at arm's length, or the purchasing of debt obligations issued by such
persons or a combination thereof, or if it is a corporation controlled by or
related to such entities. divine has informed Delano that it is of the view that
neither it nor any person with whom it does not deal at arm's length nor any
partnership or trust of which it or the person is a member or beneficiary,
respectively, is a specified financial institution at the current time, or will
be a specified financial institution immediately after the Arrangement becomes
effective. However, there can be no assurance that this status will not change
prior to such time at which dividends are received or deemed to be received by a
corporate shareholder holding Exchangeable Shares.
A Delano shareholder that is a "private corporation" (as defined in the Tax
Act) or any other corporation resident in Canada and controlled or deemed to be
controlled by or for the benefit of an individual (other than a trust) or a
related group of individuals (other than trusts) will generally be liable under
Part IV of the Tax Act to pay a refundable tax of 33-1/3% on dividends received
or deemed to be received on the Exchangeable Shares to the extent that such
dividends are deductible in computing the Delano shareholder's taxable income. A
Delano shareholder that is a "Canadian controlled private corporation" (as
defined in the Tax Act) may be liable to pay an additional refundable tax of
6-2/3% on dividends or deemed dividends that are not deductible in computing
taxable income.
Dividends on Shares of divine Common Stock
Dividends on shares of divine Common Stock will be required to be included
in the recipient's income for Canadian income tax purposes. Such dividends
received by a Delano shareholder who is an individual will not be subject to the
gross-up and dividend tax credit rules in the Tax Act. A Delano shareholder that
is a corporation will include such dividends in computing its income and
generally will not be entitled to deduct the amount of such dividends in
computing its taxable income. A Delano shareholder that is a Canadian-controlled
private
79
corporation may be liable to pay an additional refundable tax of 6-2/3% on such
dividends. United States non-resident withholding tax on dividends may be
eligible for foreign tax credit or deduction treatment where applicable under
the Tax Act. See the commentary below under the heading "Tax Consequences to
U.S. Shareholders ".
(V) REDEMPTION OR RETRACTION OF EXCHANGEABLE SHARES
On the redemption (including a retraction) of an Exchangeable Share by
Delano, the holder of that Exchangeable Share will be deemed to have received a
dividend equal to the amount, if any, by which the redemption proceeds (the fair
market value at that time of the share of divine Common Stock received by the
shareholder from Delano on the redemption plus the amount of any declared but
unpaid dividends on the Exchangeable Share prior to the date of such redemption)
exceed the paid-up capital (for purposes of the Tax Act) of the Exchangeable
Share at the time the Exchangeable Share is so redeemed. The amount of any such
deemed dividend will be generally subject to the tax treatment described above
under "Dividends on Exchangeable Shares". On the redemption, the holder of an
Exchangeable Share will also be considered to have disposed of the Exchangeable
Share for proceeds of disposition equal to the redemption proceeds less the
amount of any deemed dividend. A holder will, in general, realize a capital gain
(or a capital loss) equal to the amount by which the adjusted cost base to the
holder of the Exchangeable Share is less than (or exceeds) such proceeds of
disposition, net of any reasonable costs of disposition (see "Taxation of
Capital Gain or Capital Loss" below). In the case of a Delano shareholder that
is a corporation, in some circumstances, the amount of any deemed dividend may
be treated as proceeds of disposition and not as a dividend.
(VI) DISPOSITION OF EXCHANGEABLE SHARES OTHER THAN ON A REDEMPTION OR RETRACTION
On the disposition or deemed disposition or exchange of an Exchangeable
Share by a holder, including on the exchange of an Exchangeable Share by the
holder thereof with divine for a share of divine Common Stock (including any
related divine rights), other than on a redemption (including a retraction), the
holder will, in general, realize a capital gain (or a capital loss) to the
extent the proceeds of disposition of the Exchangeable Share, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base to the holder of the Exchangeable Share. For these purposes, where
Exchangeable Shares are acquired by divine for a share of divine Common Stock,
the proceeds of disposition will be the fair market value, at the time of the
exchange, of the share of divine Common Stock received on the exchange. The
proceeds of disposition may also include the amount of any declared but unpaid
dividend on the Exchangeable Share prior to the date of such disposition unless
such dividend is required to be included in computing income of the holder as a
dividend. Holders should consult their own tax advisors in this regard (see
"Taxation of Capital Gain or Capital Loss" below).
Because of the existence of the rights to acquire the Exchangeable Shares
granted to divine, as well as the holder's right to exchange the Exchangeable
Shares for shares of divine Common Stock (including any related divine rights),
a holder of Exchangeable Shares cannot control whether such holder will receive
shares of divine Common Stock by way of a redemption (including a retraction) of
the Exchangeable Shares by Delano or by way of purchase of the Exchangeable
Shares by divine or an affiliate of divine. As described above, the Canadian
federal income tax consequences of a redemption (including a retraction) differ
from those of a purchase.
On October 18, 2000 the Canadian Minister of Finance announced a proposal
to formulate and introduce a rule to permit shares of a Canadian corporation
held by a Canadian resident to be exchanged for shares of a foreign corporation
on a tax-deferred basis. It is possible that these contemplated amendments
could, if and when enacted into law, allow a holder of Exchangeable Shares to
exchange such shares for shares of divine Common Stock on a tax-deferred basis.
No details have been announced respecting these contemplated amendments and in
particular with respect to the various requirements that would have to be
satisfied in order to permit a holder of Exchangeable Shares to exchange such
shares on a tax-deferred basis or whether these requirements could be satisfied
in the circumstances.
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(VII) ACQUISITION AND DISPOSITION OF SHARES OF DIVINE COMMON STOCK
The cost of shares of divine Common Stock received on the redemption
(including a retraction) or exchange of Exchangeable Shares will be equal to the
fair market value of such shares of divine Common Stock at the time of such
event, to be averaged with the adjusted cost base of any other shares of divine
Common Stock held at that time by the holder as capital property.
A disposition or deemed disposition of shares of divine Common Stock by a
holder will generally result in a capital gain (or capital loss) to the extent
that the proceeds of disposition, net of any reasonable costs of disposition,
exceed (or are less than) the adjusted cost base to the holder of those shares
of divine Common Stock immediately before the disposition. See "Taxation of
Capital Gain or Capital Loss".
(VIII) TAXATION OF CAPITAL GAIN OR CAPITAL LOSS
Pursuant to the Tax Act, a Delano shareholder will be required to include
in income for the year of disposition one-half of any capital gain (a "taxable
capital gain"), and will generally be entitled to deduct one-half of any capital
loss (an "allowable capital loss") from taxable capital gains realized in the
year by the Delano shareholder or in any subsequent year to the extent and in
the circumstances described in the Tax Act. In addition, the portion of any such
allowable capital loss, computed in accordance with the rules provided for in
the Tax Act, which is not otherwise deducted from taxable capital gains realized
in the year or in any subsequent year, may be deducted from taxable capital
gains realized in any of the three preceding years to the extent and in the
circumstances described in the Tax Act. Any such capital loss may, in certain
circumstances, be reduced by the amount of any dividends, including deemed
dividends, that have been received by a Delano shareholder on such shares to the
extent and in the manner provided for in the Tax Act. Similar rules may apply
where a corporation is a member of a partnership or a beneficiary of a trust
that owns such shares, or where a trust or partnership of which a corporation is
a beneficiary or a member is a member of a partnership or a beneficiary of a
trust that owns such shares.
Capital gains realized by an individual or trust, other than certain
trusts, may give rise to alternative minimum tax under the Tax Act. A Delano
shareholder that is a "Canadian-controlled private corporation" (as defined in
the Tax Act) may be liable to pay an additional refundable tax of 62/3% on
taxable capital gains.
(IX) FOREIGN PROPERTY INFORMATION REPORTING
In general, a "specified Canadian entity", as defined in the Tax Act, for a
taxation year or fiscal period whose total cost amount of "specified foreign
property", as defined in the Tax Act, at any time in the year or fiscal period
exceeds Cdn. $100,000, is required to file an information return for the year or
period disclosing prescribed information, including the cost amount, any
dividends received in the year, and any gains or losses realized in the year, in
respect of such property. With some exceptions, a taxpayer resident in Canada in
the year will be a specified Canadian entity. Exchangeable shares and shares of
divine Common Stock will constitute specified foreign property to a holder.
Accordingly, holders of Exchangeable Shares and shares of divine Common Stock
should consult their own advisors regarding compliance with these rules.
(X) DISSENTING DELANO SHAREHOLDERS
A Delano shareholder who exercises the right to dissent with respect to the
Arrangement described herein is entitled, if the Arrangement becomes effective,
to receive the fair value of the Delano Common Shares held by such dissenting
Delano shareholder. The dissenting shareholder will be considered to have
disposed of the Delano Common Shares for proceeds of disposition equal to the
amount received by such shareholder less the amount of any deemed dividend
referred to below and any interest awarded by a court and a capital gain (or
capital loss) may result (see "Taxation of Capital Gain or Capital Loss" above).
As any amount received by a dissenting shareholder will be paid by Delano, the
dissenting shareholder will be deemed to receive a taxable dividend equal to the
amount by which the amount received (other than in respect of interest awarded
by a court) exceeds the paid-up capital (for purposes of the Tax Act) of such
shareholder's Delano Common Shares. In the case of a Delano shareholder that is
a corporation, in some circumstances, the amount of any such
81
deemed dividend may be treated as proceeds of disposition and not as a dividend.
Any interest awarded to a dissenting shareholder by a court will be included in
such shareholder's income for Canadian income tax purposes
(XI) PROPOSED AMENDMENTS RELATING TO FOREIGN INVESTMENT ENTITIES
On August 2, 2001, the Canadian Minister of Finance released draft
legislation to amend the Tax Act to implement a proposal concerning the taxation
of holdings in "foreign investment entities". In general terms, the draft
legislation would apply to property (other than an "exempt interest") of a
Canadian resident that is a share of, or a right to acquire a share of, or a
property exchangeable for a share of, a foreign investment entity. A share of
divine Common Stock or an Exchangeable Share will generally be an "exempt
interest" if throughout the holders' taxation year the shares of divine Common
Stock are listed on a "prescribed stock exchange" (which includes NASDAQ) and
are "widely held and actively traded" (as defined in the Tax Act), unless it is
reasonable to conclude that the Canadian resident had a tax avoidance motive for
the acquisition of the share. For this purpose, the Canadian resident will be
regarded as having a tax avoidance motive if it is reasonable to conclude that
the main reasons for acquiring the share include (i) benefiting from income,
profits or gains or increases in value in respect of "investment property" held
by the divine group and, (ii) benefiting from the deferral or reduction of tax
that would have been payable by the Canadian resident holder if such income,
profits or gains had been earned directly by the Canadian resident. The draft
legislation sets out a number of factors to be considered in determining the
existence of a tax avoidance motive.
If divine were a foreign investment entity and if the shares of divine
Common Stock or Exchangeable Shares did not constitute an exempt interest of a
Canadian resident, the Canadian resident would be required to take into account
in computing income, on an annual basis, any increase (or decrease) in the value
of the shares of divine Common Stock or Exchangeable Shares (as applicable)
during each taxation year. Alternatively, in the case of a holder of shares of
divine Common Stock, if the Canadian resident so elects and the relevant
information is made available, the Canadian resident will be required to take
into account in computing income the relevant share in the underlying income of
divine, calculated in accordance with Canadian tax rules (whether or not cash
distributions were received by the Canadian resident).
On December 17, 2001, the Canadian Minister of Finance announced that the
proposed new rules would generally apply for taxation years beginning after 2002
(rather than 2001, as proposed on August 2, 2001), in order to consider
suggested amendments to these rules. When applicable, the proposed new rules
(assuming they are enacted in their current form) will require a determination,
on an annual basis, as to whether or not divine is a foreign investment entity
and whether the shares of divine Common Stock or Exchangeable Shares constitute
an exempt interest.
The proposed new rules will not apply to a Canadian resident whose shares
of divine Common Stock or Exchangeable Shares constitute an exempt interest. On
the assumption that the shares of divine Common Stock will be listed on NASDAQ
and will be "widely held and actively traded" (as defined in the Tax Act), the
shares of divine Common Stock or Exchangeable Shares will constitute an exempt
interest to a Canadian resident provided the Canadian resident does not have a
tax avoidance motive for the acquisition of the share. You should consult your
own tax advisor regarding the determination of whether or not you have such a
tax avoidance motive.
(XII) ELIGIBILITY FOR INVESTMENT IN CANADA
Shares of divine Common Stock will be qualified investments under the Tax
Act for trusts governed by registered retirement savings plans, registered
retirement income funds, deferred profit sharing plans and registered education
savings plans provided such shares remain listed on NASDAQ (or are listed on
another prescribed stock exchange).
Shares of divine Common Stock will be foreign property under the Tax Act
for trusts governed by registered pension plans, registered retirement savings
plans, deferred profit sharing plans and for other persons to whom Part XI of
the Tax Act is applicable (collectively, "Deferred Income Plans").
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A Deferred Income Plan is subject to a penalty tax under Part XI of the Tax
Act in respect of the cost amount of excess holdings of foreign property. The
penalty tax generally applies where the cost amount to the Deferred Income Plan,
at the end of any month, exceeds 30% of the cost amount of all property of the
Deferred Income Plan. Where property that was not foreign property becomes or is
exchanged for foreign property, the Tax Act provides a 24 month "grace period"
before the holding of such property will result in application of the penalty
tax to the Deferred Income Plan. The Tax Act extends this treatment to property
received in the course of certain reorganizations. Accordingly, the cost of the
divine Common Stock acquired by Deferred Income Plans under the Arrangement
should not be required to be taken into account in determining the Deferred
Income Plan's excess foreign property holdings until the end of the 24th month
following the month during which the Effective Time occurs. For the purposes of
the foreign property rules, the cost amount to a Deferred Income Plan of a share
of divine Common Stock received under the Arrangement will be their fair market
value on the Effective Date.
(II) DELANO SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of the summary is applicable to holders of Delano
Common Shares who, for purposes of the Tax Act and any applicable income tax
treaty or convention, have not been and will not be resident or deemed to be
resident in Canada at any time while holding Delano Common Shares or shares of
divine Common Stock and who do not use or hold and are not deemed to use or hold
their Delano Common Shares or shares of divine Common Stock in carrying on a
business in Canada. Special rules, which are not discussed in this summary, may
apply to a non-resident Delano shareholder that is an insurer carrying on
business in Canada and elsewhere.
(I) DISPOSITION OR EXCHANGE OF DELANO COMMON SHARES
A non-resident Delano shareholder will not be subject to tax under the Tax
Act on the exchange of Delano Common Shares for shares of divine Common Stock
(including any related divine rights) provided that the Delano Common Shares
either do not constitute "taxable Canadian property" or constitute taxable
Canadian property that is "treaty-protected property" of the holder for purposes
of the Tax Act. Such holder will not be subject to tax under the Tax Act on a
sale or other disposition of shares of divine Common Stock provided such shares
do not constitute "taxable Canadian property" or constitute taxable Canadian
property that is "treaty-protected property" of the holder for purposes of the
Tax Act.
Generally, Delano Common Shares will not be taxable Canadian property to a
non-resident holder at a particular time provided that the Delano Common Shares
are not deemed to be taxable Canadian property to the holder pursuant to the
provisions of the Tax Act and further provided that the Delano Common Shares are
listed on a prescribed stock exchange (which currently includes the TSE and
NASDAQ) at the Effective Time, and the holder, persons with whom such holder
does not deal at arm's length, or the holder together with such persons, has not
owned (or had under option or an interest in) 25% or more of the issued shares
of any class or series of the capital stock of Delano at any time during the
five-year period immediately preceding the particular time. Shares of divine
Common Stock will not constitute taxable Canadian property unless more than 50%
of the fair market value of such shares is derived from real property situate in
Canada, Canadian resource properties and timber resource properties (as such
terms are defined in the Tax Act). Even if the Delano Common Shares or shares of
divine Common Stock are considered to be taxable Canadian property, such shares
will be considered treaty-protected property of a holder at any time for
purposes of the Tax Act if any income or gain from the disposition of such
shares by the holder at that time would be exempt from tax in Canada under the
terms of an applicable income tax treaty or convention. DELANO SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE AVAILABILITY OF ANY
RELIEF UNDER THE TERMS OF ANY APPLICABLE INCOME TAX TREATY OR CONVENTION IN
THEIR PARTICULAR CIRCUMSTANCES.
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(II) DISSENTING SHAREHOLDERS
For a description of the manner in which dividends will be deemed to have
been received and proceeds of disposition will be computed on the exercise of a
right to dissent to the Arrangement see "Delano Shareholders Resident in Canada
- -- Dissenting Delano Shareholders".
A non-resident Delano shareholder will be subject to Canadian non-resident
withholding tax on dividends or interest received or deemed to have been
received as a consequence of exercising a right to dissent to the Arrangement at
a rate of 25% unless the rate is reduced under the provisions of an applicable
income tax treaty or convention. In addition, the consequences and
considerations applicable with respect to the disposition of Delano Common
Shares will be as described above (see "Disposition or Exchange of Delano Common
Shares").
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion is a general summary of certain of the United
States federal income and estate tax consequences generally applicable to a
Delano shareholder who participates in the Arrangement and who holds Delano
Common Shares as capital assets for purposes of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"). The discussion is based on applicable
provisions of the Code, Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, as in effect on the date
hereof, all of which are subject to change, possibly with retroactive effect. No
statutory, judicial or administrative authority exists which addresses certain
of the United States federal income tax consequences of the issuance and
ownership of instruments and rights comparable to the Exchangeable Shares and,
consequently, as discussed more fully below, certain aspects of the United
States federal income tax treatment of the receipt and ownership of Delano
Common Stock and the Exchangeable Shares, and of the exchange of Delano Common
Shares for shares of divine Common Stock, are not certain under current law.
The following discussion does not describe all of the possible tax
consequences that may be relevant to a Delano shareholder based upon that
shareholder's particular circumstances or to shareholders that are potentially
subject to special rules, such as financial institutions, insurance companies,
tax-exempt entities, partnerships or other entities classified as partnerships
for United States federal income tax purposes, Delano shareholders who acquired
their Delano Common Shares through the exercise of employee stock options or
otherwise in connection with the performance of services, dealers in securities
or foreign currencies, persons holding Delano Common Shares as part of a hedge,
a straddle, or a constructive sale for tax purposes, persons who own (or have
owned during a five year "look back" period), directly, indirectly or by
attribution, 10% or more of the voting power of Delano's capital stock, or
persons subject to the alternative minimum tax provisions of the Code. The
discussion assumes that Delano is not, and has never been, a "collapsible
corporation" as defined in Section 341 of the Code or a "controlled foreign
corporation" as defined in Section 957 of the Code. The discussion does not
address whether any taxes imposed by a taxing jurisdiction will be creditable
against United States taxable income or whether any such taxes will be
deductible for United States tax purposes.
No opinion of counsel or advance income tax ruling has been obtained from
the United States Internal Revenue Service ("IRS") regarding the United States
federal income and estate tax consequences of any of the transactions described
herein, and no assurances can be made that the IRS will take the same view of
the tax consequences of the Arrangement as summarized below. This discussion is
for general information only and does not address aspects of United States
taxation other than United States federal income taxation and, in a limited
fashion, United States estate taxation, nor does it address state, local or
non-United States tax consequences of the Arrangement.
Accordingly, Delano shareholders are urged to consult their tax advisors
with regard both to the application of the United States federal income and
estate tax laws to their particular situations and to any consequences arising
under the laws of United States federal, state, local and foreign taxing
jurisdictions.
84
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following discussion sets forth certain of the United States federal
income tax considerations generally applicable to Delano shareholders that are
"U.S. Holders" for United States federal income tax purposes. As used herein,
the term "U.S. Holder" means a beneficial owner of Delano Common Shares that is,
for United States federal income tax purposes:
o an individual citizen or resident of the United States;
o a corporation, or other entity taxable as a corporation for United
States federal income tax purposes, created or organized in or under
the laws of the United States or of any political subdivision thereof;
o an estate, the income of which is subject to United States federal
income tax regardless of its source; or
o a trust, in general, if (x) it is subject to the primary supervision
of a United States court and the control of one or more United States
persons or (y) it has made an election to be treated as a United
States person.
The term "U.S. Holder" also includes certain former citizens and residents
of the United States. If a partnership holds common stock, the tax treatment of
a partner will generally depend upon the status of the partner and upon the
activities of the partnership.
The following discussion applies only to U.S. Holders who receive shares of
divine Common Stock in exchange for their Delano Common Shares. This discussion
does not address U.S. Holders who are residents of Canada for purposes of the
Income Tax Act (Canada) and who elect to receive Exchangeable Shares pursuant to
the Arrangement. Such U.S. Holders should consult their tax advisors concerning
the tax consequences of the transaction.
Exchange of Delano Common Shares for shares of divine Common Stock
A U.S. Holder who receives shares of divine Common Stock in exchange for
Delano Common Shares pursuant to the Arrangement may be justified in taking the
position that the shares of divine Common Stock were received in a
reorganization within the meaning of Section 368(a)(1)(B) of the Code, and
divine intends to take this position. The basis for this position would be that,
for United States federal income tax purposes, the Exchangeable Shares in
substance represent shares of divine Common Stock, and therefore for United
States federal income tax purposes the Arrangement in substance involves an
exchange of all of the Delano Common Shares for shares of divine Common Stock.
However, no statutory, judicial, or administrative authority directly addresses
the United States federal income tax treatment of exchanges involving shares
comparable to the Exchangeable Shares. There can be no assurance that the IRS
will not challenge the position that the Exchangeable Shares represent, in
substance, shares of divine Common Stock and the Arrangement therefore qualifies
as a reorganization under section 368(a)(1)(B) of the Code, or that, if that
position is challenged, a court will not agree with the IRS.
If the exchange of Delano Common Shares for shares of divine Common Stock
is pursuant to a reorganization within the meaning of Section 368(a)(1)(B) of
the Code, then, subject to the discussion below under "Passive Foreign
Investment Company Considerations," a U.S. Holder generally will recognize no
gain or loss on the receipt of divine Common Stock, except that a U.S. Holder
who receives cash in lieu of fractional shares will recognize capital gain or
loss equal to the difference between the amount of cash received and that
holder's tax basis in the fractional shares surrendered in the exchange. A U.S.
Holder's tax basis in the shares of divine Common Stock received in exchange for
the Delano Common Shares will be equal to that holder's tax basis in the
original Delano Common Shares less the amount of tax basis, if any, apportioned
to fractional shares. A U.S. Holder's holding period for divine Common Stock
received in exchange for Delano Common Shares will generally include the
holder's holding period for the original Delano Common Shares exchanged pursuant
to the Arrangement.
If an exchange of Delano Common Shares for shares of divine Common Stock
pursuant to the Arrangement does not qualify as a reorganization within the
meaning of Section 368(a) of the Code and is
85
therefore a taxable event for United States federal income tax purposes, then,
subject to the discussion below under "Passive Foreign Investment Company
Considerations", a U.S. holder generally will recognize capital gain or loss
equal to the difference between (i) the sum of (A) the fair market value (in
U.S. dollars) on the date of the exchange of the shares of divine Common Stock
received in the exchange and (B) any cash received in lieu of fractional shares;
and (ii) such U.S. Holder's basis in the Delano Common Shares that were
exchanged. A U.S. Holder's tax basis in the shares of divine Common Stock
received will be equal to the fair market value (in U.S. dollars) of those
shares of divine Common Stock on the date of the exchange, and the U.S. Holder's
holding period in the shares of divine Common Stock received will begin on the
day following the Effective Date.
A U.S. Holder who dissents from the Arrangement generally will recognize
capital gain or loss equal to the difference between the amount of cash received
and such holder's basis in the Delano Common Shares surrendered in accordance
with the dissent procedures applicable to the Arrangement. Interest, if any,
awarded by a court will be taxable as ordinary income.
Passive Foreign Investment Company Considerations
For U.S. federal income tax purposes, Delano generally would be classified
as a passive foreign investment company (a "PFIC") under the Code for any
taxable year during which either (i) 75% or more of its gross income is passive
income (as defined for United States federal income tax purposes) or (ii) on
average for such taxable year, 50% or more of its assets (by value) produce or
are held for the production of passive income. The application of these rules is
complex and may vary in accordance with the particular circumstances of each
shareholder. With certain limited exceptions, if Delano was a PFIC (and not a
qualified electing fund as described below) at any time during a U.S. Holder's
holding period for his, her or its Delano stock, such stock will be treated as
stock in a PFIC. Delano has not made a determination as to whether it was a PFIC
during any prior period or whether it is a PFIC during the current year.
Accordingly, each U.S. Holder, particularly a U.S. Holder whose basis in Delano
stock is less than the fair market value of the shares of divine Common Stock to
be received in exchange therefore, should consult his, her or its own personal
tax advisor regarding the potential application of these rules to the exchange
of Delano Common Shares pursuant to the Arrangement. Delano cannot assure Delano
shareholders that it has not been or will not become a PFIC.
If Delano has been a PFIC at any time during a particular U.S. Holder's
holding period for his, her or its Delano Common Shares and the U.S. Holder has
not made an election to treat Delano as a qualified electing fund (a "QEF")
under Section 1295 of the Code (a "QEF Election") for all taxable years included
within the U.S. Holder's holding period, then, even if the transactions
described in the Arrangement would otherwise constitute a reorganization within
the meaning of Section 368(a) of the Code, such U.S. Holder may recognize gain
(but not loss) upon the exchange of its Delano Common Shares for shares of
divine Common Stock in an amount equal to the excess of (i) the sum of (A) the
fair market value of the divine Common Stock received in the exchange and (B)
any cash received in lieu of fractional shares over (ii) the U.S. Holder's
adjusted tax basis in the Delano Common Shares that were exchanged. However,
under proposed Treasury regulations, a U.S. Holder generally would not recognize
gain on the exchange of Delano Common Shares for shares of divine Common Stock
if (i) the adjusted tax basis of the exchanged Delano Common Shares in the hands
of divine is no greater than the adjusted tax basis of the stock in the hands of
the U.S. Holder prior to the exchange; (ii) divine's holding period in the
Delano Common Shares is at least as long as the U.S. Holder's holding period and
(iii) the aggregate ownership of the U.S. Holder and divine after the exchange
is the same or greater than the U.S. Holder's proportionate ownership before the
exchange. If any of these requirements is not satisfied, the Arrangement
otherwise fails to qualify as a reorganization, or the proposed regulations are
not adopted in their present form or are determined for any reason to be
inapplicable to the Arrangement, U.S. Holders will generally be treated as if
they disposed of their Delano Common Shares in a fully taxable transaction and
will be required to recognize gain, if any, on the receipt of the divine shares
of Common Stock as described above.
As noted above, if Delano is a PFIC, and the U.S. Holder has not made a QEF
Election that applies for all taxable years included in the U.S. Holder's
holding period, such recognized gain will be treated as realized ratably over
the period during which such U.S. Holder has held its Delano Common Shares. Gain
that is treated as realized in the taxable year of the Arrangement and in each
year prior to the year during which Delano first
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became a PFIC generally will be taxable as ordinary income in the taxable year
of the Arrangement. Gain treated as realized in each of the other years during
which the U.S. Holder held the Delano Common Shares generally will be subject to
U.S. federal income tax at the maximum ordinary income tax rate or rates
applicable in the year to which the gain was treated as realized, plus an
interest-like charge. The interest-like charge will apply to the tax amount for
the period from the year to which the gain is treated as realized through the
due date of the U.S. Holder's federal income tax return for the year that
includes the date of the Arrangement. If the U.S. Holder made a QEF Election,
then the U.S. Holder generally would be taxable currently on such holder's pro
rata share of Delano's ordinary earnings and net capital gains for each taxable
year of Delano in which Delano were to be classified as a PFIC, even if no
dividend distributions were received by such U.S. Holder, unless such U.S.
Holder made an election to defer such taxes. Special rules apply if (i) a U.S.
Holder made a QEF Election that was not effective as of the first taxable year
during which such U.S. Holder's ownership of Delano Common Shares constituted
stock in a PFIC or (ii) other elections, including a "mark-to-market" election,
have been or will be made by a U.S. Holder.
Because the application of the PFIC rules is complex and will vary in
accordance with the particular circumstances of each shareholder, each U.S.
Holder of Delano Common Shares is urged to consult his, her or its own personal
tax advisor regarding the potential application of these rules to the exchange
of Delano Common Shares pursuant to the Arrangement.
Requirement of Notice Filings.
A U.S. Holder who receives shares of divine Common Stock pursuant to the
Arrangement may be required to file notices with the IRS providing certain
information relating to the Arrangement, including the notices required under
Sections 367, 368 and 1291 of the Code. In addition, if Delano is a PFIC, U.S.
Holders may be required to file an IRS Form 8621. Each U.S. Holder is advised to
consult his, her or its tax advisor with respect to such filings and any other
applicable tax reporting requirements.
UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary is generally applicable to Delano shareholders that
are not U.S. Holders ("non-U.S. Holders") who exchange Delano Common Shares for
Exchangeable Shares or divine Common Stock pursuant to the Arrangement.
Receipt of Shares of divine Common Stock or Exchangeable Shares.
A non-U.S. Holder generally will not be subject to United States federal
income taxation on gain (if any) recognized on the exchange of Delano Common
Shares for Exchangeable Shares or shares of divine Common Stock, unless (i) such
gain is attributable to an office or fixed place of business and effectively
connected with a trade or business of the non-U.S. Holder in the United States,
or, if a tax treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. Holder in the United States, or (ii) the non-U.S.
Holder is an individual who is present in the United States for 183 days or more
in the taxable year of disposition, and certain other conditions are satisfied.
Receipt of Dividends on Exchangeable Shares.
As discussed above, divine intends to take the position that the
Exchangeable Shares should be treated as shares of divine Common Stock.
Consequently, divine intends to treat any dividends paid to a non-U.S. Holder
with respect to the Exchangeable Shares as being subject to United States
withholding tax at a rate of 30%, which rate may be reduced by an applicable
income tax treaty in effect between the United States and the non-U.S. Holder's
country of residence.
If the IRS were to successfully take the position that the Exchangeable
Shares are shares of Delano rather than shares of divine, dividends received by
a non-U.S. Holder with respect to the Exchangeable Shares would not be subject
to United States withholding tax.
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Sale of Exchangeable Shares or Shares of divine Common Stock.
A non-U.S. Holder holding no more than 5% of any publicly-traded class of
divine Common Stock during the shorter of the periods described in Section
897(c)(1)(A)(ii) of the Code generally will not be subject to United States
federal income tax on gain (if any) recognized on the exchange of Exchangeable
Shares for shares of divine Common Stock, or on the sale or exchange of shares
of divine Common Stock, unless (i) such gain is attributable to an office or
fixed place of business and effectively connected with a trade or business of
the non-U.S. Holder in the United States, or, if a tax treaty applies, is
attributable to a permanent establishment maintained by the non-U.S. Holder in
the United States, or (ii) the non-U.S. Holder is an individual who is present
in the United States for 183 days or more in the taxable year of disposition,
and certain other conditions are satisfied.
Federal Estate Tax Treatment.
The status of the Exchangeable Shares for United States federal estate tax
purposes is uncertain. There is no direct authority addressing the proper
treatment of instruments similar to the Exchangeable Shares for United States
federal estate tax purposes. Non-U.S. Holders are urged to discuss the United
States federal estate tax consequences relating to the ownership of Exchangeable
Shares in the Arrangement with their tax advisors.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, divine and other appropriate persons must report annually to the
IRS the amount of dividends paid to or the proceeds received by the recipient
from a sale of stock, the name and address of the recipient, and the amount, if
any, of tax withheld. A similar report is sent to the recipient. Pursuant to tax
treaties or other agreements, the IRS may make this information available to tax
authorities in the recipient's country of residence.
United States backup withholding tax is imposed on applicable payments to
persons who fail to establish that they are entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. This backup withholding tax is imposed at a rate of 30% during 2002 and
2003, with reductions thereafter.
Under current Treasury regulations, the payment of the proceeds of the
disposition of common stock through the United States office of a broker is
subject to information reporting and backup withholding unless the holder
certifies its non-United States status under penalties of perjury or is able to
establish another exemption. Generally, the payment of the proceeds of a sale of
stock by a Non-U.S. Holder outside the United States to or through a foreign
office of a broker will not be subject to backup withholding but will be subject
to information reporting requirements if the broker is: a United States person;
a "controlled foreign corporation" for United States federal income tax
purposes; a foreign person 50% or more of whose gross income for certain periods
is from the conduct of a United States trade or business; or a foreign
partnership if at any time during its tax year, (i) one or more of its partners
are United States persons, as defined for United States federal income tax
purposes, who in the aggregate hold more than 50% of the income or capital
interests in the partnership, or (ii) it is engaged in a United States trade or
business. Information reporting generally will not apply, however, if the broker
has documentary evidence in its files of the holder's Non-U.S. status and
certain other conditions are met, or the holder is able to establish another
exemption. Neither backup withholding nor information reporting will apply to
the payment of the proceeds of a disposition of common stock by or through a
foreign office of a foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Rather, the U.S. federal
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.
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COMPARISON OF SHAREHOLDER RIGHTS
In the event that the Arrangement is consummated, holders of Delano Common
Shares will have their Delano Common Shares exchanged for shares of divine
Common Stock or, in the case of certain Delano shareholders who validly so
elect, Exchangeable Shares and certain ancillary rights, or a combination
thereof. Those who elect to receive Exchangeable Shares will have the right to
exchange such shares for an equivalent number of shares of divine Common Stock.
divine is incorporated under the Delaware General Corporation Law and,
accordingly, is governed by Delaware law and the divine certificate of
incorporation and bylaws. Delano is incorporated under the OBCA and,
accordingly, is governed by the laws of Ontario and the Delano articles and
bylaws.
While the rights and privileges of stockholders of a Delaware corporation
are, in many instances, comparable to those of shareholders of an OBCA
corporation, there are certain differences. The following is a summary
discussion of the most significant differences in shareholder rights. These
differences arise from differences between Delaware law and the OBCA and between
the divine certificate of incorporation and bylaws and the Delano articles and
bylaws. This summary is not intended to be complete and is qualified in its
entirety by reference to Delaware law, Canadian law and the governing corporate
instruments of divine and Delano. For a description of the respective rights of
the holders of shares of divine Common Stock and Delano Common Shares see,
respectively, "divine Capital Stock" and "Delano Share Capital".
REQUIRED VOTE FOR CERTAIN TRANSACTIONS
Delaware law requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale, lease or exchange of all or substantially all of the assets
of a corporation, except that, unless required by its certificate of
incorporation: (i) no authorizing stockholder vote is required of a corporation
surviving a merger if (A) such corporation's certificate of incorporation is not
amended in any respect by the merger, (B) each share of stock of such
corporation outstanding immediately prior to the effective date of the merger
will be an identical outstanding or treasury share of the surviving corporation
after the effective date of the merger, and (C) either no shares of common stock
of the surviving corporation and no shares, securities or obligations
convertible into such stock are to be issued or delivered in the merger, or the
shares of common stock of the surviving corporation to be issued in the merger
plus those initially issuable upon conversion of any other shares, securities or
obligations to be issued in the merger do not exceed 20% of such corporation's
outstanding common stock immediately prior to the effective date of the merger;
and (ii) in certain limited circumstances, no authorizing stockholder vote is
required of a corporation to authorize a merger with or into a single direct or
indirect wholly owned subsidiary of such corporation. Stockholder approval is
also not required under Delaware law for mergers or consolidations in which a
parent corporation merges or consolidates with a subsidiary of which it owns at
least 90% of the outstanding shares of each class of stock. Delaware law permits
stockholders' rights plans in general and permits the adoption of stockholders'
rights plans by a board of directors without stockholder approval.
Under the OBCA, certain extraordinary corporate actions, such as certain
amalgamations (other than with a direct or indirect wholly owned subsidiary),
continuances, and sales, leases or exchanges of all or substantially all the
property of a corporation other than in the ordinary course of business, and
other extraordinary corporate actions such as liquidations, dissolutions and (if
ordered by a court) arrangements, are required to be approved by special
resolution. A special resolution is a resolution passed at a meeting by not less
than two-thirds of the votes cast by the shareholders who voted in respect of
the resolution. In certain cases, a special resolution to approve an
extraordinary corporate action is also required to be approved separately by the
holders of a class or series of shares, including in certain cases a class or
series of shares not otherwise carrying voting rights.
CUMULATIVE VOTING
divine's certificate of incorporation does not provide for cumulative
voting, and divine stockholders may not cumulate their votes for the election of
directors. Under Delaware law, cumulative voting in the election of directors is
not mandatory, and for cumulative voting to be effective it must be expressly
provided for in the certificate of incorporation. In an election of directors
under cumulative voting, each share of stock normally having one vote is
entitled to a number of votes equal to the number of directors to be elected. A
stockholder
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may then cast all such votes for a single candidate or may allocate them among
as many candidates as the shareholder may choose. Without cumulative voting, the
holders of a majority of the shares present at an annual meeting would have the
power to elect all the directors to be elected at that meeting, and no person
could be elected without the support of holders of a majority of the shares.
Under Ontario law, unless a corporation's articles provide otherwise, there
is no cumulative voting for the election of directors. Delano's articles do not
provide for cumulative voting.
CALLING A SHAREHOLDER MEETING
Under Delaware law, special meetings of the stockholders may be called by
the board of directors or by any other person as may be authorized to do so by
the certificate of incorporation or the bylaws of the corporation. According to
the divine bylaws, divine's board of directors, chairman of the board, chief
executive officer or president may call a special meeting of the divine
stockholders.
Under the OBCA, the holders of not less than 5% of the issued shares of a
corporation that carry the right to vote at the meeting sought to be held may
requisition the directors to call a meeting of shareholders. Upon meeting the
technical requirements set out in the OBCA for making such a requisition, the
directors of the corporation must call a meeting of shareholders. If they do
not, within 21 days of receiving such requisition, the shareholders who made the
requisition may call the meeting.
Under the OBCA, a corporation's bylaws may specify the number of shares
with voting rights attached thereto which shall be present, or represented by
proxy, in order to constitute a quorum for the transaction of any business at
any meeting of the shareholders.
Under Delaware law, a corporation's certificate of incorporation or bylaws
may specify the number of shares or the voting power that shall be present, or
represented by proxy, in order to constitute a quorum for the transaction of any
business at any meeting of the shareholders. However, in no event shall a quorum
consist of less than 1/3 of the stockholders entitled to vote at the meeting
except that, where a separate vote by a class or series of classes or series is
required, a quorum shall consist of no less than one-third (1/3) of the shares
of such class or series or classes or series. At all divine stockholder
meetings, a majority of the stock issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, constitutes the quorum
requisite for the transaction of business.
AMENDMENT OF CERTIFICATE OF INCORPORATION OR ARTICLES OF INCORPORATION
Under Delaware law, the certificate of incorporation of a Delaware
corporation generally may be amended by approval of the board of directors of
the corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote on the amendment. Any amendment of a
provision of the certificate of incorporation requiring a higher vote, or having
certain effects on a class or series of a class of shares, may only be altered,
amended or repealed if authorized by such higher vote or by such class or series
of a class, respectively.
divine's certificate of incorporation reserves divine's right to amend,
alter, change or repeal any provision contained in the certificate of
incorporation, in the manner prescribed by Delaware law, and does not impose any
supermajority voting requirements.
Under the OBCA, any amendment to the articles generally requires approval
by special resolution.
AMENDMENT OF BYLAWS
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its certificate of
incorporation, confer such power upon the board of directors.
divine's certificate of incorporation provides that its bylaws may be
adopted, amended or repealed by the holders of two-thirds of the shares entitled
to vote generally and has conferred the power to adopt, amend or repeal bylaws
upon its directors as well. The fact that this power has been conferred upon the
directors does not divest or limit the stockholders' power to adopt, amend or
repeal the bylaws.
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The OBCA provides that unless the articles or bylaws otherwise provide, the
directors may, by resolution, make, amend or repeal any bylaws that regulate the
business or affairs of a corporation. Where the directors make, amend or repeal
a bylaw, they are required under the OBCA to submit the bylaw, amendment or
repeal to the shareholders at the next meeting of shareholders, and the
shareholders may confirm, reject or amend the bylaw, amendment or repeal by an
ordinary resolution, which is a resolution passed by a majority of the votes
cast by shareholders who voted in respect of the resolution. If the directors of
a corporation do not submit a bylaw, an amendment or a repeal to the
shareholders at the next meeting of shareholders, the bylaw, amendment or repeal
will cease to be effective, and no subsequent resolution of the directors to
adopt, amend or repeal a bylaw having substantially the same purpose and effect
is effective until it is confirmed or confirmed as amended by the shareholders.
DISSENTERS' OR APPRAISAL RIGHTS
Under Delaware law, holders of shares of any class or series have the
right, in certain circumstances, to dissent from a merger or consolidation by
demanding payment in cash for their shares equal to the fair value (exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation) of such shares, as determined by a court in an action
timely brought by the corporation or the dissenters. Delaware law grants
dissenters appraisal rights only in the case of mergers or consolidations and
not in the case of a sale or transfer of assets or a purchase of assets for
stock, regardless of the number of shares being issued. Further, no appraisal
rights are available for shares of any class or series that are listed on a
national securities exchange or designated as a system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 shareholders, unless the agreement of
merger or consolidation requires the holders thereof to accept for such shares
anything other than:
(i) shares of stock of the surviving corporation;
(ii) shares of stock of another corporation, which shares of stock are
either listed on a national securities exchange or designated as a
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 shareholders;
(iii) cash in lieu of fractional shares of the stock described in (i) or
(ii) above; or
(iv) some combination of the above.
In addition, appraisal rights are not available for any shares of the
surviving corporation if the merger did not require the vote of the shareholders
of the surviving corporation.
The OBCA provides that shareholders of a corporation governed thereunder
who are entitled to vote on certain matters are entitled to exercise dissent
rights and to be paid the fair value of their shares in connection therewith.
The OBCA does not distinguish for this purpose between listed and unlisted
shares. Such matters include:
(i) any amalgamation with another corporation (other than with certain
affiliated corporations);
(ii) an amendment to the corporation's articles to add, change or remove
any provisions restricting the issue, transfer or ownership of
shares;
(iii) an amendment to the corporation's articles to add, change or remove
any restriction upon the business or businesses that the corporation
may carry on;
(iv) a continuance under the laws of another jurisdiction;
(v) a sale, lease or exchange of all or substantially all the property of
the corporation other than in the ordinary course of business;
(vi) a court order permitting a shareholder to dissent in connection with
an application to the Court for an order approving an Arrangement
proposed by the corporation; or
(vii) certain amendments to the articles of a corporation which require a
separate class or series vote, provided that a shareholder is not
entitled to dissent if an amendment to the articles is effected by a
court order approving a reorganization or by a court order made in
connection with an action for an oppression remedy.
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OPPRESSION REMEDY
Delaware law does not provide for such a remedy.
The OBCA provides an oppression remedy that enables a court to make any
order, both interim and final, to rectify the matters complained of if the Court
is satisfied upon application by a complainant (as defined below) that:
(i) any act or omission of the corporation or an affiliate effects or
threatens to effect a result;
(ii) the business or affairs of the corporation or an affiliate are, have
been or are then entered to be carried on or conducted in a manner;
or
(iii) the powers of the directors of the corporation or an affiliate are,
have been or are then entered to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the
interest of any security holder, creditor, director or officer.
A complainant includes:
(i) a present or former registered holder or beneficial owner of
securities of a corporation or any of its affiliates;
(ii) a present or former officer or director of the corporation or any of
its affiliates; and
(iii) any other person who in the discretion of the Court is a proper
person to make such application.
The oppression remedy provides the Court with an extremely broad and
flexible jurisdiction to intervene in corporate affairs to protect shareholders
and other complainants. While conduct which is in breach of fiduciary duties of
directors or that is contrary to the legal right of a complainant will normally
trigger the Court's jurisdiction under the oppression remedy, the exercise of
that jurisdiction does not depend on a finding of a breach of such legal and
equitable rights. Furthermore, the Court may order a corporation to pay the
interim expenses of a complainant seeking an oppression remedy, but the
complainant may be held accountable for such interim costs on final disposition
of the complaint (as in the case of a derivative action). The complainant is not
required to give security for costs in an oppression action.
SHAREHOLDER DERIVATIVE ACTIONS
Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, a corporation governed by Delaware law. Delaware law
provides that the plaintiff in such action must be or have been a stockholder of
the corporation at the time of the transaction of which he or she complains or
that his or her stock thereafter devolved upon him or her by operation of law. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, or unless it is
shown that such request for the corporation to bring suit would not likely
succeed.
Under the OBCA, a complainant may apply to the Court for leave to bring an
action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such corporation or subsidiary is a
party, for the purpose of prosecuting, defending or discontinuing the action on
behalf of the corporation or subsidiary. Under the OBCA, no action may be
brought and no intervention in an action may be made unless the Court is
satisfied that the complainant has given required notice to the directors of the
corporation or its subsidiary of the complainant's intention to apply to the
Court and (i) the directors of the corporation or its subsidiary do not bring,
diligently prosecute or defend or discontinue the action; (ii) the complainant
is acting in good faith; and (iii) it appears to be in the interests of the
corporation or its subsidiary that the action be brought, prosecuted, defended
or discontinued. Under the OBCA, the Court in a derivative action may make any
order it thinks fit. In addition, under the OBCA, a court may order a
corporation or its subsidiary to pay the complainant's interim costs, including
reasonable legal fees and disbursements. Although the complainant may be held
accountable for the interim costs on final disposition of the complaint, it is
not required to give security for costs in a derivative action.
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DIRECTOR QUALIFICATIONS
A majority of the directors of a corporation governed by the OBCA generally
must be resident Canadians. If a corporation has one or two directors, that
director or one of the two directors, as the case may be, shall be a resident
Canadian. The OBCA also requires that at least one-third of the directors of a
corporation whose securities are publicly traded not be officers or employees of
the company or any of its affiliates.
Delaware law does not have comparable residency and qualification
requirements, but a corporation can prescribe qualifications for directors under
its certificate of incorporation or bylaws. divine's certificate of
incorporation and bylaws do not provide for any such qualifications.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations governed by the OBCA have fiduciary obligations
to the corporation. Under the OBCA, directors of an OBCA corporation must act
honestly and in good faith with a view to the best interests of the corporation,
and must exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances. A director is not liable for breach
of this duty of care under the OBCA if he relies in good faith on (i) financial
statements of the corporation represented to him by an officer of the
corporation or in a written report of the auditor of the corporation fairly to
reflect the financial condition of the corporation, or (ii) a report of a
lawyer, accountant, engineer, appraiser or other persons whose profession lends
credibility to a statement made by him.
Directors of corporations governed by Delaware law have fiduciary
obligations to the corporation and its stockholders. The duty of care requires
that the directors act with the diligence of a reasonable person in similar
circumstances, to inform themselves, prior to making a business decision, of all
material information reasonably available to them, and to perform their duties
in a manner that the directors reasonably believe to be in the best interests of
the stockholders. The duty of loyalty may be summarized as the duty to act in
good faith not out of self-interest. Pursuant to the "business judgment rule",
absent an abuse of discretion, the directors of a corporation are presumed to
have acted in accordance with their duties of care and loyalty in making a
business decision.
NUMBER OF DIRECTORS
Delaware law permits the board of directors to change the authorized number
of directors by amendment to the bylaws or in the manner provided in the bylaws
unless the number of directors is fixed in the certificate of incorporation, in
which case a change in the number of directors may be made only by amendment to
the certificate of incorporation. divine's certificate of incorporation provides
that the number of directors shall be determined from time to time by resolution
adopted by the affirmative vote of a majority of the directors in office at the
time the board adopts the resolution. However, that number shall not be less
than three nor more than fifty-nine. An amendment to divine's certificate of
incorporation requires the vote or written consent of holders of a majority of
the shares entitled to vote.
Delano's articles of incorporation provide that the number of directors of
the corporation shall consist of a minimum of three and a maximum of 15 members
until changed by amendment of Delano's articles of incorporation. Such an
amendment requires that a special resolution be passed. In the event that the
number of directors is less than the maximum authorized by the articles of
incorporation, if the articles so provide, the directors may appoint one or more
directors to hold office for a term expiring not later than the close of the
next annual meeting of shareholders, but the total number of directors so
appointed may not exceed one-third of the number of directors elected at the
previous annual meeting of shareholders.
REMOVAL OF DIRECTORS
Under Delaware law, any director of a corporation that has more than one
class of directors may only be removed for cause by the holders of a majority of
the shares entitled to vote at an election of directors. divine has three
classes of directors who are generally elected to hold office until the
expiration of the term for which they are elected and until their successors
have been duly elected and qualified. Any director or the entire board of
directors may be removed only for cause by the holders of two-thirds of the
shares then entitled to vote
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generally at an election of directors. Furthermore, divine's certificate of
incorporation provides that no reduction of the authorized number of directors
would have the effect of removing any director prior to the expiration of that
director's term in office.
Under the OBCA, provided that articles of the corporation do not provide
for cumulative voting, shareholders of a corporation may by ordinary resolution
passed at an annual or a special meeting remove any director or directors from
office. If holders of a class or series of shares have the exclusive right to
elect one or more directors, a director elected by them may only be removed by
an ordinary resolution at a meeting of the shareholders of that class or series.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under divine's certificate of incorporation, if the number of directors is
changed, any increase or decrease shall be apportioned among the classes of
directors by the board so as to maintain the number of directors in each class
as nearly equal as is reasonably possible. Any additional member elected to fill
a vacancy in a class resulting from an increase shall serve a term coinciding
with the remaining term of that class. Any director elected to fill a vacancy
not resulting from an increase in the number of directors shall have a term
commensurate with the time remaining in the term of that director's predecessor.
The board fills each vacancy by the affirmative vote of a majority of the
directors in office at the time.
Under the OBCA, subject to the articles of the corporation, a vacancy among
the directors may be filled at a meeting of shareholders or by a quorum of
directors except when the vacancy results from an increase in the number or
minimum number of directors or from a failure to elect the appropriate number of
directors required by the articles. Each director appointed holds office until
his or her successor is elected at the next meeting of shareholders of the
corporation unless his or her office is vacated earlier.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND PROPOSALS
The divine bylaws allow stockholders to nominate candidates for election to
divine's board and to propose other business at any annual or special meeting of
stockholders. To do so, the stockholder must deliver timely notice regarding
business to be conducted, including nomination of directors, to divine's
secretary. That timely notice is as follows:
o For an annual meeting, this notice must be brought at least forty-five
(45), and not more than seventy-five (75), days prior to the one-year
anniversary of the date on which divine delivered its previous year's
proxy statement (for its annual stockholders meeting) to its
stockholders.
o For a special meeting, this notice must be brought not later than the
later of (i) ninety (90) days prior to the date of the special meeting
or (ii) ten (10) days after the date on which divine notifies the
public of the special meeting.
Under the OBCA, proposals with respect to the nomination of candidates for
election to the board of directors may be made at or before any annual meetings
of the corporation.
SHAREHOLDER ACTION BY WRITTEN CONSENT
Under divine's certificate of incorporation, action by written consent is
not permitted. Any action required to be taken or that may be taken at an annual
or special meeting of shareholders may be taken only by a meeting.
Under the OBCA, shareholder action without a meeting may only be taken by
written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware law provides that a corporation may indemnify its present and
former directors, officers, employees and agents (each, an "indemnitee") against
(i) all reasonable expenses (including attorneys' fees) incurred in defense or
settlement of suits threatened or brought against them if such individuals acted
in good faith and in a manner that they reasonably believed to be in, or not
opposed to, the best interests of the
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corporation and (ii) except in actions initiated by or in the right of the
corporation, against all judgments, fines and amounts paid in settlement of
actions brought against them, if such individuals acted in good faith and in a
manner that they reasonably believed to be in, or not opposed to, the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe their conduct was unlawful. A corporation shall not
indemnify a current or former director or officer of the corporation against
expenses to the extent that he or she is adjudged to be liable to the
corporation unless and only to the extent that the Court in which such action is
heard determines such person is reasonably entitled to indemnity. A corporation
shall indemnify such persons to the extent they are successful on the merits or
otherwise in defense of the action or matter at issue. divine's certificate of
incorporation provides for indemnification of directors and officers to the
fullest extent authorized by Delaware law.
Delaware law allows for the advance payment of an officer or director
indemnitee's expenses prior to the final disposition of an action, provided
that, in the case of a current director or officer, the indemnitee undertakes to
repay any such amount advanced if it is later determined that the indemnitee is
not entitled to indemnification with regard to the action for which the expenses
were advanced.
divine has been advised that in the opinion of the United States Securities
and Exchange Commission indemnification of directors, officers and controlling
persons is against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by divine of expenses incurred or paid by a
director, officer or controlling person of divine in the successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, divine
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Neither the OBCA nor Delano's bylaws expressly provide for any similar
advance payment procedures.
Under the OBCA, a corporation may indemnify a director or officer, a former
director or officer or a person who acts or acted at the corporation's request
as a director or officer of a body corporate of which the corporation is or was
a shareholder or creditor, and his or her heirs and legal representatives (an
"indemnifiable person"), against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, reasonably incurred by
him or her in respect of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having been
a director or officer of such corporation or such body corporate, if: (i) he or
she acted honestly and in good faith with a view to the best interests of such
corporation; and (ii) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. An indemnifiable
person is entitled under the OBCA to such indemnity from the corporation if he
or she was substantially successful on the merits in his or her defense of the
action or proceeding and fulfilled the conditions set out in (i) and (ii) above.
A corporation may, with the approval of a court, also indemnify an indemnifiable
person in respect of an action by or on behalf of the corporation or body
corporate to procure a judgment in its favour, to which such person is made a
party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set forth in
(i) and (ii), above.
DIRECTOR LIABILITY
Delaware law provides that the certificate of incorporation may include a
provision that limits or eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided such liability does not arise from certain
prescribed conduct, including breach of the duty of loyalty, acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law, the payment of unlawful dividends or expenditure of funds for unlawful
stock repurchases, or redemptions or transactions for which such director
derived an improper personal benefit. The divine certificate of incorporation
contains a provision limiting the liability of its directors to the fullest
extent permitted by Delaware law.
The OBCA does not permit any such limitation of a director's liability.
95
ANTI-TAKE-OVER PROVISIONS AND INTERESTED SHAREHOLDERS
Delaware law prohibits, in certain circumstances, a "business combination"
between the corporation and an "interested stockholder" within three years of
the stockholder becoming an "interested stockholder." An "interested
stockholder" is a holder who, directly or indirectly, controls 15% or more of
the outstanding voting stock or is an Affiliate of the corporation and was the
owner of 15% or more of the outstanding voting stock at any time within the
prior three-year period. A "business combination" includes a merger,
consolidation, sale or other disposition of assets having an aggregate value in
excess of 10% of the consolidated assets of the corporation or the aggregate
market value of the consolidated assets or outstanding stock of the corporation
and certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation. This provision does not apply
where: (i) the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder is approved by the corporation's
board of directors prior to the time the interested stockholder acquired such
15% interest; (ii) upon the consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation (excluding
shares held by persons who are directors and also officers and by certain
employee stock plans); (iii) the business combination is approved by a majority
of the board of directors and the affirmative vote of two-thirds of the
outstanding votes entitled to be cast by disinterested stockholders at an annual
or special meeting; (iv) the corporation does not have a class of voting stock
that is listed on a national securities exchange, authorized for quotation on
NASDAQ, or held of record by more than 2,000 stockholders unless any of the
foregoing results from action taken, directly or indirectly, by an interested
stockholder or from a transaction in which a person becomes an interested
shareholder; (v) the corporation effectively elects not to be governed by this
provision; or (vi) in certain other limited circumstances. divine has not taken
action to elect not to be governed by this provision.
The OBCA does not contain a comparable provision with respect to business
combinations. However, policies of certain Canadian securities regulatory
authorities, including Rule 61-501 of the Ontario Securities Commission,
contains requirements in connection with "related party transactions". A related
party transaction means, generally, any transaction by which an issuer, directly
or indirectly, acquires or transfers an asset or acquires or issues treasury
securities or assumes or transfers a liability from or to, as the case may be, a
related party by any means in any one or any combination of transactions.
"Related party" is defined in OSC Rule 61-501 and includes directors, senior
officers and holders of at least 10% of the voting securities or of a sufficient
number of any securities of the issuer to materially affect control of the
issuer.
OSC Rule 61-501 requires more detailed disclosure in the proxy material
sent to shareholders in connection with a related party transaction, and,
subject to certain exceptions, the preparation of a formal valuation of the
subject matter of the related party transaction and any non-cash consideration
offered therefor and the inclusion of a summary of the valuation in the proxy
material. OSC Rule 61-501 also requires that, subject to certain exceptions, an
issuer shall not engage in a related party transaction unless minority approval
for the related party transaction has been obtained.
ACCESS TO CORPORATE RECORDS
The OBCA provides that shareholders, their agents and legal representatives
may examine certain of the corporation's records during usual business hours and
take extracts therefrom free of charge. In addition, any person is entitled to
obtain the list of registered shareholders of a "distributing corporation" (i.e.
a reporting issuer or public company) upon compliance with certain requirements.
Under Delaware law, any stockholder of a corporation, their agents or legal
representatives may make a written demand to examine the records of that
corporation. Such a demand to examine the corporation's records must have a
proper purpose, be sworn under oath, and directed to that corporation at its
principal place of business or its registered office in Delaware. A proper
purpose is one that is reasonably related to that stockholder's interest in the
corporation as a stockholder.
DISSENTING SHAREHOLDER RIGHTS
Section 185 of the OBCA provides shareholders with the right to dissent
from certain resolutions of a corporation which effect extraordinary corporate
transactions or fundamental corporate changes. The Interim
96
Order expressly provides registered Delano shareholders with the right to
dissent from the Arrangement Resolution pursuant to Section 185 of the OBCA and
the Plan of Arrangement. Any Delano shareholder who dissents from the
Arrangement Resolution in compliance with the Interim Order and Section 185 of
the OBCA and the Plan of Arrangement will be entitled, in the event the
Arrangement becomes effective, to be paid by Delano the fair value of the Delano
Common Shares held by such dissenting shareholder determined as of the close of
business on the day before the Arrangement Resolution is adopted.
Section 185 provides that a shareholder may only make a claim under that
Section with respect to all the shares of a class held by the shareholder on
behalf of any one beneficial owner and registered in the shareholder's name. One
consequence of this provision is that a Delano shareholder may only exercise the
right to dissent under Section 185 in respect of Delano Common Shares which are
registered in that shareholder's name. In many cases, shares beneficially owned
by a person (a "non-registered holder") are registered either: (a) in the name
of an intermediary that the non-registered holder deals with in respect of the
shares (such as banks, trust companies, securities dealers and brokers, trustees
or administrators of self-administered registered retirement savings plans (as
defined under the Income Tax Act (Canada)), registered retirement income funds
(as defined under the Income Tax Act (Canada)), registered education savings
plans and similar plans, and their nominees); or (b) in the name of a clearing
agency (such as The Canadian Depository for Securities Limited, or CDS) of which
the intermediary is a participant. Accordingly, a non-registered holder will not
be entitled to exercise the right to dissent under Section 185 directly (unless
the shares are re-registered in the non-registered holder's name). A
non-registered holder who wishes to exercise the right to dissent should
immediately contact the intermediary with whom the non-registered holder deals
in respect of the shares and either:
o instruct the intermediary to exercise the right to dissent on the
non-registered holder's behalf (which, if the shares are registered in
the name of CDS or other clearing agency, would require that the share
first be re-registered in the name of the intermediary); or
o instruct the intermediary to re-register the shares in the name of the
non-registered holder, in which case the non-registered holder would
have to exercise the right to dissent directly.
A REGISTERED HOLDER OF DELANO COMMON SHARES WHO WISHES TO DISSENT IN
RESPECT OF ITS DELANO COMMON SHARES MUST PROVIDE A DISSENT NOTICE TO DELANO
TECHNOLOGY CORPORATION C/O COMPUTERSHARE TRUST COMPANY OF CANADA, 100 UNIVERSITY
AVENUE, 9TH FLOOR, TORONTO, ONTARIO M5J 2Y1, FACSIMILE NUMBER (416) 263-9524 OR
(866) 249-7775, PRIOR TO 4:00 P.M. (TORONTO TIME) ON THE LAST BUSINESS DAY
PRECEDING THE SPECIAL MEETING (OR ANY ADJOURNMENT THEREOF). IT IS IMPORTANT THAT
DELANO REGISTERED SHAREHOLDERS STRICTLY COMPLY WITH THIS REQUIREMENT, AS IT IS
DIFFERENT FROM THE STATUTORY DISSENT PROVISIONS OF THE OBCA THAT WOULD OTHERWISE
PERMIT A DISSENT NOTICE TO BE PROVIDED AT OR PRIOR TO THE SPECIAL MEETING. THE
FILING OF A DISSENT NOTICE DOES NOT DEPRIVE A DELANO REGISTERED SHAREHOLDER OF
THE RIGHT TO VOTE AT THE SPECIAL MEETING; HOWEVER, THE OBCA PROVIDES, IN EFFECT,
THAT A DELANO REGISTERED SHAREHOLDER WHO HAS SUBMITTED A DISSENT NOTICE AND WHO
VOTES IN FAVOUR OF THE ARRANGEMENT RESOLUTION WILL NO LONGER BE CONSIDERED A
DISSENTING SHAREHOLDER WITH RESPECT TO THAT CLASS OF SHARES VOTED IN FAVOUR OF
THE ARRANGEMENT RESOLUTION. THE OBCA DOES NOT PROVIDE, AND DELANO WILL NOT
ASSUME, THAT A VOTE AGAINST THE ARRANGEMENT RESOLUTION OR AN ABSTENTION
CONSTITUTES A DISSENT NOTICE BUT A DELANO REGISTERED SHAREHOLDER NEED NOT VOTE
HIS OR HER DELANO COMMON SHARES AGAINST THE ARRANGEMENT RESOLUTION IN ORDER TO
DISSENT. SIMILARLY, THE REVOCATION OF A PROXY CONFERRING AUTHORITY ON THE PROXY
HOLDER TO VOTE IN FAVOUR OF THE ARRANGEMENT RESOLUTION DOES NOT CONSTITUTE A
DISSENT NOTICE; HOWEVER, ANY PROXY GRANTED BY A DELANO REGISTERED SHAREHOLDER
WHO INTENDS TO DISSENT, OTHER THAN A PROXY THAT INSTRUCTS THE PROXY HOLDER TO
VOTE AGAINST THE ARRANGEMENT RESOLUTION, SHOULD BE VALIDLY REVOKED IN ORDER TO
PREVENT THE PROXY HOLDER FROM VOTING SUCH DELANO COMMON SHARES IN FAVOUR OF THE
ARRANGEMENT RESOLUTION AND THEREBY CAUSE THE DELANO REGISTERED SHAREHOLDER TO
FORFEIT HIS OR HER RIGHT TO DISSENT. SEE "THE SPECIAL MEETING OF DELANO
SHAREHOLDERS -- VOTING OF PROXIES AT THE SPECIAL MEETING AND REVOCATION OF
PROXIES".
Delano is required, within 10 days after the adoption of the Arrangement
Resolution by the Delano shareholders, to notify each dissenting shareholder
that the Arrangement Resolution has been adopted. Such notice is not required to
be sent to any Delano shareholder who voted for the Arrangement Resolution or
who has withdrawn his or her dissent notice.
A dissenting shareholder who has not withdrawn his or her dissent notice
must then, within 20 days after receipt of notice that the Arrangement
Resolution has been adopted or, if the dissenting shareholder does not
97
receive such notice, within 20 days after he or she learns that the Arrangement
Resolution has been adopted, send to Delano a written notice containing his or
her name and address, the number of Delano Common Shares in respect of which he
or she dissents, and a demand for payment of the fair value of such Delano
Common Shares. Within 30 days after sending a demand for payment, the dissenting
shareholder must send to Delano the certificates representing the Delano Common
Shares in respect of which he or she dissents. A dissenting shareholder who
fails to send certificates representing the Delano Common Shares in respect of
which he or she dissents forfeits his or her right to dissent. The Delano
Transfer Agent will endorse on share certificates received from a dissenting
shareholder a notice that the holder is a dissenting shareholder and will
forthwith return the share certificates to the dissenting shareholder.
After sending a demand for payment, a dissenting shareholder ceases to have
any rights as a holder of the Delano Common Shares in respect of which the
shareholder has dissented other than the right to be paid the fair value of such
shares as determined under Section 185, unless:
o the dissenting shareholder withdraws the demand for payment before
Delano makes a written offer to pay;
o Delano fails to make a timely offer to pay to the dissenting
shareholder and the dissenting shareholder withdraws his or her demand
for payment;
o the directors of Delano revoke the Arrangement Resolution; or
o in all of which cases the dissenting shareholder's rights as a
shareholder are reinstated and such shares shall be subject to the
Arrangement if it has been completed.
In addition, pursuant to the Plan of Arrangement, Delano registered
shareholders who duly exercise such right of dissent and who:
(i) are ultimately determined to be entitled to be paid fair value for
their Delano Common Shares shall be deemed to have transferred their
Delano Common Shares to Delano immediately prior to the Effective
Time, to the extent the fair value therefor is paid by Delano, and
such Delano Common Shares shall be cancelled as of the Effective Time;
or
(ii) are ultimately not entitled, for any reason, to be paid fair value for
their Delano Common Shares, shall be deemed to have participated in
the Arrangement on the same basis as any non-dissenting holder of
Delano Common Shares and shall receive divine Common Stock in
accordance with the Plan of Arrangement.
Delano is required, not later than seven days after the later of the
Effective Date and the date on which Delano received the demand for payment of a
dissenting shareholder, to send to each dissenting shareholder who has sent a
demand for payment, an offer to pay for his or her Delano Common Shares in an
amount considered by the Delano board of directors to be the fair value thereof,
accompanied by a statement showing the manner in which the fair value was
determined. Every offer to pay must be on the same terms. Delano must pay for
the Delano Common Shares of a dissenting shareholder within 10 days after an
offer to pay has been accepted by a dissenting shareholder, but any such offer
lapses if Delano does not receive an acceptance thereof within 30 days after the
offer to pay has been made.
If Delano fails to make an offer to pay for a dissenting shareholder's
Delano Common Shares, or if a dissenting shareholder fails to accept an offer
which has been made, Delano may, within 50 days after the Effective Date or
within such further period as a court may allow, apply to a court to fix a fair
value for the Delano Common Shares of dissenting shareholders. If Delano fails
to apply to a court, a dissenting shareholder may apply to a court for the same
purpose within a further period of 20 days or within such further period as a
court may allow. A dissenting shareholder is not required to give security for
costs in such an application. An application to the Court by Delano must be to
the Ontario Superior Court of Justice and an application to the Court by a
dissenting shareholder must also be to the Ontario Superior Court of Justice.
Upon an application to a court, all dissenting shareholders whose Delano
Common Shares have not been purchased by Delano will be joined as parties and
bound by the decision of the Court, and Delano will be required to notify each
affected dissenting shareholder of the date, place and consequences of the
application
98
and of his or her right to appear and be heard in person or by counsel. Upon any
such application to a court, the Court may determine whether any person is a
dissenting shareholder who should be joined as a party, and the Court will then
fix a fair value for the Delano Common Shares of all dissenting shareholders.
The final order of a court will be rendered against Delano in favour of each
dissenting shareholder and for the amount of the fair value of his or her Delano
Common Shares as fixed by the Court. The Court may, in its discretion, allow a
reasonable rate of interest on the amount payable to each dissenting shareholder
from the Effective Date until the date of payment.
The foregoing is only a summary of the dissenting shareholder provisions of
the OBCA and the Plan of Arrangement, which are technical and complex. It is
recommended that any Delano shareholder wishing to avail himself or herself of
his or her dissent rights under those provisions seek legal advice as failure to
comply strictly with the provisions of the OBCA and the Plan of Arrangement may
prejudice the right of dissent. For a general summary of certain income tax
implications to a dissenting shareholder, see "Tax Considerations for Delano
Shareholders -- Delano Shareholders Resident in Canada -- Dissenting Delano
Shareholders".
LEGAL MATTERS
Certain legal matters in connection with the Arrangement will be passed
upon for Delano by Goodmans LLP, Toronto, Ontario, Canada and Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts, United States.
INDEPENDENT AUDITORS
The consolidated financial statements of divine as of December 31, 2001 and
2000, and for the years ended December 31, 2001 and 2000, and for the period
from May 7, 1999 (inception) through December 31, 1999, included in Annex I to
this Circular, have been audited by KPMG LLP, independent public accountants, as
stated in their report contained herein.
The Canadian GAAP consolidated financial statements of Delano as of March
31, 2001 and 2000 and for the years ended March 31, 2001 and 2000 and for the
period from May 7, 1998 (inception) to March 31, 1999, and the United States
GAAP consolidated financial statements of Delano as of March 31, 2001 and 2000
and for the years ended March 31, 2001 and 2000 and for the period from May 7,
1998 (inception) to March 31, 1998, included in Annex J to this Circular have
been audited by KPMG LLP, independent public accountants, as stated in their
report contained herein.
ENFORCEABILITY OF CIVIL LIABILITIES
Delano is a corporation incorporated under the laws of Ontario. Most of the
directors and officers of Delano, as well as certain experts named herein, are
residents of Canada and all or a substantial portion of their assets and a
substantial portion of the assets of Delano are located outside the United
States. As a result, it may be difficult for holders of Delano Common Shares to
effect service within the United States upon such directors, officers and
experts who are not residents of the United States or to realize in the United
States upon judgments of courts of the United States predicated upon civil
liability under the United States federal securities laws. There is some doubt
as to the enforceability in Canada against Delano or any of its directors,
officers or experts who are not residents of the United States in original
actions or in actions for enforcement of judgments of United States courts, of
liabilities predicated solely upon United States federal securities laws.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS DOCUMENT, OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY DISTRIBUTION OF
SECURITIES PURSUANT TO THIS DOCUMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH IN THIS
DOCUMENT OR IN DIVINE'S OR DELANO'S AFFAIRS SINCE THE DATE OF THIS DOCUMENT.
99
CERTIFICATE OF DELANO
The foregoing contains no untrue statement of a material fact and does not
omit to state a material fact that is required to be stated or that is necessary
to make a statement not misleading in light of the circumstances in which it was
made. The contents of this Circular and its sending to shareholders has been
approved by Delano's board of directors.
DATED at Toronto, Ontario this 14th day of June, 2002
DELANO TECHNOLOGY CORPORATION
/s/ David L. Lewis
David L. Lewis
Corporate Secretary
100
ANNEX A
COMBINATION AGREEMENT AND AMENDMENT TO
COMBINATION AGREEMENT
COMBINATION AGREEMENT
BY AND BETWEEN
DIVINE, INC.
AND
DELANO TECHNOLOGY CORPORATION
Dated as of March 12, 2002
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS....................................................... 1
1.1 Certain Definitions.............................................. 1
1.2 Interpretation................................................... 9
ARTICLE II THE ARRANGEMENT.................................................. 9
2.1 Implementation Steps by Company.................................. 9
2.2 Implementation Steps by Parent................................... 10
2.3 Interim Order.................................................... 10
2.4 Articles of Arrangement.......................................... 10
2.5 Company Circular................................................. 10
2.6 Securities Compliance............................................ 11
2.7 Preparation of Filings, etc...................................... 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY....................... 13
3.1 Organization and Qualification; Subsidiaries..................... 14
3.2 Articles of Incorporation and Bylaws............................. 14
3.3 Capitalization................................................... 14
3.4 Authority Relative to This Agreement............................. 15
3.5 No Conflict; Required Filings and Consents....................... 16
3.6 Compliance; Permits.............................................. 16
3.7 Reports; Financial Statements.................................... 17
3.8 No Undisclosed Liabilities....................................... 18
3.9 Absence of Certain Changes or Events............................. 19
3.10 Absence of Litigation............................................ 19
3.11 Employee Benefit Plans........................................... 20
3.12 Labor Matters.................................................... 22
i
3.14 Title to Property................................................ 23
3.15 Taxes............................................................ 23
3.16 Environmental Matters............................................ 24
3.17 Brokers.......................................................... 25
3.18 Intellectual Property............................................ 26
3.19 Agreements, Contracts and Commitments............................ 28
3.20 Insurance........................................................ 29
3.21 Opinion of Financial Advisor..................................... 30
3.22 Board Approval................................................... 29
3.23 Vote Required.................................................... 30
3.24 Exchangeable Shares.............................................. 30
3.25 Unlawful Payments and Contributions.............................. 30
3.26 Parent Common Stock.............................................. 30
3.27 Non-Arm's Length Transactions.................................... 30
3.28 No Cultural Business............................................. 30
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT......................... 30
4.1 Organization and Qualification; Subsidiaries..................... 31
4.2 Certificate of Incorporation and Bylaws.......................... 31
4.3 Capitalization................................................... 31
4.4 Authority Relative to this Agreement............................. 32
4.5 No Conflict; Required Filings and Consents....................... 33
4.6 Compliance; Permits.............................................. 33
4.7 SEC Filings; Financial Statements................................ 34
4.8 No Undisclosed Liabilities....................................... 34
4.9 Absence of Certain Changes or Events............................. 35
ii
4.10 Absence of Litigation............................................ 35
4.11 Parent Intellectual Property..................................... 36
4.12 Brokers.......................................................... 36
4.13 Board Approval................................................... 36
4.14 Parent Common Shares............................................. 36
4.15 Parent Ownership of Company Shares............................... 37
4.16 Unlawful Payments and Contributions.............................. 37
4.17 Canada Assets and Revenues....................................... 37
ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME............................... 38
5.1 Conduct of Business by Company................................... 38
5.2 Conduct of Business by Parent.................................... 41
ARTICLE VI ADDITIONAL AGREEMENTS............................................ 41
6.1 Confidentiality; Access to Information........................... 41
6.2 No Solicitation.................................................. 42
6.3 Public Disclosure................................................ 44
6.4 Reasonable Efforts; Notification................................. 45
6.5 Indemnification.................................................. 47
6.6 Company Affiliate Agreement...................................... 47
6.7 Regulatory Filings; Reasonable Efforts........................... 48
6.8 Employee Plans................................................... 48
6.9 Maintenance of Insurance......................................... 48
6.10 Sale of Company Services......................................... 48
6.11 Takeover Statutes................................................ 49
6.12 [Reserved]....................................................... 49
6.13 Stock Options.................................................... 49
iii
ARTICLE VII CONDITIONS TO THE COMBINATION................................... 49
7.1 Conditions to Obligations of Each Party to Effect the Arrangement 49
7.2 Additional Conditions to Obligations of Company.................. 50
7.3 Additional Conditions to the Obligations of Parent............... 51
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.............................. 52
8.1 Termination...................................................... 52
8.2 Notice of Termination; Effect of Termination..................... 53
8.3 Fees and Expenses................................................ 54
8.4 Amendment........................................................ 56
8.5 Extension; Waiver................................................ 56
ARTICLE IX GENERAL PROVISIONS............................................... 56
9.1 Survival of Representations and Warranties....................... 56
9.2 Notices.......................................................... 56
9.3 Counterparts..................................................... 57
9.4 Entire Agreement; Third Party Beneficiaries...................... 58
9.5 Severability..................................................... 58
9.6 Other Remedies; Specific Performance............................. 58
9.7 Governing Law.................................................... 58
9.8 English/French Language.......................................... 58
9.9 No Personal Liability............................................ 59
9.10 Assignment....................................................... 59
9.11 WAIVER OF JURY TRIAL............................................. 59
9.12 Currency......................................................... 59
iv
INDEX OF EXHIBITS
Exhibit A Form of Shareholder Voting Agreement
Exhibit B Form of Company Resolution
Exhibit C Form of Plan of Arrangement
Exhibit D Form of Exchangeable Share Support Agreement
Exhibit E Form of Voting and Exchange Trust Agreement
Exhibit F Form of Affiliate Agreement
Exhibit G Form of Reseller Agreement
INDEX OF EXHIBITS
<Table>
Schedule A Company Schedule
Schedule B Parent Schedule
Schedule 3.11/3.12 Benefits Schedule
COMBINATION AGREEMENT
This COMBINATION AGREEMENT is made and entered into as of March 12, 2002,
among divine, inc., a corporation organized and existing under the laws of
Delaware ("PARENT") and Delano Technology Corporation, a corporation organized
and existing under the laws of Ontario ("COMPANY").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.1) and in accordance with the BUSINESS CORPORATIONS ACT
(Ontario), as now in effect and as it may be amended from time to time prior to
the Effective Time (the "OBCA"), Parent and Company intend to enter into a
business combination transaction.
B. The Board of Directors of Company (i) has determined that the
Arrangement (as defined in Section 1.1) is fair to, and in the best interests
of, Company and its shareholders, (ii) has approved this Agreement, the
Arrangement and the other transactions contemplated by this Agreement and (iii)
has determined to recommend that the shareholders of Company approve the
Arrangement.
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
shareholders of Company are entering into a Shareholder Voting Agreement with
Parent in the form of Exhibit A attached hereto (the "SHAREHOLDER VOTING
AGREEMENT").
D. The parties hereto intend that the Arrangement will provide certain
Company Shareholders (as defined in Section 1.1) who are residents of Canada for
purposes of the ITA (as defined in Section 1.1) and any applicable income tax
convention with the opportunity to dispose of their Company Common Shares and
receive Exchangeable Shares (as defined in Section 1.1) on a tax-deferred or
"roll-over" basis for Canadian income tax purposes.
E. The parties hereto intend that the Parent Common Shares (as defined in
Section 1.1) to be issued pursuant to this Agreement will not be registered
under the 1933 Act (as defined in Section 1.1), in reliance on an exemption from
the registration requirements of Section 5 of the 1933 Act.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
DEFINITIONS
1.1. CERTAIN DEFINITIONS. The following terms shall have the following
meanings:
"1933 ACT" means the United States Securities Act of 1933, as amended;
"1934 ACT" means the United States Securities Exchange Act of 1934, as
amended;
"ACQUISITION PROPOSAL" has the meaning ascribed thereto in Section 6.2(d);
"AGREEMENT" means this Combination Agreement, made and entered into as of
March 12, 2002, between Parent and Company, together with any amendments or
supplements hereto;
"APPROVALS" has the meaning ascribed to it in Section 3.1(a);
"ARRANGEMENT" means an arrangement under section 182 of the OBCA on the
terms and subject to the conditions set out in the Plan of Arrangement, subject
to any amendments or variations thereto made in accordance with Section 8.4
hereof or Article 6 of the Plan of Arrangement or made at the direction of the
Court in the Final Order;
"ARTICLES OF ARRANGEMENT" means the articles of arrangement of Company in
respect of the Arrangement, required by the OBCA to be sent to the Director
after the Final Order is made;
"BENEFITS SCHEDULE" has the meaning ascribed to it in Section 3.11(a);
"CANADIAN GAAP" has the meaning ascribed to it in Section 3.7(b);
"CANADIAN SECURITIES REGULATORY AUTHORITIES" means the securities
commission or similar regulatory authority in each of the provinces and
territories of Canada;
"CLAIMS" includes claims, demands, actions, suits, causes of action,
assessments or reassessments, charges, arbitrations, complaints, grievances,
judgements, debts, liabilities, expenses, costs, damages or losses, professional
fees and all costs incurred in investigating or pursuing any of the foregoing or
any proceeding relating to any of the foregoing;
"CODE" means the United States Internal Revenue Code of 1986, as amended;
"COMMERCIAL SOFTWARE" has the meaning ascribed thereto in Section 3.18(j);
"COMPANY" shall have the meaning ascribed to such term in the introduction
to this Agreement;
"COMPANY ACQUISITION" has the meaning ascribed thereto in Section 8.3(b);
"COMPANY AFFILIATE" has the meaning ascribed to it in Section 6.6;
"COMPANY CHARTER DOCUMENTS" has the meaning ascribed to it in Section 3.2;
"COMPANY CIRCULAR" means the notice of the Company Meeting to be sent to
holders of Company Common Shares and the accompanying management information
circular in connection with the Company Meeting, as it may be amended;
"COMPANY COMMON SHARES" means the common shares of Company, no par value;
2
"COMPANY CONTRACT" has the meaning ascribed to it in Section 3.19(h);
"COMPANY DOCUMENTS" has the meaning ascribed to it in Section 3.7(a);
"COMPANY EMBEDDED PRODUCTS" has the meaning ascribed thereto in
Section 3.18(j);
"COMPANY FINANCIAL STATEMENTS" has the meaning ascribed to it in
Section 3.7(b);
"COMPANY MEETING" means the special meeting of Company Shareholders,
including any adjournment or postponement thereof, to be called and held in
accordance with the Interim Order to consider and vote upon the Arrangement;
"COMPANY PROPERTY" has the meaning ascribed to it in Section 3.14;
"COMPANY PROPRIETARY RIGHTS" has the meaning ascribed thereto in
Section 3.18(a);
"COMPANY REAL PROPERTY" has the meaning ascribed thereto in Section 3.14;
"COMPANY RESOLUTION" means the special resolution of the Company
Shareholders, to be substantially in the form and content of Exhibit B hereto;
"COMPANY SCHEDULE" has the meaning ascribed thereto under Article III of
this Agreement;
"COMPANY SHAREHOLDERS" means the holders of Company Common Shares;
"COMPANY SOFTWARE" has the meaning ascribed thereto in Section 3.18(g);
"COMPANY SOFTWARE AUTHORS" has the meaning ascribed thereto in
Section 3.18(g);
"COMPANY STOCK OPTION PLANS" has the meaning ascribed to it in
Section 3.3(a);
"COMPANY STOCK OPTIONS" has the meaning ascribed to it in Section 3.3(a);
"CONFIDENTIALITY AGREEMENT" means the agreement pursuant to Section 6.1(a);
"CONTINUING EMPLOYEES" has the meaning ascribed to it in Section 6.8;
"CONTRACT" means any written, oral or other agreement, contract,
subcontract or other arrangement;
"COURT" means the ONTARIO SUPERIOR COURT OF JUSTICE;
"DGCL" means Delaware General Corporation Law, as amended;
"DIRECTOR" means the Director appointed pursuant to section 278 of the
OBCA;
"DISSENT RIGHTS" means the rights of dissent in respect of the Arrangement
described in Section 3.1 of the Plan of Arrangement;
3
"EDGAR" has the meaning ascribed thereto in Section 4.7(a);
"EFFECTIVE TIME" has the meaning ascribed thereto in the Plan of
Arrangement;
"EMPLOYEE PLAN" means any employment, severance or similar contract or
arrangement (whether or not written, but only if not immaterial) or any plan,
policy, fund, program or contract or arrangement (whether or not written, funded
or unfunded) providing for compensation, bonus, profit-sharing, stock option, or
other stock related rights or other forms of incentive or deferred compensation,
vacation benefits, insurance coverage (including any self-insured arrangements),
health or medical benefits, disability benefits, workers' compensation,
supplemental unemployment benefits, severance benefits and post-employment or
retirement benefits (including compensation, pension, health, medical or life
insurance or other benefits) that (A) is entered into, maintained, administered,
contributed to or required to be contributed to, as the case may be, by Company
or any of its Subsidiaries or ERISA Affiliates and (B) with respect to which
Company or any of its Subsidiaries has or may have any liability or obligation;
"EMPLOYEES" means those individuals employed or retained by Company or any
of its Subsidiaries on a full-time, part-time or temporary basis, including
those employees on disability leave, parental leave or other absence;
"EMPLOYMENT CONTRACT" means any Contract, whether oral or written, relating
to an Employee, including any communication or practice relating to an Employee
that imposes any obligation on Company or any of its Subsidiaries;
"ENCUMBRANCE" means any claim, lien, pledge, charge, security interest,
equitable interest, option, right of first refusal or preemptive right,
condition or other restriction of any kind, including any restriction on use,
voting (in the case of any security), transfer, receipt of income or exercise of
any other attribute of ownership;
"ENVIRONMENTAL COSTS AND LIABILITIES" has the meaning ascribed thereto in
Section 3.16(b);
"ENVIRONMENTAL LAWS" has the meaning ascribed thereto in Section 3.16(b);
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended;
"ERISA AFFILIATE" means any trade or business (whether or not incorporated)
that is a member of a controlled group or that is under common control with
Company within the meaning of Section 414 of the Code;
"EXCHANGE RATIO" means 1.1870, subject to adjustment as provided under the
Plan of Arrangement, if any;
"EXCHANGEABLE SHARE SUPPORT AGREEMENT" means an agreement to be made
between Parent and Company substantially in the form and content of Exhibit D
hereto, with such changes thereto as the parties hereto, acting reasonably, may
agree;
4
"EXCHANGEABLE SHARES" means exchangeable shares in the capital of Company,
having substantially the rights, privileges, restrictions and conditions set out
in Appendix 1 to the Plan of Arrangement;
"EXPENSE REIMBURSEMENT" has the meaning ascribed thereto in Section 8.3(b);
"FINAL ORDER" means the final order of the Court approving the Arrangement
as such order may be amended or varied at any time prior to the Effective Time
or, if appealed, then unless such appeal is withdrawn or denied, as affirmed or
as amended on appeal;
"FORM S-3" has the meaning ascribed thereto in Section 2.6(c);
"FORM S-4" has the meaning ascribed thereto in Section 2.6(b);
"FORM S-8" has the meaning ascribed thereto in Section 2.6(d);
"GOVERNMENTAL ENTITY" has the meaning ascribed thereto in Section 3.5(b);
"HAZARDOUS MATERIAL" has the meaning ascribed to it in Section 3.16(b);
"INDEMNIFIED PARTIES" has the meaning ascribed to it in Section 6.5;
"INSURANCE POLICIES" has the meaning ascribed to it in Section 3.20;
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
worldwide common law and statutory rights in, arising out of, or associated
therewith: (i) patents and applications therefor and all reissues, divisions,
renewals, extensions, provisionals, re-extensions, continuations and
continuations-in-part thereof ("PATENTS"); (ii) inventions (whether patentable
or not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, processes, procedures, technical data,
manuals, records and customer lists, and all documentation relating to any of
the foregoing; (iii) copyrights, copyrights registrations and applications
therefor, and all other rights corresponding thereto throughout the world; (iv)
domain names, uniform resource locators ("URLS") and other names and locators
associated with the Internet ("DOMAIN NAMES"); (v) industrial designs or similar
rights and any registrations and applications therefor; (vi) trade names, logos,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor; (vii) all databases and data
collections and all rights therein; (viii) all moral and economic rights of
authors and inventors, however denominated, and (ix) any similar or equivalent
rights to any of the foregoing (as applicable);
"INTERIM ORDER" means the interim order of the Court, as the same may be
amended in respect of the Arrangement, as contemplated by Section 2.3;
"INTERNATIONAL PLAN" means any Employee Plan that has been adopted or
maintained by Company or its Subsidiaries principally for the benefit of
Employees outside the United States;
"ITA" means the INCOME TAX ACT (Canada), as amended;
5
"KNOWLEDGE" with respect to a party hereto shall mean the actual knowledge
of any of the executive officers of such party after due inquiry of senior
management responsible for the subject matter of the applicable representation
or covenant;
"LAWS" means, as to any applicable Person, applicable laws, statutes,
bylaws, rules, regulations, orders, ordinances, protocols, codes, treaties,
policies, notices, directions and judicial, arbitral, administrative,
ministerial or departmental judgements, awards or other requirements of any
Governmental Entity having force of law and binding on such Person or any of its
Subsidiaries;
"LEASED REAL PROPERTY" has the meaning ascribed thereto in Section 3.14;
"MATERIAL ADVERSE EFFECT" means, with respect to any party or any of its
Subsidiaries, any change, event, circumstance or effect that is or would
reasonably be expected to be materially adverse to the business, assets
(including intangible assets), financial condition, prospects or results of
operations or financial performance of such party taken as a whole with its
Subsidiaries, other than any such change, event, circumstance, or effect
resulting from (i) the announcement of the execution of this Agreement or the
consummation of the transactions contemplated hereby, (ii) changes,
circumstances or conditions generally affecting the industry in which such party
operates and not having a disproportionate effect on such party, (iii) changes
in general economic conditions in the United States, Europe, Canada, or other
foreign economies where Parent or Company (together with their respective
Subsidiaries), as applicable, have operations or sales, not having a
disproportionate effect on such party; (iv) any change in or effect on the
business of Parent or Company (together with their respective Subsidiaries), as
applicable, caused by, relating to or resulting from, directly or indirectly,
the transactions contemplated by this Agreement or the announcement thereof; (v)
changes in the trading price for such party's capital stock; or (vi) any
business conditions of such party (including the state of such person's
liquidity or capital resources) to the extent set forth on the Company Schedule
or the Parent Schedule, as applicable. The parties agree that any change in
quarterly revenues, cash flow, or earnings from those mostly recently reported
by such person or from those included in any projections disclosed to the other
parties hereto by such person not resulting from a change, event, circumstance,
or effect that would otherwise render any representation or warranty of such
party in the Agreement untrue or inaccurate, or from the breach of any covenant
of such party in the Agreement, shall not constitute a Material Adverse Effect
hereunder;
"MATERIAL SUBSIDIARY" means with reference to any entity, any Subsidiary of
such entity that, as of the date hereof or as of the Effective Time, would
qualify as a "significant subsidiary" within the meaning of Rule 1-02(w) of
Regulation S-X promulgated under the 1934 Act;
"NASDAQ" means the Nasdaq National Market;
"OBCA" has the meaning ascribed thereto in the recitals to this Agreement;
"OUT-OF-THE-MONEY OPTIONS" has the meaning ascribed thereto in
Section 6.13(a);
"PARENT" shall have the meaning ascribed to such term in the introduction
to this Agreement;
6
"PARENT CHARTER DOCUMENTS" has the meaning ascribed to it in Section 4.2;
"PARENT COMMON SHARES" means shares of class A common stock, par value
$0.001 per share, of Parent (including any attached rights issued pursuant to
the Parent Rights Agreement, as defined in Section 4.3 hereof);
"PARENT CONTRACT" has the meaning ascribed to it in Section 4.18;
"PARENT OPTION PLANS" has the meaning ascribed thereto in Section 4.3;
"PARENT PLANS" has the meaning ascribed thereto in Section 6.8;
"PARENT PROPRIETARY RIGHTS" has the meaning ascribed to it in
Section 4.11(a);
"PARENT RIGHTS" has the meaning ascribed thereto in Section 4.3;
"PARENT RIGHTS AGREEMENT" has the meaning ascribed thereto in Section 4.3;
"PARENT SCHEDULE" has the meaning ascribed to it under Article IV of this
Agreement;
"PARENT SEC REPORTS" has the meaning ascribed thereto in Section 4.7(a);
"PENSION PLAN" shall mean each Employee Plan that is an "employee pension
benefit plan," within the meaning of Section 3(2) of ERISA;
"PERSON" shall mean any individual, corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization, entity or Governmental Entity;
"PLAN OF ARRANGEMENT" means the plan of arrangement substantially in the
form and content of Exhibit C hereto and any amendments or variations thereto
made in accordance with Section 8.4 hereof or Article 6 of the Plan of
Arrangement or made at the direction of the Court in the Final Order;
"PREFERENCE SHARES" has the meaning ascribed thereto in Section 3.3(a);
"PROPRIETARY RIGHTS" has the meaning ascribed thereto in Section 3.18(j);
"REGISTRATION STATEMENTS" means each of the Form S-3 and Form S-8, and, if
used as contemplated herein, the Form S-4.
"REGULATORY APPROVALS" means those sanctions, rulings, consents, orders,
exemptions, waivers, permits, agreements, certificates, authorizations and other
approvals (including the lapse, without objection, of a prescribed time under a
statute or regulation that states that a transaction may be implemented if a
prescribed time lapses following the giving of notice without an objection being
made) of Governmental Entities, the failure of which to be obtained would cause
the consummation of the transactions contemplated hereby to be prohibited;
7
"REPLACEMENT OPTION" has the meaning ascribed thereto in the Plan of
Arrangement;
"RESELLER AGREEMENT" has the meaning ascribed thereto in Section 6.10;
"RETURN(S)" has the meaning ascribed thereto in Section 3.15(b);
"SECURITIES ACT" means the SECURITIES ACT (Ontario), as now in effect and
as it may be amended from time to time prior to the Effective Time;
"SEC" means the United States Securities and Exchange Commission;
"SECURITIES LAWS" means the OBCA, the Securities Act and the equivalent
legislation in the other provinces of Canada, the 1933 Act, the 1934 Act, all as
now enacted or as the same may from time to time be amended, re-enacted or
replaced, and the applicable rules, regulations, rulings, orders, forms and
written policies made or promulgated under such statutes and the published
policies of regulatory authorities administering such statutes, as well as the
rules, regulations, by-laws and policies of the TSE and the Nasdaq;
"SPECIAL SHARES" has the meaning ascribed thereto in Section 3.3(a);
"SPECIAL VOTING SHARE" means the share of special voting stock of Parent as
defined in the Voting and Exchange Trust Agreement;
"SUBSIDIARY" shall mean, when used with reference to any party, any Person
of which such party (either alone or through or together with any other
Subsidiary) owns, directly or indirectly, fifty percent (50%) or more of the
outstanding capital stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such Person;
"SUPERIOR PROPOSAL" has the meaning ascribed thereto in Section 6.2(d);
"TAX(ES)" has the meaning ascribed thereto in Section 3.15(a);
"TERMINATION DATE" has the meaning ascribed thereto in Section 8.1(b);
"TERMINATION FEE" has the meaning ascribed thereto in Section 8.3(b);
"TRADE UNION" means an organization of employees formed for the purposes
that include the regulation of relations between employees and employers and
includes a provincial, national or international trade union, a certified
council of trade unions, a designated or certified employee bargaining agency,
and any organization that has been declared a trade union pursuant to applicable
provincial labor regulations legislation;
"TRANSACTION EXPENSES" has the meaning ascribed thereto in Section 8.3(a);
"TRIGGERING EVENT" has the meaning ascribed to it in Section 8.1(g);
8
"TRUSTEE" means a Canadian trust company to be chosen by Parent and Company
to act as trustee under the Voting and Exchange Trust Agreement and any
successor trustee appointed under the Voting and Exchange Trust Agreement;
"TSE" means The Toronto Stock Exchange;
"US GAAP" has the meaning ascribed to it in Section 3.7(b); and
"VOTING AND EXCHANGE TRUST AGREEMENT" means an agreement to be made between
Parent, Company and the Trustee substantially in the form and content of Exhibit
E hereto, with such changes thereto as the parties hereto, acting reasonably,
may agree.
1.2 INTERPRETATION. When a reference is made in this Agreement to Exhibits,
such reference shall be to an Exhibit to this Agreement unless otherwise
indicated. When a reference is made in this Agreement to Sections, such
reference shall be to a Section of this Agreement unless otherwise indicated.
Unless otherwise indicated the words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When reference is made herein to "the business
of" an entity, such reference shall be deemed to include the business of such
entity and all direct and indirect Subsidiaries of such entity. Reference to the
Subsidiaries of an entity shall be deemed to include all direct and indirect
Subsidiaries of such entity.
ARTICLE II
THE ARRANGEMENT
2.1 IMPLEMENTATION STEPS BY COMPANY. Company covenants in favor of Parent
that Company shall:
(a) subject to the terms of this Agreement and the preparation of a
substantially complete version of the Company Circular, as soon as reasonably
practicable, and in any event no later than sixty (60) days after the date
hereof, provided Parent has delivered to Company all information concerning
Parent necessary for inclusion in the Company Circular, apply in a manner
acceptable to Parent, acting reasonably, under Section 182 of the OBCA for an
order approving the Arrangement and for the Interim Order, and thereafter
proceed with and diligently seek the Interim Order;
(b) subject to the terms of this Agreement and in accordance with the
Interim Order, convene and hold the Company Meeting on a date no later than one
hundred and twenty (120) days after the date hereof for the purpose of
considering the Company Resolution;
(c) except as required for quorum purposes, not adjourn, postpone or cancel
(or propose for adjournment, postponement or cancellation) the Company Meeting
without Parent's prior written consent, except as required by Laws or the
Company Shareholders;
9
(d) subject to obtaining such approvals as are required by the Interim
Order, proceed with and diligently pursue the application to the Court for the
Final Order;
(e) subject to obtaining the Final Order and the satisfaction or waiver of
the other conditions herein contained in favor of each party, send to the
Director, for endorsement and filing by the Director, the Articles of
Arrangement and such other documents as may be required in connection therewith
under the OBCA to give effect to the Arrangement; and
(f) subject to obtaining the Final Order and the satisfaction or waiver of
the other conditions herein in its favor, execute and deliver the Exchangeable
Share Support Agreement and Voting and Exchange Trust Agreement.
2.2 IMPLEMENTATION STEPS BY PARENT. Parent covenants in favor of Company
that subject to obtaining the Final Order and the satisfaction or waiver of the
other conditions herein in its favor, Parent shall on or prior to the Effective
Date execute and deliver the Exchangeable Share Support Agreement and Voting and
Exchange Trust Agreement and issue to the Trustee the Special Voting Share.
2.3 INTERIM ORDER. The notice of motion for the application referred to in
Section 2.1(a) shall request that the Interim Order provide:
(a) for the class of Persons to whom notice is to be provided in respect of
the Arrangement and the Company Meeting and for the manner in which such notice
is to be provided;
(b) that the requisite approval for the Company Resolution shall be 66 2/3%
of the votes cast on the Company Resolution by Company Shareholders present in
person or by proxy at the Company Meeting (such that each Company Shareholder is
entitled to one vote for each Company Common Share held);
(c) that, in all other respects, the terms, restrictions and conditions of
the bylaws and articles of Company, including quorum requirements and all other
matters, shall apply in respect of the Company Meeting;
(d) for the grant of the Dissent Rights; and
(e) for the notice requirements with respect to the presentation of the
application to the Court for a Final Order.
2.4 ARTICLES OF ARRANGEMENT. The Articles of Arrangement shall implement
the Plan of Arrangement.
2.5 COMPANY CIRCULAR. As promptly as reasonably practicable after the
execution and delivery of this Agreement, Company shall complete the Company
Circular together with any other documents required by the Securities Laws or
other applicable Laws in connection with the Arrangement, and, as promptly as
practicable after the execution and delivery of this Agreement, Company shall,
unless otherwise agreed by the parties, cause the Company Circular and other
documentation required in connection with the Company Meeting to be sent to each
Company
10
Shareholder and filed as required by the Interim Order and applicable Laws.
Subject to the terms of this Agreement and except to the extent that the Board
of Directors of Company has changed its recommendation in accordance with the
terms of this Agreement, the Company Circular will include (A) the
recommendation of the Board of Directors of Company in favor of approval of the
Arrangement and (B) unless Company has been informed to the contrary, the
representation by Company to the effect that each member of the Board of
Directors of Company intends to vote all Company Common Shares held by such
individual in favor of the Arrangement. Company shall permit Parent to review
and comment on drafts of the Company Circular and other documentation referred
to above in the course of its preparation and shall not file or amend such
documentation without the prior consent of Parent (which consent will not be
unreasonably withheld or delayed).
2.6 SECURITIES COMPLIANCE.
(a) The Parent shall use all reasonable efforts to obtain all orders
required from the applicable Canadian Securities Regulatory Authorities to
permit (i) the issuance and first resale of the Exchangeable Shares and Parent
Common Shares issued pursuant to the Arrangement, and (ii) the issuance and
first resale of the Parent Common Shares to be issued from time to time upon
exchange of the Exchangeable Shares and upon the exercise of Replacement Options
in each case without further qualification with or approval of or the filing of
any document including any prospectus or similar document, or the taking of any
proceeding with, or the obtaining of any further order, ruling or consent from,
any Governmental Entity or regulatory authority under any Canadian federal,
provincial or territorial securities laws or other Laws or pursuant to the rules
and regulations of any regulatory authority administering such Laws, or the
fulfillment of any other legal requirement in any such jurisdiction (other than,
with respect to such first resales, any restrictions on transfer by reason of,
among other things, a holder being a "control person" of Parent for purposes of
Securities Laws and other customary qualifications for such orders).
(b) Parent shall use all reasonable efforts to obtain the approval of the
Nasdaq for the quotation of the Parent Common Shares to be issued in connection
with the transactions contemplated by this Agreement, such quotation to be
effective prior to or as of the Effective Time. The parties shall cooperate with
each other and shall take all reasonable actions so that the Parent Common
Shares to be issued in connection with the Arrangement will be exempt from the
registration requirements of Section 5 of the 1933 Act. In the event that an
exemption from registration is not available at the Effective Time in connection
with the Arrangement, then Parent shall promptly prepare and file a Registration
Statement on Form S-4 (or other applicable form) (the "FORM S-4") under the 1933
Act for the purpose of registering under the 1933 Act the offering and issuance
of shares of Parent Common Shares pursuant to the Arrangement.
(c) Parent shall within 30 days after the date hereof file a registration
statement on Form S-3 (or other applicable form) (the "FORM S-3"), in order to
register under the 1933 Act, the Parent Common Shares to be issued from time to
time after the Effective Time upon exchange of the Exchangeable Shares, and
shall use all reasonable efforts to cause the Form S-3 to become effective at or
prior to the Effective Time and to maintain the effectiveness of such
registration for the period that such Exchangeable Shares remain outstanding.
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(d) Within 30 days of the Effective Time, Parent shall file a registration
statement on Form S-8 (or other applicable forms) (the "FORM S-8"), in order to
register under the 1933 Act, the Parent Common Shares to be issued from time to
time after the Effective Time upon the exercise of the Replacement Options, and
shall use all reasonable efforts to cause the Form S-8 to become effective as
promptly as practicable thereafter, assuming that Parent has been provided with
copies of all relevant option plans and forms of option agreements, and to
maintain the effectiveness of such registration for the period of time that the
Replacement Options remain outstanding and may be exercised.
2.7 PREPARATION OF FILINGS, ETC.
(a) Company shall use all reasonable efforts to have the Company Circular
cleared, if applicable, by any applicable Canadian Securities Regulatory
Authority (including by way of exemption) and any other applicable Government
Entity. Parent shall use all reasonable efforts to have each of the Registration
Statements declared effective by the SEC. Each of Parent and Company shall,
immediately upon receipt thereof, provide the other party copies of any written
comments and advise the other party of any oral comments, in the case of the
Company, with respect to its Circular or, in the case of Parent, the Form S-3
and the Form S-4 (if used) received from the SEC, the Canadian Securities
Regulatory Authorities or any other Governmental Entity. The parties shall
cooperate and provide the other with a reasonable opportunity to review and
comment on the Company Circular, the Form S-3, and the Form S-4 (if used) or any
amendment or supplement to any of the aforementioned filings prior to filing
such with the SEC, the Canadian Securities Regulatory Authorities and/or each
other applicable Government Entity, and will provide each other with a copy of
all such filings made. Each party will advise the other party, promptly after it
receives notice thereof, of the time when the Form S-3 and the Form S-4 (if
used) has become effective, the issuance of any stop order, the suspension of
the qualification of any of the Parent Common Shares or the Exchangeable Shares
for offering or sale in any jurisdiction, or any request by the SEC, the
Canadian Securities Regulatory Authorities or any other Governmental Entity for
amendment of the Company Circular, the Form S-3 or the Form S-4 (if used).
(b) Each of Parent and Company shall furnish to the other all such
information concerning it and its shareholders as may be required (and, in the
case of its shareholders, available to it) for the effectuation of the actions
described in Sections 2.5 and 2.6 and the foregoing provisions of this Section
2.7, and each covenants that no information furnished by it (or, to its
Knowledge, with respect to information concerning its shareholders) in
connection with such actions or otherwise in connection with the consummation of
the transactions contemplated by this Agreement will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in any such document or necessary in order to make any information so
furnished for use in any such document not misleading in the light of the
circumstances in which it is furnished. Each of Parent and Company shall
cooperate in the preparation of the Company Circular and Company shall cause the
same to be distributed to Company Shareholders and/or filed with the relevant
securities regulatory authorities and/or stock exchanges, as applicable. Each of
Parent and Company shall cooperate in the preparation of each of the
Registration Statements and shall cause its counsel and accountants to cooperate
with each other's counsel and accountants in the preparation of each of the
Registration Statements.
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(c) Parent and Company shall each promptly notify each other if, at any
time before the Effective Time, it becomes aware that the Company Circular, an
application for an order or any other document described in Section 2.6 contains
any untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading in light of the circumstances in which they are made, or
that otherwise requires an amendment or supplement to the Company Circular or
such application or other document. In any such event, each of Parent and
Company shall cooperate in the preparation of a supplement or amendment to the
Company Circular or such application or other document, as required and as the
case may be, and, if required, shall cause the same to be distributed to Company
Shareholders, and/or filed with the relevant securities regulatory authorities
and/or stock exchanges, as applicable.
(d) Company shall use all reasonable efforts to ensure that the Company
Circular and the Form S-4 (if used) comply with all applicable Laws and, without
limiting the generality of the foregoing, that the Company Circular and the Form
S-4 (if used) do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading in light of the circumstances in
which they are made (other than with respect to any information relating to and
provided by Parent or any third party that is not an affiliate of Company) and
Parent shall provide all information regarding it and the Parent Common Shares
necessary to do so.
(e) Parent shall use all reasonable efforts to ensure that the Form S-3,
the Form S-4 (if used) and the Form S-8 comply with all applicable Laws and,
without limiting the generality of the foregoing, that such documents do not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading in light of the circumstances in which they are made
(other than with respect to any information relating to and provided by Company
or any third party that is not an affiliate of Parent), and Company shall
provide all information regarding it and the Company Common Shares necessary to
do so.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Parent that the statements set forth in
this Article III are true and correct, subject to such exceptions as are
specifically disclosed in writing in the disclosure letter supplied by Company
to Parent dated as of the date hereof (the "COMPANY SCHEDULE"). The Company
Schedule shall be arranged in sections and paragraphs corresponding to the
lettered and numbered paragraphs contained in this Article III, and the
disclosure in any paragraph shall qualify only the corresponding paragraph in
this Article III (provided that the listing of an item in one paragraph of the
Company Schedule shall be deemed to be a listing in each paragraph of the
Company Schedule and to apply to any other representation and warranty of
Company in this Agreement to the extent that it is reasonably apparent from a
reading of such disclosure item that it would also qualify or apply to such
other paragraph or representation or warranty).
13
3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of Company and its
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization and is qualified and in good
standing as a foreign entity in each jurisdiction where the properties owned,
leased or operated, or the business conducted, by it require such qualification,
except where failure to be so qualified would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on Company.
Each of Company and its Subsidiaries has all requisite corporate power and
authority to own its properties and to carry on its business as it is now being
conducted. All of the Subsidiaries of Company are set forth in Section 3.1 of
the Company Schedule.
3.2 ARTICLES OF INCORPORATION AND BYLAWS. Company has previously furnished
to Parent a complete and correct copy of its Articles of Incorporation and
Bylaws or other organizational documents as amended to date (together, the
"COMPANY CHARTER DOCUMENTS") and the equivalent organizational documents of each
of its Subsidiaries and other equity holdings. Such Company Charter Documents
and equivalent organizational documents of each of its Subsidiaries and other
equity holdings and investments are in full force and effect. Company is not in
violation of any of the provisions of Company Charter Documents, and no
Subsidiary of Company is in violation of its equivalent organizational
documents.
3.3 CAPITALIZATION.
(a) The authorized capital stock of Company consists of an unlimited number
of Company Common Shares, an unlimited number of Class A Special Shares, an
unlimited number of Class B Special Shares, an unlimited number of Class C
Special Shares (collectively, the "SPECIAL SHARES") and an unlimited number of
Preference Shares issuable in series (the "PREFERENCE SHARES"). At the close of
business on March 1, 2002, (i) 43,429,694 Company Common Shares were issued and
outstanding, all of which are validly issued, fully paid and non-assessable;
(ii) options ("COMPANY STOCK OPTIONS") to purchase 6,689,399 Company Common
Shares were issued and outstanding under the Company stock option plan's, as
amended, (the "COMPANY STOCK OPTION PLAN") and (iii) warrants to purchase 36,723
Company Common Shares were issued and outstanding. As of the date hereof, no
Special Shares or Preference Shares in the capital of the Company were issued or
outstanding. Section 3.3(a) of the Company Schedule sets forth the following
information with respect to each Company Stock Option outstanding as of the date
of this Agreement: (i) the name of the optionee; (ii) the particular plan
pursuant to which such Company Stock Option was granted; (iii) the number of
Company Common Shares subject to such Company Stock Option; (iv) the exercise
price of such Company Stock Option; (v) the date on which such Company Stock
Option was granted; (vi) the applicable vesting schedule; (vii) the date on
which such Company Stock Option expires; (viii) whether the exercisability of
such Company Stock Option will be accelerated in any way by the transactions
contemplated by this Agreement (assuming the other relevant conditions to such
acceleration have been satisfied) and indicates the extent of acceleration and
(ix) any other adjustments to such Company Stock Option resulting from the
consummation of the transactions contemplated by this Agreement. Company has
made available to Parent accurate and complete copies of all stock option plans
pursuant to which Company has granted such Company Stock Options that are
currently outstanding and the form of all stock option agreements evidencing
such Company Stock Options. Except as set forth in Section 3.3(a) of the Company
Schedule, there are no commitments or agreements of any character to which
Company is bound obligating
14
Company to accelerate the vesting of any Company Stock Option as a result of the
Arrangement or the transactions contemplated hereby.
(b) All of the outstanding shares of capital stock or other ownership
interests of Company's Subsidiaries that are held directly or indirectly by
Company are validly issued, fully paid and non-assessable. Except as set forth
in Section 3.3(a) hereof or Section 3.3(a) of the Company Schedule, there are no
subscriptions, options, warrants, equity securities, partnership interests,
conversion privileges or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which Company
or any of its Subsidiaries is a party or by which it is bound obligating Company
or any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of Company or any of its
Subsidiaries or obligating Company or any of its Subsidiaries to grant, extend,
accelerate the vesting of or enter into any such subscription, option, warrant,
equity security, call, right, commitment or agreement. There are no outstanding
bonds, debentures, or other evidences of indebtedness of Company or any
Subsidiary thereof having the right to vote (or that are convertible for or
exercisable into securities having the right to vote) with the holders of
Company Common Shares on any matter. As of the date of this Agreement, except as
contemplated by this Agreement, there are no registration rights and there is no
voting trust, proxy, rights plan, anti-takeover plan or other agreement or
understanding to which Company or any of its Subsidiaries is a party or by which
they are bound with respect to any equity security of any class of Company or
with respect to any equity security, partnership interest or similar ownership
interest of any class of any of its Subsidiaries.
3.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Company has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by Company and the consummation by Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of Company and no other corporate proceedings on the part of Company
are necessary to authorize this Agreement, or to consummate the transactions so
contemplated; other than (i) with respect to the completion of the Arrangement,
the approval of Company Shareholders as described in Article II and (ii) with
respect to the Company Circular and other matters relating solely thereto, the
approval of the Board of Directors of Company. This Agreement has been duly and
validly executed and delivered by Company and, assuming the due authorization,
execution and delivery by Parent, constitutes the valid and binding agreement of
Company, enforceable against Company in accordance with its terms, except that
(i) such enforcement may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding may be
brought and (iii) the CURRENCY ACT (Canada) precludes a court in Canada from
rendering judgement in any currency other than Canadian currency.
15
3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except to the extent disclosed in Section 3.5(a) of the Company
Schedule, the execution and delivery of this Agreement by Company does not, and
the performance of this Agreement by Company shall not, (i) conflict with or
violate the Company Charter Documents or the equivalent organizational documents
of any of Company's Subsidiaries, (ii) subject to obtaining the approval of
Company Shareholders as described in Article II and compliance with the
requirements set forth in Section 3.5(b) below, conflict with or violate any
law, rule, regulation, order, judgement or decree applicable to Company or any
of its Subsidiaries or by which its or any of their respective properties is
bound or affected or (iii) result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under, or materially impair Company's or any of its Subsidiaries' rights or
alter the rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or encumbrance on any of the properties or assets of
Company or any of its Subsidiaries pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Company or any of its Subsidiaries is a
party or by which Company or any of its Subsidiaries or its or any of their
respective properties are bound or affected, except in the case of clauses (ii)
or (iii), to the extent such conflict, violation, breach, default, impairment or
other effect would not have, individually or in the aggregate, a Material
Adverse Effect on Company, (iv) result in any payment becoming due to any
director or officer of Company or any Subsidiary or increase in any benefits
otherwise payable under any Employee Plan or (v) result in any material payment
becoming due to any other employee of Company or any Subsidiary or materially
increase in any benefits otherwise payable under any Employee Plan.
(b) The execution and delivery of this Agreement by Company does not, and
the performance of this Agreement by Company shall not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
court, administrative agency, tribunal, bureau, board, commission, public
authority, governmental or regulatory authority, agency, ministry, crown
corporation or other law, rule- or regulation-making entity, domestic or
foreign, or any quasi-governmental body, self-regulatory organization or stock
exchange, including without limitation, the Nasdaq or the TSE (any of which, a
"GOVERNMENTAL ENTITY") to be made or obtained by Company, except (A) pursuant to
applicable requirements, if any, of the Securities Laws, U.S. state securities
laws, and foreign Governmental Entities, the rules and regulations of the Nasdaq
or the TSE, any approvals required by the Interim Order, the Final Order,
filings with the Director under the OBCA, and the Regulatory Approvals relating
to Company and (B) any consents, approvals, authorizations or permits, filings
or notifications, which, if not obtained, would not, individually or in the
aggregate, reasonably be expected to prevent Company from consummating the
Arrangement or otherwise prevent Company from performing its obligations under
this Agreement.
3.6 (a) COMPLIANCE. Except as set forth in Section 3.6 of the Company
Schedule, neither Company nor any of its Subsidiaries is in conflict with, or in
default or violation of, (i) any Law, order, judgement or decree applicable to
Company or any of its Subsidiaries or by which its or any of their respective
properties is bound or affected or (ii) any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or
16
obligation to which Company or any of its Subsidiaries is a party or by which
Company or any of its Subsidiaries or its or any of their respective properties
is bound or affected; except in each case, for any conflicts, defaults or
violations that (individually or in the aggregate) would not reasonably be
expected to have a Material Adverse Effect on Company. No investigation or
review by any Governmental Entity is pending or, to the Knowledge of Company,
threatened against Company or its Subsidiaries, other than, in each such case,
those the outcome of which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on Company.
(b) PERMITS. Company and each of its Subsidiaries hold all licenses,
permits, registrations, orders, authorizations, approvals and franchises that
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 reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on Company. All
such licenses, permits, registrations, orders, authorizations, approvals and
franchises are now, and will be after the Effective Time, valid and in full
force and effect, except where the failure to be valid and in full force and
effect of any such license, permit, registration, order, authorization, approval
or franchise would not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect on Company. Neither 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 failure would not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect on Company.
3.7 REPORTS; FINANCIAL STATEMENTS.
(a) Company has furnished or made available to Parent true and complete
copies of all forms, reports, schedules, prospectuses, circulars, statements and
other documents filed by it with any of the Canadian Securities Regulatory
Authorities, Nasdaq, TSE and SEC since March 31, 2001, and, prior to the
Effective Time, Company will have furnished or made available to Parent true and
complete copies of any additional documents filed with any of the Canadian
Securities Regulatory Authorities, Nasdaq, TSE and SEC by Company prior to the
Effective Time (such forms, reports, schedules, prospectuses, circulars,
statements and other documents, including any financial statements or other
documents, including any schedules included therein, are referred to as the
"COMPANY DOCUMENTS"). Company Documents, at the time filed (and if amended or
superseded by a filing prior to the date of this Agreement then on the date of
such filing), (i) did not contain any misrepresentation (as defined in the
Securities Act), did not at the time they were filed contain any untrue
statement of a material fact or omit 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 and (ii) complied
in all material respects with the requirements of applicable Securities Laws.
Company has not filed any confidential material change report with the Canadian
Securities Regulatory Authorities or any other securities authority or regulator
or any stock exchange or other self-regulatory authority that as of the date
hereof remains confidential. None of Company's Subsidiaries is required to file
any reports or other documents with any of the Canadian Securities Regulatory
Authorities, Nasdaq, TSE and SEC.
17
(b) The annual audited consolidated financial statements and the quarterly
unaudited consolidated financial statements of Company, including the notes
thereto, included in Company Documents (the "COMPANY FINANCIAL STATEMENTS")
complied as to form in all material respects, as of their respective dates, (i)
in the case of Company Documents containing financial statements prepared in
accordance with Canadian generally accepted accounting principles ("CANADIAN
GAAP"), with Canadian GAAP applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto and except that unaudited statements do not contain footnotes as
permitted under applicable rules) and with the published rules and regulations
of the Canadian Securities Regulatory Authorities and the TSE and (ii) in the
case of Company Documents containing financial statements prepared in accordance
with United States generally accepted accounting principles ("US GAAP"), with US
GAAP applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto and
except that unaudited statements do not contain footnotes as permitted under
applicable rules) and with the published rules and regulations of applicable
Governmental Entities. The Company Financial Statements present fairly, in all
material respects, in accordance with US GAAP or Canadian GAAP, as applicable,
the consolidated financial position, results of operations and cash flows of
Company, its Subsidiaries and all entities substantially controlled by Company
at the dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal, recurring year-end adjustments and the absence
of notes thereto) and reflect appropriate and adequate reserves in respect of
contingent liabilities, if any, of Company and its Subsidiaries on a
consolidated basis. Since March 31, 2001, there has been no material change in
Company's accounting policies, except as described in the notes to Company
Financial Statements or as required by concurrent changes in generally accepted
accounting principles.
(c) The books and records of Company and its Subsidiaries, in all material
respects, (i) have been maintained in accordance with good business practices on
a basis consistent with prior years, (ii) state in reasonable detail the
material transactions and dispositions of the assets of Company and its
Subsidiaries and (iii) accurately and fairly reflect the basis for Company
Financial Statements. Company has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; and (ii) transactions are recorded as necessary (A) to permit
preparation of consolidated financial statements in conformity with US GAAP and
Canadian GAAP, as applicable, and (B) to maintain accountability of the assets
of Company and its Subsidiaries.
3.8 NO UNDISCLOSED LIABILITIES. Except to the extent disclosed in Section
3.8 of the Company Schedule, neither Company nor any of its Subsidiaries has any
liabilities of any nature (whether absolute, accrued, contingent or otherwise)
that are, individually or in the aggregate, material to the business, results of
operations, assets or financial condition of Company and its Subsidiaries taken
as a whole, except liabilities (i) fully reflected in, reserved against or
otherwise described in Company's balance sheet as of December 31, 2001, (or the
notes thereto), (ii) liabilities incurred since December 31, 2001, in the
ordinary course of business consistent with past practice, (iii) that are
obligations to perform under executory contracts in the ordinary course of
business (none of which is a liability resulting from a breach of contract or
warranty, tort, infringement or legal action), or (iv) that, individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on Company.
18
3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except to the extent disclosed in
Section 3.9 of the Company Schedule or in any Company Document filed prior to
the date hereof, since December 31, 2001, there has not been (i) any Material
Adverse Effect on Company, (ii) any declaration, setting aside or payment of any
dividend on, or other distribution (whether in cash, stock or property) in
respect of, any of Company's or any of any Material Subsidiaries' capital stock,
or any purchase, redemption or other acquisition by Company of any of Company's
capital stock or any other securities of Company or any Material Subsidiaries or
any options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase agreements,
(iii) any split, combination or reclassification of any of Company's or any
Material Subsidiaries' capital stock, (iv) any granting by Company or any of its
Subsidiaries of any increase in compensation or fringe benefits, except for
normal increases in the ordinary course of business consistent with past
practice, or any payment by Company or any of its Subsidiaries of any bonus,
except for bonuses made in the ordinary course of business consistent with past
practice, or any granting by Company or any of its Subsidiaries of any increase
in severance or termination pay, except for non-material increases made in the
ordinary course of business consistent with past practice with respect to
non-management employees, or any entry by Company or any of its Subsidiaries
into any currently effective employment, severance, termination or
indemnification agreement or any agreement the benefits of which are contingent
or the terms of which are materially altered upon the occurrence of a
transaction involving Company of the nature contemplated hereby, (v) any damage,
destruction or loss of assets of Company or any of its Subsidiaries (whether or
not covered by insurance) that has had or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company, (vi) any
labor dispute or charge of unfair labor practice (other than routine individual
grievances) that, individually or in the aggregate, has had or would reasonably
be expected to have a Material Adverse Effect on Company, any activity or
proceeding by a labor union or representative thereof to organize any employee
of Company or any of its Subsidiaries or any campaign being conducted to solicit
authorization from employees to be represented by such labor union in each case
that, individually or in the aggregate, has had or would reasonably be expected
to have a Material Adverse Effect on Company, (vii) any waiver by Company or any
of its Subsidiaries of any rights that would reasonably be expected to have a
Material Adverse Effect on Company, (viii) any other action or event that would
have required the consent of Parent pursuant to Section 5.1 had such action or
event occurred after the date of this Agreement, (ix) any material change by
Company in its accounting methods, principles or practices, except as required
by concurrent changes in US GAAP or Canadian GAAP, as applicable, or applicable
Law, or any disagreement between Company and its independent accountants
concerning Company Financial Statements or their conformity with US GAAP or
Canadian GAAP, as applicable, or (x) any material revaluation by Company of any
of its assets, including, without limitation, writing down the value of
capitalized software, inventory or deferred tax assets or writing off notes or
accounts receivable or any material sale of assets of Company other than in the
ordinary course of business.
3.10 ABSENCE OF LITIGATION. Except as disclosed in Section 3.10 of the
Company Schedule or in Company Documents filed prior to the date hereof (a)
there is no claim, action, proceeding or investigation pending or, to the
Knowledge of Company, threatened against Company or any of its Subsidiaries
that, individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Company; (b) neither Company nor any of its
19
Subsidiaries is subject to any outstanding judgement, order, writ, injunction or
decree that (i) has or may have the effect of prohibiting or impairing any
business practice of Company or any of its Subsidiaries, any acquisition of
property (tangible or intangible) by Company or any of its Subsidiaries, the
conduct of the business by Company or any of its Subsidiaries, or Company's
ability to perform its obligations under this Agreement or (ii) individually or
in the aggregate, would reasonably be expected to have a Material Adverse Effect
on Company; and (c) as of the date of this Agreement, neither Company nor any of
its Subsidiaries is subject to any outstanding judgement, order, writ,
injunction or decree that would reasonably be expected to prevent or adversely
affect the ability of the parties hereto to consummate the transactions
contemplated by this Agreement.
3.11 EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.11/3.12 to this Agreement, a schedule that is separate from
and not part of the Company Schedule (the "BENEFITS SCHEDULE") identifies each
material Employee Plan (exclusive of all Employee Plans required by statute).
(b) Except as set specifically forth in Section 3.11 of the Company
Schedule,
(i) Company has made available to Parent copies of the material
Employee Plans (and, if applicable, related funding or trust agreements)
and all amendments thereto and written interpretations thereof (together
with all related statements of investment policies, legal opinions,
consultants' reports, booklets, summaries, and manuals) together with the
annual filings or other reports for the past year (including, if
applicable, Form 5500 including, if applicable, Schedule B thereto) and, if
applicable, the most recent actuarial valuation report prepared in
connection with any such Employee Plan. Company has also made available to
Parent copies of all audited financial statements and accounting statements
and reports, for the past three (3) years in respect of each Employee Plan
and copies of all material correspondence with respect to each Employee
Plan between the Company or its Subsidiaries (or on their behalf) and any
regulatory authority having jurisdiction over any Employee Plan.
(ii) Neither Company, its Subsidiaries nor any ERISA Affiliate of
Company or its Subsidiaries has engaged in, or is a successor or parent
corporation to an entity that has engaged in, a transaction described in
Section 4069 or 4212(c) of ERISA. Neither Company or any ERISA Affiliate of
Company currently maintains, sponsors, participates in or contributes to,
or has in the past 6 years, maintained, sponsored, participated in or
contributed to, a Pension Plan that is subject to Title IV of ERISA or
Section 412 of the Code. There are no going concern unfunded actuarial
liabilities, past service unfunded liabilities or solvency deficiencies
respecting any of the Employee Plans and all Employee Plans that require
funding or insurance are fully insured or fully funded.
(iii) Except as set forth in Section 3.11(b)(iii) of the Company
Schedule, each Employee Plan that is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter, or has
pending or has time remaining in which to file, an application for such
determination from the Internal Revenue Service. Each Employee Plan has
been maintained in material compliance with its terms and in material
20
compliance with the requirements prescribed by any and all statutes,
orders, rules and regulations, including but not limited to ERISA and the
Code, which are applicable to such Employee Plan, except that would not
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Company. All material employer or employee
payments, contributions or premiums required to be remitted, paid to or in
respect of each Employee Plan have been paid or remitted in accordance with
its terms and all Laws, and no material taxes, penalties or fees are owing
under any Employee Plan. Each material Employee Plan can be amended,
terminated or otherwise discontinued after the Closing Date in accordance
with its terms, and such actions will not, either alone or in the
aggregate, have a Material Adverse Effect on Parent, Company or any
Subsidiary.
(iv) Except as set forth in Section 3.11(b)(iv) of the Company
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute,
bonus or otherwise) becoming due to any employee, independent contractor or
director of Company or any Subsidiary under any Employee Plan or otherwise,
(ii) materially increase any benefits or material obligation pursuant to
any Employee Plan, (iii) trigger funding obligations under any Employee
Plan or (iv) result in the acceleration of the time of payment or vesting
of any benefits for any employee, independent contractor or director of the
Company or any Subsidiary. There is no agreement, plan, arrangement or
other contract covering any current or former employee, independent
contractor or director of the Company or any of its Subsidiaries that,
considered individually or considered collectively with any other such
agreements, plans, arrangements or other contracts, will, or would
reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code. There is no contract,
agreement, plan or arrangement to which Company or any of its Subsidiaries
is a party or by which Company or any of its Subsidiaries is bound to
compensate any individual for excise taxes paid pursuant to Section 4999 of
the Code. Section 3.11(b)(iv) of the Company Schedule attached hereto sets
forth all Employment Contracts, severance agreements, gross-ups and option
agreements, if any, true and correct copies of which have been provided to
Parent.
(v) With respect to any Employee Plan, there is no claim or proceeding
pending against or involving or, to the Knowledge of Company, threatened
with respect to the assets thereof (other than routine claims for
benefits).
(vi) Except as set forth in Section 3.11(b)(vii) of the Company
Schedule, neither Company nor any of its Subsidiaries has any material
current or projected liability in respect of post-employment or
post-retirement health or medical or life insurance benefits for retired,
former or current employees of Company or its Subsidiaries, except as
required to avoid excise tax under Section 4980B of the Code.
(vii) At no time has during the past 6 years Company or its
Subsidiaries or any ERISA Affiliate of Company or its Subsidiaries
contributed to or been requested to contribute to any multiemployer plan,
as defined in Section 3(37) of ERISA or under
21
applicable pension standards legislation or any plan described in Section
413(c) of the Code.
(viii) Each International Plan of Company or its Subsidiaries has been
registered (if applicable) and maintained in material compliance with its
terms and conditions and in material compliance with the requirements
prescribed by any and all Laws that are applicable to such International
Plan, except that would not, individually or in the aggregate, be expected
to have a Material Adverse Effect on Company. There has been no amendment
to, written interpretation of or announcement (whether or not written) by
Company or any of its Subsidiaries relating to an International Plan, or
change in employee participation or coverage under any International Plan,
that would increase materially the expense of maintaining such
International Plan above the level of expense incurred in respect thereof
for the end of the prior fiscal year. To Company's Knowledge, no step has
been taken, no event has occurred, and no condition or circumstance exists
that has resulted in or could reasonably be expected to result in any
International Plan being ordered or required to be terminated or wound up
in whole or in part or having its registration under applicable Laws
refused or revoked, or being placed under the administration of any trustee
or receiver or regulatory authority or being required to pay any material
taxes, penalties or levies under applicable Laws.
(ix) No surplus assets have ever been withdrawn or permitted to be
withdrawn by the Company or any of its Subsidiaries from any International
Plan, nor have contribution or premium holidays ever been taken under any
International Plan by the Company or any of its Subsidiaries. No material
changes have occurred in respect to any International Plan since the date
of the most recent financial, accounting, actuarial or other report as
applicable, issued in connection with any International Plan (all of which
reports have been provided to Parent by Company), which would reasonably be
expected to adversely affect the relevant report (including rendering it
misleading in any material respect).
(x) None of the International Plans require or permit a retroactive
increase in premiums or payments, and the level of insurance reserves, if
any, under any insured International Plan is reasonable and sufficient to
provide for all incurred but unreported claims.
3.12 LABOR MATTERS.
(a) None of the employees of Company or any of its Subsidiaries is
represented in his or her capacity as an employee of such company by any labor
organization; (ii) neither 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 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 (iii) to the Knowledge of Company, there is no active or current
union organization activity involving the employees of Company or any of its
Subsidiaries, nor has there ever been union representation involving employees
of Company or any of its Subsidiaries.
22
(b) Company and each of its Subsidiaries is in compliance with all federal,
foreign (as applicable) provincial, and state Laws regarding employment and
labor practices, including Laws relating to workers' safety, sexual harassment
or discrimination, human rights or labor relations except where the failure to
so comply, individually or in the aggregate, would not have a Material Adverse
Effect on Company.
3.13 [Reserved]
3.14 TITLE TO PROPERTY. Each of Company and its Subsidiaries has good and
marketable title to all real property owned by it ("COMPANY REAL PROPERTY"). All
leases or other occupancy agreements for the real property leased or otherwise
occupied by Company and its Subsidiaries ("LEASED REAL PROPERTY" and, together
with Company Real Property, "COMPANY PROPERTY") are valid leasehold interests in
the Leased Real Property. Except as set forth in Section 3.14 of the Company
Schedule and except for breaches, violations or defaults that would not,
individually or in the aggregate, have a Material Adverse Effect on Company,
neither Company nor any of its Subsidiaries, nor to Company's Knowledge any
other party to any such lease or other occupancy agreement, is in breach,
violation or default under, and neither Company nor any of its Subsidiaries has
received written notice that it has breached, violated or defaulted under, any
of the material terms or conditions of any such lease or other occupancy
agreement to which Company or any of its Subsidiaries is a party or by which it
is bound in such a manner as would permit any other party to cancel or terminate
any such lease or other occupancy agreement, or would permit any other party to
seek damages or other remedies.
3.15 TAXES.
(a) DEFINITION OF TAXES. For the purposes of this Agreement, "TAX" and
"TAXES" means, with respect to any entity, all income taxes (including any tax
on or based upon net income, gross income, income as specially defined,
earnings, profits or selected items of income, earnings or profits) and all
capital taxes, gross receipts taxes, environmental taxes, sales taxes, use
taxes, ad valorem taxes, value added taxes, transfer taxes, franchise taxes,
license taxes, withholding taxes or other withholding obligations, payroll
taxes, employment taxes, Canada or Quebec Pension Plan premiums, excise taxes,
severance, social security premiums, workers' compensation premiums,
unemployment insurance or compensation premiums, stamp taxes, occupation taxes,
premium taxes, property taxes, windfall profits taxes, alternative or add-on
minimum taxes, goods and services taxes, customs duties or other governmental
charges, duties or imposts of any kind whatsoever, together with any interest
and any penalties or additional amounts imposed by any taxing authority
(domestic or foreign) on such entity or for which such entity is responsible,
and any interest, penalties, additional taxes, additions to tax or other amounts
imposed with respect to the foregoing and any liability for any such amounts
imposed with respect to any other person, including under any agreements or
arrangements or any liability for taxes of a predecessor or transferor entity.
(b) TAX RETURNS AND AUDITS.
(i) Except as set forth in Section 3.15(b)(i) of the Company Schedule,
all material Tax returns, statements, reports and forms (including
estimated Tax returns and reports and information returns and reports)
required to be filed with any taxing authority
23
by or on behalf of Company or any of its Subsidiaries (collectively, the
"RETURNS"), were filed when due (including any applicable extension
periods) in accordance with all applicable Laws and were correct and
complete in all material respects when filed.
(ii) Company and each of its Subsidiaries have timely paid (or
withheld and remitted to the appropriate taxing authority, as the case may
be) all material Taxes due and payable by any of them under any applicable
Law.
(iii) The charges, accruals and reserves for Taxes with respect to
Company and its Subsidiaries reflected on the Company Financial Statements
(whether or not due and whether or not shown on any Return but excluding
any provision for deferred income Taxes) are adequate to cover such Taxes,
other than any liability for unpaid Taxes that may have accrued since the
date of such Company Financial Statements in connection with the normal
operation of the business of Company and its Subsidiaries. Company and its
Subsidiaries have made adequate provisions in accordance with US GAAP and
Canadian GAAP, as applicable, in their books and records for all Taxes
accruing in respect of any period ending after the date of such Company
Financial Statements.
(iv) There is no material claim (including under any indemnification
or Tax-sharing agreement), audit, action, suit, proceeding, or
investigation, to the Knowledge of Company, now pending or threatened in
writing against or in respect of any Tax or "TAX ASSET" of Company or any
of its Subsidiaries. Neither Company nor any of its Subsidiaries has
executed any unexpired waiver of any statute of limitations on or extension
of any period for the assessment or collection of any Tax that is still in
effect. For purposes of this Section 3.15, the term "TAX ASSET" shall
include any net operating loss, net capital loss, investment tax credit,
foreign tax credit, charitable deduction or any other credit or Tax
attribute that would reduce Taxes (past, present or future).
(v) There are no material liens for Taxes upon the assets of Company
or its Subsidiaries except for liens for current Taxes not yet due and
payable.
(vi) To the Knowledge of Company, neither Company nor any of its
Subsidiaries is party to or has any obligation under any tax sharing, tax
indemnity or tax allocation agreement or arrangement that would result in
any material Tax liability for Company or any of its Subsidiaries.
(vii) As of the date of this Agreement, the "paid-up-capital" for
purposes of the ITA of the Company Common Shares is $217,883,000.
3.16 ENVIRONMENTAL MATTERS.
(a) Except for such non-compliance as would not reasonably be expected to
result, individually or in the aggregate, in a Material Adverse Effect on
Company, (i) Company and its Subsidiaries and the operations, assets and
properties thereof are in compliance with all Environmental Laws; (ii) there are
no judicial or administrative actions, suits, proceedings or investigations
pending or, to the Knowledge of Company, threatened against Company or any
Subsidiary of Company alleging the violation of any Environmental Law and
neither Company nor any Subsidiary has received notice from any governmental
body or Person alleging any
24
violation or liability of Company or any of its Subsidiaries under any
Environmental Laws, in either case that would reasonably be expected to result
in a Material Adverse Effect on Company; (iii) to the Knowledge of Company,
there are no facts, circumstances or conditions relating to, arising from,
associated with or attributable to Company or its Subsidiaries or any real
property currently or previously owned, operated or leased by Company or its
Subsidiaries that would result in Environmental Costs and Liabilities that would
reasonably be expected to result in a Material Adverse Effect on Company; (iv)
to the Knowledge of Company, neither 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 such manner and quantity
that exceeds remediation criteria or standards under Environmental Law or
otherwise would require remediation (either by Company or any of its
Subsidiaries, or for which Company or any of its Subsidiaries would be liable)
under Environmental Law that would create any Environmental Costs and
Liabilities that would reasonably be expected to result in a Material Adverse
Effect on Company; and (v) to the Knowledge of Company, no such Hazardous
Material has been or is currently present on, in, at or under Company Property
in a manner (including without limitation, containment by means of any
underground or aboveground storage tank) that would create any Environmental
Costs and Liabilities that would reasonably be expected to result in a Material
Adverse Effect on Company. Except for such non-compliance as would not
reasonably be expected to result, individually or in the aggregate, in a
Material Adverse Effect, with respect to Company Properties located in Canada,
to the Knowledge of the Company, there are no liabilities for Claims for
clean-up or related control obligations of Company or any of its Subsidiaries
arising out of the presence of Hazardous Materials in excess of criteria
specified in the following: for Company Property in Ontario, the Guideline for
Use at Contaminated Sites in Ontario.
(b) For the purpose of this Agreement, the following terms have the
following definitions: (X) "ENVIRONMENTAL COSTS AND LIABILITIES" means any
losses, liabilities, obligations, damages, fines, penalties, judgements,
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 any Environmental Law; (Y)
"ENVIRONMENTAL LAWS" means any applicable federal, state, local or foreign law
(including common law), statute, code, ordinance, rule, regulation, or other
requirement relating to the environment, natural resources, or public or
employee health and safety or exposure to any substances, materials or wastes,
including the U.S. Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the U.S. Resource Conservation and Recovery Act of 1976,
the U.S. Federal Water Pollution Control Act, the U.S. Clean Air Act, the U.S.
Hazardous Materials Transportation Act, the Occupational Safety and Health Act
(to the extent relating to exposure to Hazardous Materials); and (Z) "HAZARDOUS
MATERIAL" means any substance, material or waste regulated by federal, state or
local government, including, without limitation, any substance, material or
waste that 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.
3.17 BROKERS. Except pursuant to an engagement letter with Broadview
International LLC, a copy of which has been provided to Parent, Company has not
incurred, nor will it incur,
25
directly or indirectly, any liability for brokerage or finders fees or agent's
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
3.18 COMPANY INTELLECTUAL PROPERTY.
(a) Company owns, or is licensed, or otherwise possesses legally
enforceable rights, to use, sell or license, as applicable, all Proprietary
Rights (excluding in each case Commercial Software) used, sold, distributed or
licensed in or as a part of the business of Company and its Subsidiaries as
currently conducted (the "COMPANY PROPRIETARY RIGHTS"). Company has licenses for
all copies of Commercial Software used in its business and Company does not have
any obligation to pay fees, royalties and other amounts at any time pursuant to
any such license.
(b) Except for Company Software and Company Embedded Products for which
Company has valid non-exclusive licenses that are adequate for the conduct of
Company's business, Company is the sole and exclusive owner of Company
Proprietary Rights (free and clear of any Encumbrances), and, except for
non-exclusive licenses and non-exclusive reseller agreements entered into in the
ordinary course of business, has sole and exclusive rights to the use and
distribution therefor of the material covered thereby in connection with the
services or products in respect of which such Company Proprietary Rights are
currently being used, sold, licensed or distributed in the course of or as part
of the business of Company and its Subsidiaries as currently conducted. Company
is not contractually obligated to pay compensation to any third party with
respect to the use or distribution of any Company Proprietary Rights, except
pursuant to the contracts set forth in Section 3.18(g) of the Company Schedule.
(c) To the Knowledge of Company, (A) Company has not infringed on any
Intellectual Property rights of any third Persons and (B) none of the Company
Proprietary Rights infringes on any Intellectual Property rights of any third
Persons.
(d) No actions, suits, claims, investigations or proceedings with respect
to Company Proprietary Rights are pending or, to the Knowledge of Company,
threatened by any Person, (A) alleging that the manufacture, sale, license,
distribution or use of any Company Proprietary Rights as now manufactured, sold,
licensed, distributed or used by Company or any third party infringes on any
Intellectual Property rights of any third party, (B) against the use or
distribution by Company or any third party of any Company Proprietary Rights or
(C) challenging the ownership by Company or validity of any Company Proprietary
Rights.
(e) Except as disclosed in Section 3.18(e) of the Company Schedule, Company
has not entered into any agreement, contract or commitment under which Company
is restricted, and Company is not otherwise restricted, from (A) selling,
licensing or otherwise distributing any products to any class or type of
customers or directly or through any type of channel in any geographic area or
during any period of time or (B) combining, incorporating, embedding or bundling
or allowing others to combine, incorporate, embed or bundle any of its products
with those of another party.
(f) Company has taken reasonable security measures to safeguard and
maintain its rights in all of Company Proprietary Rights. To Company's
Knowledge, except as set forth in Section 3.18(f) of the Company Schedule, all
copies of the source code to Company Software
26
and Company trade secrets are physically in the control of Company at Company's
facilities. All officers, employees and consultants of Company who have access
to proprietary information have executed and delivered to Company an agreement
regarding the protection of proprietary information, and the assignment to or
ownership by Company of all Company Proprietary Rights arising from the services
performed for Company by such Persons. To the Knowledge of Company, no current
or prior officers, employees or consultants of Company have asserted a claim,
and Company is not aware of any grounds to assert a claim to, any ownership
interest in any Company Proprietary Right as a result of having been involved in
the development of such property while employed by or consulting to Company or
otherwise.
(g) To the Knowledge of Company, all authors of the software included in
Company Proprietary Rights (the "COMPANY SOFTWARE") or any other Person who
participated in the development of Company Software or any portion thereof or
performed any work related to Company Software (such authors and other persons
or entities are collectively referred to as the "COMPANY SOFTWARE AUTHORS") made
his or her contribution to Company Software within the scope of employment with
Company, as a "work made for hire," and was directed by Company to work on
Company Software, or as a consultant who assigned all rights to such products to
Company. Except as set forth in Section 3.18(g) of the Company Schedule, Company
Software and every portion thereof are an original creation of Company Software
Authors and do not contain any source code or portions of source code (including
any "canned program") created by any persons other than Company Software
Authors. Company has not, by any of its acts or omissions, or, to its Knowledge,
by acts or omissions of its affiliates, directors, officers, employees, agents
or representatives caused any of its proprietary rights in Company Software,
including copyrights, trademarks and trade secrets to be transferred, diminished
or adversely affected to any material extent.
(h) There are no defects in Company's software products, and such products
shall perform in substantial accordance with related documentation and
promotional material supplied by Company, and there are no errors in any
documentation, specifications, manuals, user guides, promotional material,
internal notes and memos, technical documentation, drawings, flow charts,
diagrams, source language statements, demo disks, benchmark test results and
other written materials related to, associated with or used or produced in the
development of Company's software products except, in either case, where such
defects, shortcomings in performance, or errors would not reasonably be expected
to have a Material Adverse Effect on Company. Computer software included in
Company Proprietary Rights does not contain any "back door," "time bomb,"
"Trojan horse," "worm," "drop dead device," "virus" (as these terms are commonly
used in the computer software industry) or other software routines designed to
permit unauthorized access, to disable or erase software or data or to perform
any other similar type of functions.
(i) No government funding or university or college facilities were used in
the development of the computer software programs or applications owned by
Company.
For the purpose of this Section 3.18, the following terms have the
following definitions: (A) the term "COMMERCIAL SOFTWARE" means packaged
commercially available software programs generally available to the public that
have been licensed to Company pursuant to end-user licenses that permit the use
of such programs without a right to modify, distribute or
27
sublicense the same; (B) the term "COMPANY EMBEDDED PRODUCTS" means software
that is incorporated in any existing product or service of Company and (C) the
term "PROPRIETARY RIGHTS" means (1) patents, patent applications and inventions,
(2) trademarks, service marks, trade dress, trade names, Internet domain names
and Company's corporate name (in its jurisdiction of incorporation) and
registrations and applications for registration thereof, (3) copyrights and
registrations and applications for registration thereof, (4) mask works and
registrations and applications for registration thereof, (5) computer software,
data and documentation (in both source code and object code form), (6) trade
secrets, know-how and copyrightable works, (7) other confidential and
proprietary Intellectual Property rights, (8) copies and tangible embodiments
thereof (in whatever form or medium) and (9) all renewals, extensions, revivals
and resuscitations thereof.
3.19 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth in Section
3.19 of the Company Schedule or as filed prior to the date hereof as an exhibit
to any Company Documents, neither Company nor any of its Subsidiaries is a party
to or is bound by:
(a) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(b) any agreement, contract or commitment (i) containing any covenant
limiting in any respect the right of Company or any of its Subsidiaries or, upon
consummation of the Arrangement, Parent and its Subsidiaries, to engage in any
line of business or to compete with any Person or (ii) granting any exclusive
distribution rights;
(c) any agreement, contract or commitment currently in force relating to
the disposition or acquisition by Company or any of its Subsidiaries after the
date of this Agreement of a material amount of assets (other than the sale or
purchase of goods or services in the ordinary course of business) or pursuant to
which Company or any of its Subsidiaries has any ownership interest in any
corporation, partnership, joint venture or other business enterprise other than
Company's Subsidiaries, in each case, with a value exceeding $150,000 of which
would subject Company to any liability in excess of $150,000;
(d) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other material agreements or instruments relating to the
borrowing of money or extension of credit in excess of $150,000, except for
trade payables incurred in the ordinary course of business;
(e) any other agreement, contract or commitment that has a commitment of
$150,000 or more individually by Company or its Subsidiaries (other than with
respect to the sale or purchase of goods or services in the ordinary course of
business) or extends beyond ninety (90) days and cannot be terminated without
penalty upon notice of thirty (30) days or less;
28
(f) 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 Company or any of its Subsidiaries and with outstanding
obligations in excess of $150,000; or
(g) any agreement of indemnification or guaranty by Company or any of its
Subsidiaries not entered into in the ordinary course of business other than
indemnification agreements between Company or any of its Subsidiaries and any of
its officers or directors in standard forms as filed by Company with the SEC.
Except for breaches, violations or defaults that would not, individually or
in the aggregate, have a Material Adverse Effect on Company, neither Company nor
any of its Subsidiaries, nor to Company's Knowledge any other party to a Company
Contract (as defined below), is in breach, violation or default under, and
neither Company nor any of its Subsidiaries has received written notice that it
has breached, violated or defaulted under, any of the material terms or
conditions of any of the agreements, contracts or commitments to which Company
or any of its Subsidiaries is a party or by which it is bound that are required
to be disclosed in the Company Schedule (any such agreement, contract or
commitment, a "COMPANY CONTRACT") in such a manner as would permit any other
party to cancel or terminate any such Company Contract, or would permit any
other party to seek material damages or other remedies (for any or all of such
breaches, violations or defaults, in the aggregate). Company has made available
to Parent true and correct copies (including all amendments) of each Company
Contract.
3.20 INSURANCE. Company maintains insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of Company and its Subsidiaries (collectively, the
"INSURANCE POLICIES") that are of the type and in amounts reasonably appropriate
to conduct its business. To Company's Knowledge, there is no claim by Company or
any of its Subsidiaries pending under any of the Insurance Policies as to which
coverage has been questioned, denied or disputed by the underwriters of such
policies or bonds. Company has not received any notice of cancellation or intent
to cancel or increase or intent to increase premiums with respect to such
insurance policies nor, to the Knowledge of Company, is there any basis for any
such action.
3.21 OPINION OF FINANCIAL ADVISOR. The Board of Directors of Company has
been advised in writing by Company's financial advisor, Broadview International
LLC, that in its opinion, as of the date of this Agreement, the Exchange Ratio
is fair from a financial point of view to the Company Shareholders, and Company
has delivered to Parent a copy of such opinion.
3.22 BOARD APPROVAL. The Board of Directors of Company has, as of the date
of this Agreement, unanimously (i) approved this Agreement and the transactions
contemplated hereby, (ii) determined that the transactions contemplated by this
Agreement are in the best interests of Company and the Company Shareholders and
are on terms that are fair to such shareholders and (iii) determined to
unanimously recommend that the Company Shareholders vote in favor of the
Arrangement. Each member of the Board of Directors of Company has advised
Company that such individual intends to vote all Company Common Shares held by
such individual in favor of the Arrangement.
29
3.23 VOTE REQUIRED. Subject to any requirement of the Interim Order, the
affirmative vote of holders of the outstanding Company Common Shares is the only
vote of the holders of any class or series of Company's capital stock or other
securities necessary to approve this Agreement and the transactions contemplated
hereby.
3.24 EXCHANGEABLE SHARES. The Exchangeable Shares to be issued at the
Effective Time in connection with the Arrangement will be duly and validly
issued by Company as fully paid and non-assessable.
3.25 UNLAWFUL PAYMENTS AND CONTRIBUTIONS. To the Knowledge of Company,
neither Company, any Subsidiary of Company nor any of their respective
directors, officers, employees or agents has, with respect to the businesses of
Company or its Subsidiaries, (i) used any funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense relating to political
activity; (ii) made any direct or indirect unlawful payment to any foreign or
domestic government official or employee; (iii) violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977, as amended or (iv)
made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any Person or entity.
3.26 PARENT COMMON STOCK. Neither Company nor any of its Subsidiaries is,
nor at any time during the last three years has any of such been, an "interested
stockholder" of Parent as defined in Section 203 of the DGCL.
3.27 NON-ARM'S LENGTH TRANSACTIONS. Except as filed prior to the date
hereof in any Company Document, there are no contracts, commitments, agreements,
arrangements or other transactions between Company or any of its Subsidiaries,
on the one hand, and any (i) employee, officer or director of Company or any of
its Subsidiaries, (ii) registered or beneficial owner of five percent or more of
the voting securities of Company or (iii) affiliate of any such employee,
officer, director or beneficial owner, on the other hand, that would be required
to be reported by the Company pursuant to Item 404 of Regulation S-K promulgated
by the SEC.
3.28 NO CULTURAL BUSINESS. Neither Company nor any of its affiliates
(within the meaning of the OBCA) is engaged in any activities referred to in
Schedule IV of the Regulations Respecting Investment in Canada made under the
Investment Canada Act or in section 14.1(5) of such statute.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Company that the statements contained in
this Article IV are true and correct, subject to such exceptions as are
specifically disclosed in writing in the disclosure letter supplied by Parent to
Company dated as of the date hereof (the "PARENT SCHEDULE"). The Parent Schedule
shall be arranged in sections and paragraphs corresponding to the lettered and
numbered paragraphs contained in this Article IV, and the disclosure in any
paragraph shall qualify only the corresponding paragraph in this Article IV
(provided that the listing of an item in one paragraph of the Parent Schedule
shall be deemed to be a listing in each paragraph of the Parent Schedule and to
apply to any other representation and warranty of Parent
30
in this Agreement to the extent that it is reasonably apparent from a reading of
such disclosure item that it would also qualify or apply to such other paragraph
or representation or warranty).
4.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Each of Parent and its Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted, except where the failure to do so would not, individually or in
the aggregate, have a Material Adverse Effect on Parent. Each of Parent and its
Subsidiaries is in possession of all Approvals necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to have such
Approvals would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
(b) Each of Parent and its Subsidiaries is qualified to do business as a
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of their business requires such qualification and
where the failure to so qualify would have a Material Adverse Effect on Parent.
4.2 CERTIFICATE OF INCORPORATION AND BYLAWS. Parent has previously
furnished to Company complete and correct copies of its Certificate of
Incorporation and Bylaws as amended to date (together the "PARENT CHARTER
DOCUMENTS"). Such Parent Charter Documents and equivalent organizational
documents of each of its Material Subsidiaries are in full force and effect.
Parent is not in violation of any of the provisions of the Parent Charter
Documents, and no Material Subsidiary of Parent is in violation of any of its
equivalent organizational documents.
4.3 CAPITALIZATION. The authorized capital stock of Parent consists of (i)
2,500,000,000 Parent Common Shares, of which 454,365,111 shares were issued and
outstanding on February 28, 2002, approximately 60,000,000 of which are validly
reserved for issuance in connection with the Merger, (ii) 100,000,000 shares of
class C common stock, $0.001 par value per share, of which none were issued and
outstanding on the date hereof and (iii) 50,000,000 shares of preferred stock,
$0.001 par value per share, 500,000 shares of which have been designated Series
A Junior Participating Preferred Stock. No shares of Series A Junior
Participating Preferred Stock are issued and outstanding as of the date hereof.
All of the outstanding shares of capital stock of Parent have been duly
authorized and validly issued and are fully paid and non-assessable. Parent has
no outstanding stock appreciation rights, phantom stock or similar rights,
except, as of February 28, 2002, options to purchase an aggregate of
approximately 92,000,000 shares of Parent Common Stock were outstanding under
Parent's 1999 Stock Incentive Plan, Parent's 2000 Employee Stock Purchase Plan
and Parent's 2001 Stock Incentive Plan (the 1999 Stock Incentive Plan, 2000
Stock Incentive Plan and 2001 Stock Incentive Plan, collectively, the "PARENT
OPTION PLANS") and under options assumed or converted in connection with
Parent's acquisitions of various businesses. As of February 28, 2002, except as
set forth in Section 4.3 of the Parent Schedule and other than options and
shares issued or outstanding under the Parent Option Plans and the Rights (the
"PARENT RIGHTS") under the Rights Agreement, dated as of February 12, 2001,
between Parent and Computershare
31
Investor Services, LLC, as amended (the "PARENT RIGHTS AGREEMENT"), there are no
outstanding or authorized options, warrants, calls, rights (including preemptive
rights), commitments or any other agreements of any character to which the
Parent is a party, or by which it may be bound, 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 Parent.
4.4 AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) Parent has all necessary corporate power and authority to execute and
deliver this Agreement, the Exchangeable Share Support Agreement and the Voting
and Exchange Trust Agreement and to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement by Parent and the consummation by
Parent of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Parent, and no other
corporate proceedings on the part of Parent are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by Parent and, assuming the due
authorization, execution and delivery by Company, constitutes the legal and
binding obligation of Parent, enforceable against Parent in accordance with its
terms, except that (i) such enforcement may be subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now or hereafter
in effect, affecting creditors' rights generally, (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding may be brought and (iii) the CURRENCY ACT (Canada) precludes a court
in Canada from rendering judgement in any currency other than Canadian currency.
(b) The execution and delivery of the Exchangeable Share Support Agreement
and the Voting and Exchange Trust Agreement by Parent, when executed, and the
consummation by Parent of the transactions contemplated thereby, will have been
duly and validly authorized by all necessary corporate action on the part of
Parent, and no other corporate proceedings on the part of Parent will be
necessary to authorize the Exchangeable Share Support Agreement and the Voting
and Exchange Trust Agreement or to consummate the transactions contemplated
thereby. The Exchangeable Share Support Agreement and the Voting and Exchange
Trust Agreement, when executed and delivered, shall have been duly and validly
executed and delivered by Parent and, assuming the due authorization, execution
and delivery of the counterparties thereto, constitute legal and binding
obligations of Parent, enforceable against Parent in accordance with their
respective terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding may be brought and (iii) the CURRENCY ACT (Canada) precludes a
court in Canada from rendering judgement in any currency other than Canadian
currency.
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4.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement, and when executed and
delivered, the Exchangeable Share Support Agreement and the Voting and Exchange
Trust Agreement by Parent do not, and the performance of this Agreement, the
Exchangeable Share Support Agreement and the Voting and Exchange Trust Agreement
by Parent shall not, (i) conflict with or violate the Parent Charter Documents,
(ii) subject to compliance with the requirements set forth in Section 4.5(b)
below, conflict with or violate any law, rule, regulation, order, judgement or
decree applicable to Parent or by which its properties are bound or affected, or
(iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or impair
Parent's rights or alter the rights or obligations of any third party under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Parent pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent is a party or by which Parent or
its properties are bound or affected, except in the case of clauses (ii) or
(iii), to the extent such conflict, violation, breach, default, impairment or
other effect would not have, individually or in the aggregate, a Material
Adverse Effect on Parent.
(b) The execution and delivery of this Agreement, and when executed and
delivered, the Exchangeable Share Support Agreement and the Voting and Exchange
Trust Agreement by Parent do not, and the performance of this Agreement, the
Exchangeable Share Support Agreement and the Voting and Exchange Trust Agreement
by Parent shall not, require any consent, approval, authorization or permit of,
or filing with or notification to, any Governmental Entity to be made or
obtained by Parent, except (A) pursuant to applicable requirements, if any, of
the Securities Laws, including without limitation, exemption orders from the
Canadian Securities Regulatory Authorities from the registration and prospectus
requirements with respect to the Arrangement and the Exchangeable Share
structure, and the requirements of the U.S. state securities laws, the
pre-merger notification requirements of foreign Governmental Entities, the rules
and regulations of the Nasdaq, any approvals required by the Interim Order, the
Final Order, filings with the Director under the OBCA, and the Regulatory
Approvals relating to Parent, (B) any approvals or filings required in
connection with the creation and issuance of the Special Voting Share or the
Parent Common Shares issued upon exchange of the Exchangeable Shares or upon
exercise of the Replacement Options and (C) any consents, approvals,
authorizations or permits, filings or notifications, which, if not obtained,
would not, individually or in the aggregate, reasonably be expected to prevent
Parent from consummating the transactions contemplated hereby or otherwise
prevent Parent from performing its respective obligations under this Agreement.
4.6 (a) COMPLIANCE. Parent is not in conflict with, or in default or
violation of, (i) any Law (including, without limitation, Environmental Laws),
order, judgement or decree applicable to Parent or by which its properties is
bound or affected or (ii) any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Parent is a party or by which Parent or its properties is
bound or affected; except, in each case, for any conflicts, defaults or
violations that individually or in the aggregate, would not, reasonably be
expected to have a Material Adverse Effect on Parent. No investigation or review
by any Governmental Entity is pending or, to the Knowledge of
33
Parent, threatened against Parent or its Material Subsidiaries, other than, in
each such case, those the outcome of which would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on Parent.
(b) PERMITS. Parent and each of its Material Subsidiaries hold all
licenses, permits, registrations, orders, authorizations, approvals and
franchises that 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
reasonably be expected to, individually or in the aggregate, have a Material
Adverse Effect on Parent. All such licenses, permits, registrations, orders,
authorizations, approvals and franchises are now, and will be after the
Effective Time, valid and in full force and effect, except where the failure to
be valid and in full force and effect of any such license, permit, registration,
order, authorization, approval or franchise would not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on Parent.
Neither Company nor any of its Material 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 failure would not
reasonably be expected to, individually or in the aggregate, have a Material
Adverse Effect on Parent.
4.7 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent 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 1933 Act and the 1934 Act (collectively, the
"PARENT SEC REPORTS") and all of which are available through the SEC's
Electronic Data Gathering and Retrieval System ("EDGAR"). None of the Parent SEC
Reports at the time they were filed (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) (i)
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 or (ii) failed to comply in all material respects with the
requirements of applicable Securities Laws. None of Parent's Subsidiaries is
required to file any reports or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports was prepared in
accordance with US GAAP consistently applied, and each fairly presents in all
material respects the consolidated financial position of Parent and its
consolidated Subsidiaries at the respective dates thereof and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal
adjustments that were not or are not expected to be material in amount.
4.8 NO UNDISCLOSED LIABILITIES. Except as set forth in Section 4.8 of the
Parent Schedule, neither Parent nor any of its Subsidiaries has any liabilities
of any nature (whether absolute, accrued, contingent or otherwise) that are,
individually or in the aggregate, material to the business, results of
operations, assets or financial condition of Parent and its Subsidiaries taken
as a whole, except liabilities (i) set forth in Parent's balance sheet as of
September 30, 2001 (or the notes thereto), (ii) incurred since September 30,
34
2001, in the ordinary course of business consistent with past practice, (iii)
that are obligations to perform executory contracts in the ordinary course of
business (none of which is a liability resulting from a breach of contract or
warranty, tort, infringement or other legal action) or (iv) that, individually
or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect on Parent.
4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as described in the Parent
SEC Reports or as otherwise set forth in Section 4.9 of the Parent Schedule,
since September 30, 2001, except with respect to the actions contemplated by
this Agreement, there has not been (i) any Material Adverse Effect on Parent (or
the occurrence or failure to occur of any event that would reasonably be
expected to result in a Material Adverse Effect on Parent); (ii) any damage,
destruction or loss of any assets of Parent or any of its Material Subsidiaries
(whether or not covered by insurance) that has had or would reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Parent; (iii) any material change by Parent in its accounting methods,
principles or practices or any disagreement between Parent and its independent
accountants concerning Parent Financial Statements or their conformity with US
GAAP; (iv) any revaluation by Parent or any of its Material Subsidiaries of any
of its or their assets that would reasonably be expected to result in a Material
Adverse Effect on Parent; (v) any labor dispute or charge of unfair labor
practice (other than routine individual grievances), which, individually or in
the aggregate, has had or would reasonably be expected to have a Material
Adverse Effect on Parent, any activity or proceeding by a labor union or
representative thereof to organize any employee of Parent or any of its Material
Subsidiaries or any campaign being conducted to solicit authorization from
employees to be represented by such labor union in each case that, individually
or in the aggregate, has had or would reasonably be expected to have a Material
Adverse Effect on Parent; (vi) any waiver by Parent or any of its Material
Subsidiaries of any rights that would reasonably be expected to result in a
Material Adverse Effect on Parent; (vii) any repurchase of any stock of Parent
or (viii) any declaration, setting aside or payment of any dividend on, or other
distribution (whether in cash, stock or property) in respect of, any of Parent's
capital stock.
4.10 ABSENCE OF LITIGATION. Except as set forth in Parent's SEC Reports or
as otherwise set forth in Section 4.10 of the Parent Schedule, there are no
claims, actions, suits or proceedings pending or, to the Knowledge of Parent,
threatened (or, to the Knowledge of Parent, any governmental or regulatory
investigation pending or threatened) against Parent or any of its Material
Subsidiaries or any properties or rights of Parent or any of its Material
Subsidiaries, before any court, arbitrator or administrative, Governmental
Entity, domestic or foreign, except for claims, actions, suits or proceedings
that would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect on Parent. Neither Parent nor any of its Subsidiaries
is subject to any outstanding judgement, order, writ, injunction or decree that
involves or may involve, or restricts or may restrict or requires or may
require, (i) an expenditure of money as a condition to or a necessity for the
right or ability of Parent or any of its Subsidiaries, as the case may be, to
conduct its business in a manner in which it currently carries on such business,
or (ii) individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Parent.
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4.11 PARENT INTELLECTUAL PROPERTY.
(a) Except for such matters as would not reasonably be expected to have a
Material Adverse Effect on Parent, Parent or its Subsidiaries owns or is
properly licensed to use all Parent Proprietary Rights used or required for the
conduct of the business of Parent and its Subsidiaries. "PARENT PROPRIETARY
RIGHTS" means (1) patents, patent applications and inventions, (2) trademarks,
service marks, trade dress, trade names, Internet domain names and corporate
names (in Parent's state of incorporation) and registrations and applications
for registration thereof, (3) copyrights and registrations and applications for
registration thereof, (4) mask works and registrations and applications for
registration thereof, (5) computer software, data and documentation (in both
source code and object code form), (6) trade secrets, know-how and copyrightable
works and (7) all renewals, extensions, revivals and resuscitations thereof, but
does not include Commercial Software.
(b) Except for such matters as would not reasonably be expected to have a
Material Adverse Effect on Parent, neither Parent nor any of its Subsidiaries
nor, to the Knowledge of Parent, any other party to any agreement relating to or
involving any Parent Proprietary Right is in breach thereof or in default
thereunder.
(c) Except for such matters as would not reasonably be expected to have a
Material Adverse Effect on Parent, to the Knowledge of Parent, no third party is
infringing, misappropriating, diluting or otherwise violating any Parent
Proprietary Right.
(d) Except for such matters as would not reasonably be expected to have a
Material Adverse Effect on Parent or as otherwise set forth in Section 4.11 of
the Parent Schedule, neither Parent nor any of its Subsidiaries has received
oral or written notification or is a party to any suit, action, complaint, legal
or administrative proceeding (1) relating to a claim of infringement,
misappropriation, dilution or other violation of any Proprietary Right of any
third party, (2) relating to a demand to cease and desist certain conduct, an
offer to license, or notice of the existence of any Proprietary Right of any
third party or (3) relating to any claim involving the validity, enforceability,
or the right of Parent or any of its Subsidiaries to use any Parent Proprietary
Right.
4.12 BROKERS. Parent has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders fees or agent's commissions
or any similar charges in connection with this Agreement or any transaction
contemplated hereby.
4.13 BOARD APPROVAL. The Board of Directors of Parent has, as of the date
of this Agreement approved this Agreement and the transactions contemplated
hereby.
4.14 PARENT COMMON SHARES. The Parent Common Shares to be issued pursuant
to the Arrangement or upon the exchange from time to time of the Exchangeable
Shares or upon the exercise from time to time of the Replacement Options will,
in all cases, be duly and validly issued by Parent, fully paid and
non-assessable and free of preemptive rights, encumbrances, charges and liens on
their respective dates of issue.
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4.15 PARENT OWNERSHIP OF COMPANY SHARES. Neither Parent nor any of its
Subsidiaries is, nor at any time during the last five years has any of Parent or
its Subsidiaries been, a registered or beneficial holder of any Company Common
Shares.
4.16 UNLAWFUL PAYMENTS AND CONTRIBUTIONS. To the Knowledge of Parent,
neither Parent, any Subsidiary of Parent nor any of their respective directors,
officers, employees or agents has, with respect to the businesses of Parent or
its Subsidiaries, (i) used any funds for any unlawful contribution, endorsement,
gift, entertainment or other unlawful expense relating to political activity;
(ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee; (iii) violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977, as amended or (iv) made
any bribe, rebate, payoff, influence payment, kickback or other unlawful payment
to any Person or entity.
4.17 CANADA ASSETS AND REVENUES. Based on Parent's audited financial
statements for the most recently completed fiscal year, Parent, together with it
affiliates (within the meaning of the OBCA) does not have: (i) assets in Canada
with an aggregate gross value in excess of Cdn. $290 million; or (ii) revenues
from sales in, from or into Canada with an aggregate value in excess of Cdn.
$320 million.
4.18 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth in Section
4.18 of the Parent Schedule, (a) each material agreement, contract, obligation,
promise or undertaking (whether written or oral and whether express or implied),
to which Parent is a party or by which Parent or its assets is or may become
bound (a "PARENT CONTRACT"), is in full force and effect; and (b) no condition
exists or event has occurred that to the Knowledge of Parent (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, except as would not, individually or in
the aggregate, be reasonably expected to result in a Material Adverse Effect on
Parent.
4.19 TAX RETURNS AND AUDITS.
(a) Parent and each of its Subsidiaries has timely filed (after taking
into account any extensions to file) all federal, state, local and foreign
Returns required by applicable Laws to be filed by Parent and each of its
Subsidiaries. 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, as of the date hereof, have
been paid and, as of the Effective Time, will have been paid. All Returns were
true and correct in all material respects when filed. Other than any reserve for
deferred Taxes established to reflect timing differences between book and Tax
treatment, Parent has made accruals for Taxes on the Parent SEC Reports that are
adequate to cover any Tax liability of Parent and each of its Subsidiaries
determined in accordance with US GAAP through the date of the Parent SEC
Reports.
(b) Parent and each of its Subsidiaries have withheld with respect to its
employees, creditors, independent contractors, stockholders or other parties all
federal and state income taxes, FICA, FUTA and other Taxes required to be
withheld.
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(c) There is no Tax deficiency outstanding, assessed, or to Parent's
Knowledge, proposed against Parent or any of its Subsidiaries. Neither Parent
nor any of its Subsidiaries have 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. There are no liens
for Taxes on the assets of Parent or of any of its Subsidiaries other than with
respect to current Taxes not yet due and payable.
(d) To Parent's Knowledge, 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 either in writing or orally
of any request for such federal or state Tax audit or other examination.
(e) 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.
ARTICLE V
CONDUCT PRIOR TO THE EFFECTIVE TIME
5.1 CONDUCT OF BUSINESS BY COMPANY. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Company and each of its
Subsidiaries shall, except as set forth in Section 5.1 of the Company Schedule,
or except to the extent that Parent shall otherwise consent in writing, carry on
its business, in the ordinary course, consistent with past practice and in
compliance with applicable Laws, pay or perform its material obligations when
due, and use all reasonable efforts consistent with past practices and policies
to (i) preserve intact its present business organization, (ii) keep available
the services of its present officers and employees and (iii) preserve its
relationships with customers, suppliers, distributors, licensors, licensees and
others with which it has significant business dealings.
In addition, except as set forth in Section 5.1 of the Company Schedule,
without the prior written consent of Parent (which consent shall not be
unreasonably withheld or delayed), during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Company shall not do any of the
following and shall not permit its Subsidiaries to do any of the following:
(a) Waive any stock repurchase rights or reprice options granted under any
employee, consultant, director or other stock plans or authorize cash payments
in exchange for any options granted under any of such plans;
(b) (i) Grant any severance or termination pay to any officer or employee
except (A) as required by applicable Law, (B) non-material payments, both
individually and in the aggregate, to non-management employees (consistent with
past practice) or (C) pursuant to written agreements outstanding, or policies
existing, on the date hereof delivered to Parent and set forth on the Company
Schedule, or (ii) adopt any new severance plan or (iii) amend or
38
modify or alter in any manner any severance plan, agreement or arrangement
existing on the date hereof;
(c) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock;
(d) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Company or its Subsidiaries, except repurchases of
unvested shares at cost in connection with the termination of the employment
relationship with any employee pursuant to stock option or purchase agreements
in effect on the date hereof;
(e) Issue, deliver, sell, authorize, pledge or otherwise encumber or
propose any of the foregoing with respect to, any shares of capital stock or any
securities convertible into shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any securities
convertible into shares of capital stock, or enter into other agreements or
commitments of any character obligating it to issue any such shares or
convertible securities, other than (x) the issuance, delivery and/or sale of
Company Common Shares pursuant to the exercise of Company Stock Options
outstanding as of the date of this Agreement and (y) the granting of Company
Stock Options (and the issuance of Company Common Shares upon exercise thereof),
in the ordinary course of business and consistent with past practices, provided
that no such grants shall be made to officers or directors of the Company;
(f) Cause, permit or propose any amendments to Company Charter Documents
(or similar governing instruments of any of its Subsidiaries);
(g) Reorganize, amalgamate or merge Company or any Subsidiary with any
other Person (other than pursuant to this Agreement);
(h) Acquire or agree to acquire by merging, amalgamating, reorganizing or
consolidating with, or by purchasing any equity interest in, or a portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or agree to
enter into any joint ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets (other than the sale or purchase of goods or services in the ordinary
course of business), except for the sale, lease or disposition (other than
through licensing) of property or assets that are not material, individually or
in the aggregate, to the business of Company and its Subsidiaries;
Transfer, license or sell to any person or entity or otherwise extend,
amend or modify any rights to the Company Proprietary Rights (including rights
to resell or relicense the Company Proprietary Rights) or enter into grants to
future patent rights, other than on standard forms of Company or any of its
Subsidiaries (or pursuant to written agreements negotiated at arm's length)
providing for a non-exclusive license entered into in the ordinary course of
business;
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(k) Make any material loan, advance or capital contribution to, or
investment in, any other Person, or purchase any equity interest in, or any
securities of, any Person, other than (i) by Company or any of its Subsidiaries
to or in Company or any of its Subsidiaries or (ii) in the ordinary course of
business consistent with past practice;
(l) Incur any material indebtedness for borrowed money or guarantee any
such indebtedness of another Person, issue or sell any debt securities or
options, warrants, calls or other rights to acquire any debt securities of
Company, enter into any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the economic effect of
any of the foregoing other than in ordinary course of business, consistent with
past practice;
(m) Except as required by Law or the terms of any existing Employee Plan or
other agreement, adopt, amend or enter into any employee benefit plan, policy or
arrangement, any employee stock purchase or employee stock option plan, or enter
into any material Employment Contract or collective agreement, pay any special
bonus or special remuneration to any director, officer, employee or consultant,
or materially increase the salaries or compensation wage rates (except for wage
increases in the ordinary course of business and consist with past practices) or
fringe benefits (including rights to severance, termination pay or
indemnification) of its directors, officers, employees or consultants or make
any loan or provide any other financial assistance to such persons;
(n) Pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), or litigation (whether or not commenced prior to the date of this
Agreement) in excess of $200,000 (in any one case) or $500,000 in the aggregate
or knowingly waive the benefits of, agree to modify in any manner, terminate,
release any person from or knowingly fail to enforce any confidentiality or
similar agreement to which Company or any of its Subsidiaries is a party or of
which Company or any of its Subsidiaries is a beneficiary;
(o) Except in the ordinary course of business, consistent with past
practices, modify, amend or terminate any material Contract or agreement to
which Company or any Subsidiary thereof is a party or waive, delay the exercise
of, release or assign any material rights or claims thereunder;
(p) Except as required by US GAAP, revalue any of its assets or make any
change in accounting methods, principles or practices;
(q) Commence any material litigation other than (i) for the routine
collection of bills, (ii) for software piracy or (iii) in such cases where
Company in good faith determines that failure to commence suit would result in
the material impairment of a valuable aspect of the business of Company or any
of its Subsidiaries, provided that Company consults with Parent prior to the
filing of such a suit and keeps Parent advised of the status and details of such
litigation (provided that, notwithstanding the foregoing, Company shall not be
required to obtain Parent's consent to any claim, suit or proceeding against
Parent, any Subsidiary of Parent, or any of their affiliates, nor shall Company
be required to consult with Parent with respect thereto);
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(r) Make any tax election or any tax accounting method change that,
individually or in the aggregate, is reasonably likely to adversely affect in
any material respect the Tax liability or Tax attributes of Company or any of
its Subsidiaries, settle or compromise any material Tax liability, or consent to
any extension or waiver of any limitation period with respect to Taxes;
(s) Release or permit the release of any Person from, or waive or permit
the waiver of any provision of, any confidentiality, "standstill" or similar
agreement to which Company or any of its Subsidiaries is a party or under which
Company or any of its Subsidiaries has any rights, and will use all reasonable
efforts to enforce or cause to be enforced each such agreement at the request of
Parent. Company will also request each Person that has executed, within 12
months prior to the date of this Agreement, a confidentiality agreement in
connection with such Person's consideration of a possible Company Acquisition or
equity or debt investment in Company to return all confidential information
heretofore furnished to such Person by or on behalf of Company or any of its
Subsidiaries;
(t) Purchase or renew any of the Insurance Policies except in compliance
with the provisions of Section 6.9 hereof; or
(u) Agree in writing or otherwise to take any of the actions described in
Section 5.1(a) through (t) above or any action that would cause or would be
reasonably likely to cause, any of the conditions to the Agreement set forth in
Sections 7.1 or 7.3 not to be satisfied.
5.2 CONDUCT OF BUSINESS BY PARENT. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms and the Effective Time, Parent shall not, without the
prior written consent of Company (which consent shall not be unreasonably
withheld or delayed):
(a) propose or adopt a plan of complete or partial liquidation or
dissolution;
(b) declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any of its capital stock, or
(c) take, or agree in writing or otherwise to take, any of the actions
described in this Section 5.2, or any action that would cause or would be
reasonably likely to cause, any of the conditions to the Agreement set forth in
Sections 7.1 or 7.2 not to be satisfied.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 CONFIDENTIALITY; ACCESS TO INFORMATION.
(a) CONFIDENTIALITY. The parties acknowledge that Company and Parent have
previously executed a mutual Confidentiality Agreement, dated as of January 22,
2002 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will
continue in full force and effect in accordance with its terms.
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(b) ACCESS TO INFORMATION. Each of Parent and Company will (and will cause
each of its Subsidiaries to) afford the other party and its accountants, counsel
and other representatives reasonable access during normal business hours, upon
reasonable notice, to its properties, books, records, contracts and personnel
during the period prior to the Effective Time to obtain all information
concerning its business, including the status of product development efforts,
properties, results of operations and personnel, as may be reasonably requested
for purposes of appropriate and necessary due diligence. No information or
Knowledge obtained by any party in any investigation pursuant to this Section
6.1 will affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Arrangement. Notwithstanding the foregoing, either party may restrict the
foregoing access to the extent that any Law, treaty, rule or regulation of any
Governmental Entity applicable to such party requires such party or its
Subsidiaries to restrict or prohibit access to any such properties. The parties
will hold any information obtained pursuant to this Section 6.1(b) in confidence
in accordance with, and otherwise subject to, the provisions of the
Confidentiality Agreement.
(c) RESTRUCTURING. Company agrees to give due consideration to such
restructuring steps, including changes to the transaction structure, as may be
reasonably requested by Parent for implementation prior to or as part of the
Plan of Arrangement; provided, however, that Parent shall have agreed with
Company upon the terms of an indemnity agreement in favor of Company and its
Subsidiaries in the event that the Arrangement is not consummated and any
transactions effected by such restructuring shall not be covered by Company's
representations and warranties or other covenants or otherwise expand Company's
liability under this Agreement. Parent agrees to give due consideration to such
restructuring steps, including changes to the transaction structure, as may be
reasonably requested by Company for implementation prior to or as part of the
Plan of Arrangement; provided, however, that Company shall have agreed with
Parent upon the terms of an indemnity agreement in favor of Parent and its
Subsidiaries in the event that the Arrangement is not consummated and any
transactions effected by such restructuring shall not be covered by Parent's
representations and warranties or other covenants or otherwise expand Parent's
liability under this Agreement.
(d) CHANGE IN TAX LAW. If, in the opinion of counsel to Company, a change
in tax Law is enacted and becomes effective on a date that is on or prior to the
Effective Time pursuant to which beneficial owners of Company Common Shares who
are Canadian residents and who hold their shares as capital property for
purposes of the ITA and any corresponding Ontario legislation may exchange their
Company Common Shares for Parent Common Shares on a tax-deferred basis for
purposes of the ITA and any corresponding Ontario legislation, then, at the
option of Parent, no Exchangeable Shares will be issued and the Plan of
Arrangement will be amended accordingly.
6.2 NO SOLICITATION.
(a) From the date hereof until the Effective Time or, if earlier, the
termination of this Agreement, Company shall not, nor shall it permit or
authorize its Subsidiaries, or any of their respective officers, directors or
employees, or any investment banker, attorney or other advisor or representative
retained by any of them to, directly or indirectly: (i) solicit, initiate,
knowingly encourage or otherwise knowingly facilitate any Acquisition Proposal
(as defined hereinafter) or
42
any inquiries or proposals relating thereto; (ii) engage in discussions or
negotiations with, or disclose any non-public information relating to Company or
its Subsidiaries or afford access to the properties, books or records of Company
or its Subsidiaries to, any Person (other than Parent or any designees of
Parent) concerning or in connection with an Acquisition Proposal; (iii)
withhold, withdraw, modify or change, or publicly propose to do so, in a manner
adverse to Parent, or fail to make its recommendation to vote in favor of the
Arrangement or approve, endorse or recommend an Acquisition Proposal or (iv)
accept or enter into, or publicly propose to accept or enter into, any letter of
intent, agreement, arrangement or understanding related to any Acquisition
Proposal; provided, however, that in each case, if (A) after the date of this
Agreement and prior to the date of any securityholder approval of the
Arrangement, an unsolicited, bona fide written Acquisition Proposal is made to
Company and is not withdrawn; (B) Company's Board of Directors reasonably
believes in good faith, after consultation with Company's financial advisor,
that such Acquisition Proposal constitutes (if consummated as proposed) a
Superior Proposal (as defined hereafter); (C) Company's Board of Directors
reasonably believes in good faith, after consultation with Company's outside
legal counsel, as reflected in the minutes of Company's Board of Directors, that
the Board is required to engage in such negotiations or discussions, to provide
such information, or to withhold, withdraw, amend, modify or change its
recommendation to vote in favor of the Arrangement in order to discharge
properly the fiduciary duties of the Board of Directors of Company to Company
Shareholders; (D) prior to furnishing any such non-public information to any
Person, Company receives from such Person an executed confidentiality agreement
(including "standstill" provisions) no less favorable to Company than the
Confidentiality Agreement; and (E) at the time of or prior to furnishing any
such non-public information to such Person, Company furnishes such non-public
information to Parent (to the extent such non-public information has not been
previously furnished by Company to Parent), then Company and its directors,
officers, employees, investment bankers, attorneys and other advisors and
representatives may furnish information with respect to Company and its
Subsidiaries to such Person, participate with such Person in negotiations
regarding such Acquisition Proposal, enter into discussions or negotiations
with, such Person, withhold, withdraw, modify or change in a manner adverse to
Parent, or fail to make, its recommendation to vote in favor of the Arrangement,
or approve, endorse or recommend such Acquisition Proposal.
(b) Company shall promptly after receipt of any Acquisition Proposal
provide Parent with a copy of any written Acquisition Proposal and the identity
of the Person making such Acquisition Proposal and a written statement with
respect to any non-written Acquisition Proposal received, which statement shall
include the identity of the Person making the Acquisition Proposal and a
reasonably detailed description of all the material terms thereof. Company shall
promptly advise Parent of any material modification or proposed modification
thereto. Company shall not release or permit the release of any Person from, or
waive or permit the waiver of any provision of, any confidentiality,
"standstill" or similar agreement (other than as required pursuant to the terms
thereof as in effect on the date hereof) under which Company or any of its
Subsidiaries has any rights, or fail to use reasonable best efforts to enforce
or cause to be enforced each such agreement at the request of Parent. Company
shall use all reasonable efforts to ensure that its Subsidiaries and any of
their respective officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by any of them are aware of
the provisions of this Section 6.2, and shall be responsible for any breach of
this
43
Section 6.2 by its and its Subsidiaries and any of their respective officers,
directors or employees or any investment banker, attorney or other advisor or
representative retained by any of them.
(c) Nothing contained in this Agreement shall prohibit Company or Company's
Board of Directors from taking and disclosing to Company Shareholders a position
with respect to a tender or exchange offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated under the 1934 Act or Section 99 under the
Securities Act.
(d) Parent shall be released from any standstill obligation under the
Confidentiality Agreement (i) to the extent that Company or any of its
Subsidiaries releases any third party from its standstill obligations or (ii) if
this Agreement is terminated as a result of a Triggering Event (as hereinafter
defined) having occurred, solely to the extent necessary for Parent to make an
offer on substantially similar or superior economic terms to any Superior
Proposal.
For purposes of this Agreement, "ACQUISITION PROPOSAL" means any offer
or proposal for a merger, amalgamation, arrangement, reorganization, share
exchange, consolidation, recapitalization, liquidation, dissolution or
other business combination involving Company or the acquisition or purchase
of 50% or more of any class of equity securities of Company, or any
take-over bid or tender offer (including issuer bids and self-tenders) or
exchange offer that if consummated would result in any Person beneficially
owning 50% or more of any class of any equity securities of Company, or any
transaction involving the sale, lease, license or other disposition (by
sale, merger or otherwise) of 50% or more of the book or market value of
assets (including, without limitation, securities of any Subsidiary of
Company) of Company and its Subsidiaries, taken as a whole:
As used herein, a "SUPERIOR PROPOSAL" shall mean any Acquisition
Proposal that Company's Board of Directors reasonably believes in good
faith, after consultation with the Company's financial advisor, (i) is
superior from a financial point of view to Company's shareholders to the
transactions contemplated by this Agreement and (ii) is reasonably capable
of being consummated on a timely basis by the Person making such
Acquisition Proposal (including, if applicable, obtaining any necessary
financing), taking into account all legal, financial, regulatory and other
aspects of such Acquisition Proposal.
6.3 PUBLIC DISCLOSURE. Parent and Company will consult with each other, and
to the extent practicable, agree, before issuing any press release or otherwise
making any public statement with respect to the Arrangement or this Agreement
and will not issue any such press release or make any such public statement
prior to such consultation, except as may be required by law or any listing
agreement with a 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 reasonable efforts to consult in good faith
with the other party before issuing any such press release or make any such
public announcement. The parties have agreed to the text of the joint press
release announcing the signing of this Agreement.
44
6.4 REASONABLE EFFORTS; NOTIFICATION.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, as soon as reasonably practicable,
the Arrangement and the other transactions contemplated by this Agreement.
(b) Company shall and shall cause its Subsidiaries to perform all
obligations required or desirable to be performed by Company or any of its
Subsidiaries under this Agreement, cooperate with Parent in connection
therewith, and do all such other acts and things as may be necessary or
desirable in order to consummate and make effective, as soon as reasonably
practicable, the transactions contemplated in this Agreement and, without
limiting the generality of the foregoing, Company shall and where appropriate
shall cause its Subsidiaries to:
(i) use all reasonable efforts to obtain the requisite approvals of
Company Shareholders with respect to the Arrangement except to the extent
that the Board of Directors of Company has withdrawn, modified or qualified
its recommendation to shareholders in accordance with the terms of this
Agreement;
(ii) advise Parent as reasonably requested, as to the aggregate tally
of the proxies and votes received in respect of the Company Meeting and all
matters to be considered at such meeting;
(iii) apply for and use all reasonable efforts to obtain all
Regulatory Approvals relating to Company or any of its Subsidiaries and, in
doing so, to keep Parent informed as to the status of the proceedings
related to obtaining the Regulatory Approvals, including, but not limited
to, providing Parent with copies of all related applications and
notifications, in draft form, in order for Parent to provide its reasonable
comments and providing Parent with copies of all material correspondence;
(iv) use all reasonable efforts to effect all necessary registrations,
filings and submissions of information required by Governmental Entities
from Company or any of its Subsidiaries relating to the Arrangement;
(v) use all reasonable efforts to obtain all necessary waivers,
consents and approvals required to be obtained by Company or a Subsidiary
in connection with the Arrangement from other parties to any material loan
agreements, leases or other material Contracts;
(vi) carry out the terms of the Interim Order and the Final Order
applicable to it and use all reasonable efforts to comply promptly with all
requirements that applicable Laws may impose on Company or its Subsidiaries
with respect to the transactions contemplated by this Agreement;
(vii) provide Parent with a copy of any purported exercise of the
Dissent Rights and written communications with such Company Shareholder
purportedly exercising the
45
Dissent Rights, and not settle or compromise any claim brought by any
present, former or purported holder of any of its securities in connection
with the Arrangement; and
(viii) promptly advise Parent orally and, if then requested, in
writing:
(A) of any event occurring subsequent to the date of this
Agreement (I) that would render any representation or warranty of
Company contained in this Agreement untrue or inaccurate in any
material respect at the time it was made or (II) that would not
reasonably be expected to be cured prior to the Effective Time and
would render any representation or warranty of Company contained in
this Agreement untrue or inaccurate in any material respect at the
Effective Time;
(B) of any Material Adverse Effect on Company and
(C) of any material breach by Company of any covenant or
agreement contained in this Agreement.
(c) Parent shall perform all obligations required or desirable to be
performed by it under this Agreement, to cooperate with Company in connection
therewith, and to do all such other acts and things as may be necessary or
desirable in order to consummate and make effective, as soon as reasonably
practicable, the transactions contemplated by this Agreement and, without
limiting the generality of the foregoing:
(i) to apply for and use its reasonable best efforts to obtain all
Regulatory Approvals relating to Parent and, in doing so, to keep Company
informed as to the status of the proceedings related to obtaining the
Regulatory Approvals, including, but not limited to, providing Company with
copies of all related applications and notifications, in draft form, in
order for Company to provide its reasonable comments and providing Company
with copies of all material correspondence;
(ii) to use all reasonable efforts to effect all necessary
registrations, filings and submissions of information required by
Governmental Entities from Parent or its Subsidiaries relating to the
Arrangement;
(iii) to carry out the terms of the Interim Order and Final Order
applicable to it and use all reasonable efforts to comply promptly with all
requirements that applicable Laws may impose on Parent or its Subsidiaries
with respect to the transactions contemplated by this Agreement;
(iv) to promptly advise Company orally and, if then requested, in
writing:
(A) of any event occurring subsequent to the date of this
Agreement (I) that would render any representation or warranty of
Parent contained in this Agreement untrue or inaccurate in any
material respect at the time it was made or (II) that would not
reasonably be expected to be cured prior to the Effective Time and
would render any representation or warranty of Parent contained in
this Agreement untrue or inaccurate in any material respect at the
Effective Time;
46
(B) of any Material Adverse Effect on Parent and
(C) of any material breach by Parent of any covenant or agreement
contained in this Agreement;
(v) Parent agrees to authorize for listing on the Nasdaq Parent Common
Shares to be issued at the Effective Time and from time to time upon
exchange of the Exchangeable Shares and upon exercise of Replacement
Options and
(vi) Parent shall use reasonable best efforts to maintain the listing
of the Parent Common Shares on the Nasdaq and, if Parent receives notice of
delisting, Parent shall submit a plan to the Nasdaq to maintain its
listing, keep Company generally informed of Parent's efforts and plans with
respect to maintaining such listing and provide copies to Company of any
correspondence sent to or received from Nasdaq.
(d) Company and Parent shall promptly notify the other party of any
actions, suits, claims, investigations or proceedings commenced or, to its
Knowledge, threatened against, relating to or involving or otherwise affecting
such party or any of its Subsidiaries that relate to the consummation of the
transactions contemplated by this Agreement.
6.5 INDEMNIFICATION. From and after the Effective Time, Company will
fulfill and honor in all respects the obligations of Company pursuant to any
indemnification agreements between Company and its directors and officers (the
"INDEMNIFIED PARTIES") in effect immediately prior to the Effective Time and set
forth in Section 6.5 of the Company Schedule and any indemnification provisions
under Company Charter Documents as in effect on the date hereof. The Articles of
Incorporation and Bylaws of Company will contain provisions with respect to
exculpation and indemnification that are at least as favorable to the
Indemnified Parties as those contained in Company Charter Documents as in effect
on the date hereof, which provisions will 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 individuals who,
immediately prior to the Effective Time, were directors or officers of Company,
unless such modification is required by any applicable Law. In compliance with
Section 6.9, Parent will purchase, prior to Closing, a directors' and officers'
liability insurance policy for a six (6) year period covering those persons whom
are currently covered by Company's directors' and officers' liability insurance
policy on terms comparable to those applicable to the current directors and
officers of Company covering the period prior to the Effective Time; provided,
however, that in no event will Parent or Company be required to expend in the
aggregate in excess of $1,000,000 for such coverage and, if such amount is not
sufficient to purchase such coverage, Parent will purchase the maximum amount of
coverage for six (6) years as is available for such amount.
6.6 COMPANY AFFILIATE AGREEMENT. Set forth in Section 6.6 of the Company
Schedule is a list of those persons who may be deemed to be, in Company's
reasonable judgement, affiliates of Company within the meaning of Rule 145
promulgated under the 1933 Act (each, a "COMPANY AFFILIATE"). Company will
provide Parent with such information and documents as Parent reasonably requests
for purposes of reviewing such list. Company shall use all reasonable
47
efforts to cause each Company Affiliate to enter into an Affiliate Agreement in
substantially the form attached hereto as Exhibit F.
6.7 REGULATORY FILINGS; REASONABLE EFFORTS. As soon as may be reasonably
practicable, Company and Parent each shall file merger notification forms
required by the merger notification or control laws and regulations of any other
applicable jurisdiction, which Parent reasonably determines to be necessary.
Company and Parent each shall promptly (a) supply the other with any information
that may be required in order to effectuate such filings and (b) supply any
additional information that reasonably may be required by the competition or
merger control authorities of any jurisdiction. The parties will file all Tax
Returns and take all other actions in a manner that is consistent with the
treatment of the transaction contemplated by this Agreement as a tax-free
reorganization within the meaning of Section 368 of the Code.
6.8 EMPLOYEE PLANS. For a period of one year from the Effective Time,
Parent, in its sole discretion, shall either: (a) continue (or cause Company and
its Subsidiaries to continue) to maintain the Employee Plans for the benefit of
Employees who continue employment with Parent or one of its Subsidiaries
("CONTINUING EMPLOYEES") on substantially the same terms in the aggregate as in
effect immediately prior to the Effective Time, (b) arrange for the Continuing
Employees to participate in any similar plans of Parent ("PARENT PLANS") on
terms no less favorable than those offered to similarly situated employees of
Parent or its Subsidiaries or (c) a combination of clauses (a) and (b). Each
Continuing Employee shall, to the extent permitted by law and applicable tax
qualification requirements, and subject to any generally applicable break in
service or similar rule, receive full credit for purposes of eligibility to
participate, vesting, severance and vacation under Parent Plans for years of
service with Company or its Subsidiaries prior to the Effective Time.
6.9 MAINTENANCE OF INSURANCE. Between the date hereof and through the
Effective Time, Company will maintain in full force and effect all of its and
its Subsidiaries' presently existing Insurance Policies or insurance comparable
to the coverage afforded by such policies. Company agrees that any and all
additional, renewed or replacement insurance coverage for any liability of
Company or its officers and directors, including, without limitation, coverage
for directors' and officers' liability, employment practices liability,
fiduciary liability, errors and omissions, property, general liability,
automobile liability, workers' compensation, or umbrella liability, shall be
placed by Parent (or any of its affiliates) using the insurance broker selected
by Parent in its sole and absolute discretion; provided, however, that nothing
in this Section 6.9 shall preclude Company from renewing or replacing insurance
coverage if Parent is unable to place promptly such insurance on behalf of
Company. Company further agrees to fully cooperate with Parent and to provide
Parent (and its affiliates and designees) and Parent's insurance broker with any
documents, permissions or information requested by Parent and to allow Parent
(or its affiliate) and Parent's insurance broker to approach Company's current
insurance carriers and any additional carriers to negotiate and acquire any such
insurance coverage.
6.10 SALE OF COMPANY SERVICES. Concurrently with the execution and delivery
of this Agreement, Parent and Company have entered into a Reseller Agreement in
the form attached as Exhibit G hereto (the "RESELLER AGREEMENT").
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6.11 TAKEOVER STATUTES. If any "fair price," "moratorium," "control share
acquisition" or other form of antitakeover statute or regulation is or shall
become applicable to the transactions contemplated hereby, each of the parties
and its board of directors shall grant such approvals and take all such actions
as are reasonably necessary so that the transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of such statute or regulation
on the transactions contemplated hereby.
6.12 [RESERVED]
6.13 STOCK OPTIONS.
(a) In accordance with the Company Stock Option Plans, Company shall cause
all Company Stock Options having an exercise price greater than the product of
(i) the Exchange Ratio times (ii) the closing sale price of the Parent Common
Shares on the trading day immediately prior to the date Company sends out notice
of such acceleration to the holders of such Company Stock Options which date
shall be ten (10) business days prior to the Effective Time ("OUT-OF-THE-MONEY
OPTIONS") to vest prior to the Effective Time, such that all such
Out-of-the-Money Options are exercisable and may be conditionally exercised
prior to the Effective Time and that to the extent such Out-of-the-Money Options
are not exercised prior to the Effective Time, such Out-of-the-Money Options
shall terminate and expire immediately prior to the Effective Time; provided,
however, that nothing herein shall prevent Company from retracting the
acceleration of the vesting of the Out-of-the Money Options, reverting the
vesting to the manner provided in the applicable option agreement and reversing
any such exercises, if this Agreement terminates for any reason. For greater
clarity, Out-of-the-Money Options will not be eligible for exchange for
Replacement Options (as defined in the Plan of Arrangement) pursuant to section
2.2 of the Plan of Arrangement. Company agrees to deliver or cause to be
delivered to holders of Company Stock Options appropriate notices with respect
to the transactions contemplated hereunder in accordance with the Company Stock
Option Plans.
(b) Based on the mutual determination of the officers of the Company after
the Effective Time and Parent, and pursuant to the Parent Option Plans or such
other stock option plan as may be duly approved and adopted by Parent and
Parent's customary procedures, Parent shall make available options to purchase
an aggregate of 2,750,000 Parent Common Shares for issuance to employees of the
Company after the Effective Time. Such options shall have an exercise price
equal to the closing price of Parent Common Shares on the date immediately
preceding the Effective Time and shall vest in accordance with, and otherwise be
governed by, the Parent Option Plans (or such other stock option plan as may be
duly approved and adopted by Parent).
ARTICLE VII
CONDITIONS TO THE COMBINATION
7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE ARRANGEMENT. The
respective obligations of each party to this Agreement to effect the Arrangement
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
49
(a) COMPANY SHAREHOLDER APPROVAL. The Arrangement shall have been approved
at the Company Meeting by at least 66 2/3% of the votes cast by the Company
Shareholders who are represented at the Company Meeting and in accordance with
any other conditions that may be imposed by the Interim Order. The Arrangement
shall have been approved at the Company Meeting in accordance with any other
conditions that may be imposed by the Interim Order;
(b) INTERIM ORDER; FINAL ORDER. The Interim Order and the Final Order shall
each have been obtained in form and on terms satisfactory to each of Parent and
Company, acting reasonably, and shall not have been set aside or modified in a
manner unacceptable to such parties, acting reasonably, on appeal or otherwise;
(c) ORDERS OF CANADIAN SECURITIES REGULATORY AUTHORITIES. The orders
referenced in Section 2.6(a) shall have been obtained;
(d) FAIRNESS HEARING; REGISTRATION STATEMENT. Either (i) following a
hearing upon the fairness of the terms and conditions of the Arrangement, all
applicable requirements under the 1933 Act for an exemption from the
registration requirements of Section 5 thereof shall have been satisfied or (ii)
the Form S-4 shall have been declared effective by the SEC and shall not be the
subject of any stop order or proceeding seeking a stop order;
(e) FORM S-3 REGISTRATION STATEMENT. The Form S-3 shall have become
effective in accordance with the provisions of the 1933 Act, and the Form S-3
shall have been declared effective by the SEC and shall not be the subject of
any stop order or proceeding seeking a stop order;
(f) NO ORDERS. There shall not be in force any final and non-appealable
injunction, order or decree restraining or enjoining the consummation of the
transactions contemplated by this Agreement and there shall be no proceeding
(other than an appeal made in connection with the Arrangement), of a judicial or
administrative nature or otherwise, brought by a Governmental Entity in progress
or threatened that relates to or results from the transactions contemplated by
this Agreement that would, if successful, result in an order or ruling that
would preclude completion of the transactions contemplated by this Agreement in
accordance with the terms hereof or would otherwise be inconsistent with the
Regulatory Approvals that have been obtained;
(g) REGULATORY APPROVALS. Parent and Company and their respective
Subsidiaries shall have obtained from each Governmental Entity all approvals,
waivers and consents, if any, the failure of which to be obtained would cause
the consummation of the Arrangement and the several transactions contemplated
hereby to be prohibited; and
(h) LISTING OF SHARES. The Parent Common Shares issuable pursuant to the
Arrangement, upon exchange of the Exchangeable Shares from time to time and upon
exercise of the Replacement Options from time to time shall have been approved
for quotation on the Nasdaq, subject to notice of issuance.
7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF COMPANY. The obligation of
Company to consummate and effect the Arrangement shall be subject to the
satisfaction at or prior to the
50
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Parent set forth in Article IV that are qualified as to materiality or Material
Adverse Effect shall be true and correct and those 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 (it being understood that for
purposes of determining the accuracy of such representations and warranties any
update or modification to the Parent Schedule made or purported to have been
made without the Company's written consent thereto shall be disregarded).
Company shall have received a certificate with respect to the foregoing signed
on behalf of Parent by an authorized officer of Parent;
(b) AGREEMENTS AND COVENANTS. Parent shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and Company shall have received a certificate to such effect signed on
behalf of Parent by an authorized officer of Parent; and
(c) ARRANGEMENT. The Board of Directors of Parent shall have adopted all
necessary resolutions, and all other necessary corporate action shall have been
taken by the Parent to permit the consummation of the Arrangement and the
issuance of Parent Common Shares pursuant to the Arrangement and upon the
exchange from time to time of the Exchangeable Shares and the exercise from time
to time of the Replacement Options.
7.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT. The obligations of
Parent to complete the Arrangement shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in Article III that are qualified as to materiality or
Material Adverse Effect shall be true and correct and those 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 (it being understood
that for purposes of determining the accuracy of such representations or
warranties any update or modifications to the Company Schedule made or purported
to have been made without Parent's written consent thereto shall be
disregarded). Parent shall have received a certificate with respect to the
foregoing signed on behalf of Company by an authorized officer of Company;
(b) AGREEMENTS AND COVENANTS. Company shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Effective
Time, and Parent shall have received a certificate to such effect signed on
behalf of Company by an authorized officer of Company;
51
(c) ARRANGEMENT. The Board of Directors of Company shall have adopted all
necessary resolutions, and all other necessary corporate action shall have been
taken by Company and its Subsidiaries, to permit the consummation of the
Arrangement and the issue of the Exchangeable Shares contemplated thereby; the
Board of Directors of Company shall have made and shall not have modified or
amended, in any material respect, prior to the Company Meeting, an affirmative
recommendation that the Company Shareholders approve the Arrangement; and
(d) DISSENT RIGHTS. The holders of no more than 5% of the issued and
outstanding Company Common Shares shall have exercised their Dissent Rights (and
shall not have lost or withdrawn such rights) in respect of the Arrangement.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approval of the Company
Shareholders:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and Company;
(b) by either Company or Parent, if the Arrangement shall not have been
consummated by June 30, 2002, for any reason (the "TERMINATION DATE"); provided,
however, that (A) if the failure to obtain any approval, waiver or consent from
any Governmental Entity necessary for the consummation of, or in connection
with, the Arrangement or the transactions contemplated hereby has been the cause
of, or resulted in the failure of the Effective Time to occur on or before such
date, then the Termination Date shall be automatically extended to July 31,
2002, and (B) the right to terminate this Agreement under this Section 8.1(b)
shall not be available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the Arrangement to occur on or
before such date (or the extension thereof, if applicable) and such action or
failure to act constitutes a breach of this Agreement;
(c) by either Company or Parent, if there shall be passed any Law that
makes the consummation of the Arrangement illegal or otherwise prohibited, or if
a Governmental Entity shall have issued an order, decree or ruling or taken any
other action, in any case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Arrangement, which order, decree, ruling
or other action is final and non-appealable;
(d) by either Company or Parent, if the required approval of the Company
Shareholders contemplated by this Agreement shall not have been obtained by
reason of the failure to obtain the required vote at a meeting of Company
Shareholders duly convened therefor or at any adjournment thereof; provided,
however, that the right to terminate this Agreement under this Section 8.1(d)
shall not be available to Company where the failure to obtain the approval of
the Company Shareholders shall have been caused by the action or failure to act
of Company and such action or failure to act constitutes a breach by Company of
this Agreement;
52
(e) by Company, upon a breach of any representation, warranty, covenant or
agreement on the part of Parent set forth in this Agreement, or if any
representation or warranty of Parent shall have become untrue, in either case
such that the conditions set forth in Section 7.2(a) or Section 7.2(b) would not
be satisfied as of the time of such breach or as of the time such representation
or warranty shall have become untrue, provided, that if such inaccuracy in
Parent's representations and warranties or breach by Parent is curable by Parent
through the exercise of all reasonable efforts, then Company may not terminate
this Agreement under this Section 8.1(e) for twenty (20) days after delivery of
written notice from Company to Parent of such breach, provided Parent continues
to exercise all reasonable efforts to cure such breach (it being understood that
Company may not terminate this Agreement pursuant to this paragraph (e) if such
breach by Parent is cured during such twenty (20) day period);
(f) by Parent, upon a breach of any representation, warranty, covenant or
agreement on the part of Company set forth in this Agreement, or if any
representation or warranty of Company shall have become untrue, in either case
such that the conditions set forth in Section 7.3(a) or Section 7.3(b) would not
be satisfied as of the time of such breach or as of the time such representation
or warranty shall have become untrue, provided, that if such inaccuracy in
Company's representations and warranties or breach by Company is curable by
Company through the exercise of all reasonable efforts, then Parent may not
terminate this Agreement under this Section 8.1(f) for twenty (20) days after
delivery of written notice from Parent to Company of such breach, provided
Company continues to exercise all reasonable efforts to cure such breach (it
being understood that Parent may not terminate this Agreement pursuant to this
paragraph (f) if such breach by Company is cured during such twenty (20) day
period); and
(g) by Parent, if a Triggering Event (as defined below) shall have
occurred.
For the purposes of this Agreement, a "TRIGGERING EVENT" shall be deemed to
have occurred if any of the following events shall have occurred (whether or not
permitted by this Agreement): (i) the Board of Directors of Company or any
committee thereof shall for any reason have withheld, withdrawn or shall have
amended, modified or changed (including by way of disclosure or the taking of a
position specified in Section 6.2(c)) in a manner adverse to Parent its
recommendation in favor of, the adoption and approval of the Agreement or the
approval of the transactions contemplated by this Agreement; (ii) the Board of
Directors of Company or any committee thereof shall have approved or recommended
any Acquisition Proposal (other than this Agreement); (iii) Company shall have
breached Section 6.2 of this Agreement, including by reason of having entered
into any letter of intent or similar document or any agreement, contract or
commitment (other than a confidentiality or standstill agreement) with respect
to any Acquisition Proposal; or (iv) a tender or exchange offer relating to
securities of Company shall have been commenced by a person unaffiliated with
Parent and Company shall not have sent to its securityholders pursuant to Rule
14e-2 promulgated under the 1933 Act and section 99 of the Securities Act (and
the equivalent provisions in other Canadian provincial securities acts), within
fifteen (15) calendar days after such tender or exchange offer is first
published, sent or given, a statement disclosing that Company recommends
rejection of such tender or exchange offer.
8.2 NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination of this
Agreement under Section 8.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties hereto.
In the event of the termination of this Agreement as
53
provided in Section 8.1, this Agreement shall be of no further force or effect,
except (i) as set forth in Section 6.2(d), Section 8.2, Section 8.3 and Article
IX (General Provisions), each of which shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for
any intentional or willful breach of this Agreement. If this Agreement is
terminated under circumstances in which Parent or Company is entitled to receive
the Termination Fee (as hereinafter defined) or the Expense Reimbursement (as
hereinafter defined), when applicable, (i) the obligation to pay the Termination
Fee and the Expense Reimbursement, when applicable, shall survive the
termination of this Agreement and (ii) the payment of the Termination Fee and
the Expense Reimbursement, when applicable, shall be the sole and exclusive
remedy available to Parent or Company, as applicable, except in the event of the
willful or intentional breach of any provision of this Agreement, in which event
the party entitled to the Termination Fee and the Expense Reimbursement, when
applicable, shall have all rights, powers and remedies against the other party
that may be available at law or in equity. No termination of this Agreement
shall affect the obligations of the parties contained in the Confidentiality
Agreement, other than as set forth in Section 6.2(d), all of which obligations
shall survive termination of this Agreement in accordance with their terms.
8.3 FEES AND EXPENSES.
(a) GENERAL. Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby ("TRANSACTION EXPENSES") shall be paid by the party incurring such
expenses whether or not the Arrangement is consummated.
(b) COMPANY PAYMENTS.
(i) Company shall pay to Parent in immediately available funds, within
one (1) business day after demand by Parent, an amount equal to $1,000,000
(the "TERMINATION FEE") plus up to $500,000 for all documented Transaction
Expenses incurred by Parent prior to such termination (the "EXPENSE
REIMBURSEMENT"), if this Agreement is terminated by Parent pursuant to
Section 8.1(f) or 8.1(g).
(ii) Company shall pay Parent in immediately available funds, within
one (1) business day after demand by Parent, an amount equal to the Expense
Reimbursement, if this Agreement is terminated by Parent or Company, as
applicable, pursuant to Section 8.1(d);
(iii) Company shall pay Parent in immediately available funds, upon
consummation of any Company Acquisition (as defined below), an amount equal
to the Termination Fee plus the Expense Reimbursement (if not already
paid), if:
(A) this Agreement is terminated by Parent or Company, as
applicable, pursuant to Section 8.1(b) or 8.1(d);
(B) following the date hereof and prior to the termination of
this Agreement, an Acquisition Proposal shall have been publicly
announced or generally disclosed by Company or the party making such
Acquisition Proposal to the Company Shareholders; and
54
(C) within six (6) months following the termination of this
Agreement, a Company Acquisition is consummated or Company enters into
an agreement or letter of intent providing for a Company Acquisition,
in either case, with any party.
(iv) Company acknowledges that the agreements contained in this
Section 8.3(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Parent would not enter
into this Agreement; accordingly, if Company fails to pay in a timely
manner the amounts due pursuant to this Section 8.3(b) and, in order to
obtain such payment, Parent makes a claim that results in a judgement
against Company for the amounts set forth in this Section 8.3(b), Company
shall pay to Parent its reasonable costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amounts set forth in this Section 8.3(b) at the prime rate
of LaSalle Bank National Association in effect on the date such payment was
required to be made. Payment of the fees described in this Section 8.3(b)
shall not be in lieu of damages incurred in the event of intentional or
willful breach of this Agreement.
(v) For purposes of this Agreement, "COMPANY ACQUISITION" means any of
the following transactions (other than the transactions contemplated by
this Agreement), either as a single transaction or series of transactions:
(i) a merger, amalgamation, arrangement, reorganization, share exchange,
consolidation, recapitalization, liquidation, dissolution or other business
combination involving Company, pursuant to which the Company Shareholders
immediately preceding such transaction hold less than 50% of the aggregate
equity interests in the surviving or resulting entity of such transaction,
(ii) the acquisition or purchase of 50% or more of equity securities of
Company (including by way of tender offer or an exchange offer or issuance
by Company) or the right to acquire such equity securities, or (iii) the
sale, lease, license or other disposition (by sale, merger or otherwise) of
50% or more of the book or market value of assets (including, without
limitation, securities of any Subsidiary of Company) of Company and its
Subsidiaries, taken as a whole.
(c) PARENT PAYMENT.
(i) Parent shall pay Company in immediately available funds, within
one (1) business day after demand by Company, an amount equal to $2,000,000
plus the Expense Reimbursement, if this Agreement is terminated by Company,
pursuant to Section 8.1(e).
(ii) Parent acknowledges that the agreements contained in this Section
8.3(c) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Company would not enter into
this Agreement; accordingly, if Parent fails to pay in a timely manner the
amounts due pursuant to this Section 8.3(c) and, in order to obtain such
payment, Company makes a claim that results in a judgement against Parent
for the amounts set forth in this Section 8.3(c), Parent shall pay to
Company its reasonable costs and expenses (including reasonable attorneys'
fees and expenses) in connection with such suit, together with interest on
the amounts set forth in this Section 8.3(c) at the prime rate of LaSalle
Bank National Association in effect on the date such
55
payment was required to be made. Payment of the fees described in this
Section 8.3(c) shall not be in lieu of damages incurred in the event of
intentional or willful breach of this Agreement.
8.4 AMENDMENT. Subject to applicable law and the Interim Order, this
Agreement may be amended, not later than the Effective Time, by the parties
hereto at any time by execution of an instrument in writing signed on behalf of
each of Parent and Company.
8.5 EXTENSION; WAIVER. At any time prior to the Effective Time, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other party hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE IX,
GENERAL PROVISIONS
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. For greater certainty, the
representations and warranties of Company and Parent contained herein shall
survive the execution and delivery of this Agreement and shall terminate on the
earlier of the termination of this Agreement in accordance with its terms or the
Effective Time. Any investigation by a party hereto and its advisors shall not
mitigate, diminish or affect the representations and warranties of another party
to this Agreement.
9.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent to:
divine, inc.
1301 North Elston Avenue
Chicago, Illinois 60622
Attention: Jude M. Sullivan
Fax: 773-394-6604
56
with copies to:
Bell, Boyd & Lloyd LLC
70 West Madison Street
Suite 3300
Chicago, Illinois 60602
Attention: D.Mark McMillan
Fax: 312-372-2098
and
Osler, Hoskin & Harcourt LLP
Box 50, 1 First Canadian Place
Toronto, Ontario M5X 1B8
Attention: Linda Robinson
Fax: 416-862-6666
(b) if to Company, to:
Delano Technology Corporation
302 Town Centre Boulevard
Markham, Ontario L3R 0E8
Attention: David Lewis
Fax: 905-947-2150
with copies to:
Goodmans LLP
250 Yonge Street
Toronto, Ontario M5B 2M6
Attention: Stephen Halperin
Fax: 416-979-1234
and
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02110
Attn: F. George Davitt
Fax: 617-248-7100
9.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, which may be delivered by facsimile transmission, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party, it being understood that all parties need not sign the same
counterpart.
57
9.4 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Schedule (a)
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
it being understood that the Confidentiality Agreement shall continue in full
force and effect until the Effective Time and shall survive any termination of
this Agreement and (b) are not intended to confer upon any other person any
rights or remedies hereunder, except as specifically provided in Sections 6.5,
6.7 and 6.13.
9.5 SEVERABILITY. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 OTHER REMEDIES; SPECIFIC PERFORMANCE. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state thereof or Ontario or any
province of Canada having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
9.7 GOVERNING LAW. The internal laws of the Province of Ontario
(irrespective of its choice of law principles) will govern this Agreement, the
construction of its terms and the interpretation of the rights and duties of the
parties hereto.
9.8 ENGLISH/FRENCH LANGUAGE. The parties confirm that it is their wish that
this Agreement as well as any other documents relating hereto, including
notices, have been and shall be drawn up in English only. Les parties aux
presents confirment leur volonte que cette convention de meme tous les
documents, y compris tous avis s'y rattachant soient rediges en anglais
seulement.
9.9 NO PERSONAL LIABILITY.
(a) No director or officer of Parent shall have any personal liability
whatsoever to Company under this Agreement, or any other document delivered in
connection with the Arrangement on behalf of Parent.
58
(b) No director or officer of Company shall have any personal liability
whatsoever to any Parent under this Agreement, or any other document delivered
in connection with the Arrangement on behalf of Company.
9.10 ASSIGNMENT. Neither party may assign either this Agreement or any of
its rights, interests or obligations hereunder without the prior written
approval of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
9.11 WAIVER OF JURY TRIAL. EACH OF PARENT AND COMPANY HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF PARENT OR COMPANY IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
9.12 CURRENCY. Unless otherwise specifically indicated, all sums of money
referred to in this Agreement are expressed in U.S. Dollars.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY
LEFT BLANK; THE SIGNATURE PAGE FOLLOWS]
59
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
PARENT:
DIVINE, INC.
By: /s/ JUDE M. SULLIVAN
-------------------------------------
Name: Jude M. Sullivan
Title: Senior Vice President, General
Counsel and Secretary
COMPANY:
DELANO TECHNOLOGY CORPORATION
By: /s/ VIKAS KAPOOR
-------------------------------------
Name: Vikas Kapoor
Title: Chief Executive Officer
60
AMENDMENT TO COMBINATION AGREEMENT
This Amendment to the Combination Agreement (the "AMENDMENT") is made
this 30th day of May, 2002, by and between divine, inc., a corporation organized
and existing under the laws of Delaware (the "Parent"), and Delano Technology
Corporation, a corporation organized and existing under the laws of Ontario (the
"COMPANY"). All capitalized terms not defined herein shall have the meaning
ascribed to them in that certain Combination Agreement, made and entered into as
of March 12, 2002, by and between the parties hereto (the "COMBINATION
AGREEMENT").
WHEREAS, pursuant to Section 8.1(b) of the Combination Agreement, the
Combination Agreement may be terminated if the Arrangement shall not have been
consummated by June 30, 2002, unless automatically extended to July 31, 2002, as
provided therein.
WHEREAS, the parties wish to amend the Combination Agreement to extend
the automatic termination and extension dates therein.
NOW, THEREFORE, with reference to the foregoing facts and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Section 8.1(b) of the Combination Agreement shall be deleted and
replaced in its entirety by the following:
(b) by either Company or Parent, if the Arrangement shall not have been
consummated by August 15, 2002, for any reason (the "TERMINATION DATE");
provided, however, that (A) if the failure to obtain any approval, waiver or
consent from any Governmental Entity necessary for the consummation of, or in
connection with, the Arrangement or the transactions contemplated hereby has
been the cause of, or resulted in the failure of the Effective Time to occur on
or before such date, then the Termination Date shall be automatically extended
to September 16, 2002, and (B) the right to terminate this Agreement under this
Section 8.1(b) shall not be available to any party whose action or failure to
act has been a principal cause of or resulted in the failure of the Arrangement
to occur on or before such date (or the extension thereof, if applicable) and
such action or failure to act constitutes a breach of this Agreement;
2. This Amendment may be executed in counterparts, each of which shall
be deemed an original but together shall constitute one and the same instrument.
3. Except as otherwise set forth in this Amendment, all other terms and
conditions of the Combination Agreement shall remain the same and in full force
and effect.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK;
THE SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized respective officers as of the date first
written above.
PARENT:
DIVINE, INC.
By:/s/ JUDE M. SULLIVAN
------------------------------------------
Name: Jude M. Sullivan
Title:Senior Vice President, General
Counsel and Secretary
COMPANY:
DELANO TECHNOLOGY CORPORATION
By:/s/ DAVID L. LEWIS
------------------------------------------
Name: David L. Lewis
Title:V.P., General Counsel
[Signature Page to Amendment to Combination Agreement]
ANNEX A-1
SHAREHOLDER VOTING AGREEMENT
EXECUTION COPY
SHAREHOLDER VOTING AGREEMENT
SHAREHOLDER VOTING AGREEMENT, dated as of March 12, 2002 (this
"Agreement"), among the shareholders listed on the signature page(s) hereto
(collectively, "Shareholders" and each individually, a "Shareholder") and
divine, inc., a Delaware corporation ("Parent"). Capitalized terms used and not
otherwise defined herein shall have the respective meanings assigned to them in
the Combination Agreement referred to below.
WHEREAS, as of the date hereof, the Shareholders are the beneficial
owners of the number of shares of capital stock of Company set forth on the
signature pages hereto (such shares, or any other voting or equity of securities
of Company hereafter acquired by any Shareholder prior to the termination of
this Agreement, being referred to herein collectively as the "Shares");
WHEREAS, concurrently with the execution of this Agreement, Parent and
Company are entering into a Combination Agreement, dated as of the date hereof
(the "Combination Agreement"), pursuant to which, upon the terms and subject to
the conditions thereof, Company will become a wholly owned subsidiary of Parent
(the "Combination"); and
WHEREAS, as a condition to the willingness of and in order to induce
Parent to enter into the Combination Agreement, Parent has required that each of
the Shareholders agree, and each of the Shareholders are willing to, enter into
this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereby agree, severally and not jointly, as follows:
Section 1. Voting of Shares.
(a) Each Shareholder covenants and agrees that, until the termination of
this Agreement in accordance with the terms hereof, at the Company Meeting or
any other meeting of the shareholders of Company, however called, and in any
action by written consent of the shareholders of Company, such Shareholder will
vote, or cause to be voted, all of such Shareholder's respective Shares, in
favor of the adoption and approval of the Combination Agreement, the
Combination, the Arrangement, and the transactions contemplated by the
Combination Agreement and the Plan of Arrangement, as they may be modified or
amended from time to time in a manner not materially adverse to the
Shareholders. Each Shareholder further covenants and agrees that, until the
termination of this Agreement in accordance with the terms hereof, such
Shareholder will not vote any Shares in favor of any of the following (other
than the Combination and the transactions contemplated by the Combination
Agreement and the Plan of Arrangement): (i) any Acquisition Proposal, (ii) any
merger, combination, consolidation, reorganization, recapitalization, sale of
assets, liquidation, dissolution, or other business combination transaction
involving Company, (iii) any removal of members of the board of directors of
Company, (iv) any amendment to Company's articles of incorporation, (v) any
other action that is inconsistent with the Combination or Arrangement, or that
is intended, or could reasonably be expected, to impede, interfere with, delay,
postpone, discourage, or adversely
affect the Combination, the Arrangement, or any of the other transactions
contemplated by the Combination Agreement, the Plan of Arrangement, or this
Agreement.
Section 2. Irrevocable Proxy. Each Shareholder hereby irrevocably
grants to, and appoints, Parent, and any individual designated in writing by
Parent, and each of them individually, as such Shareholder's proxy (with full
power of substitution), for and in its name, place, and stead, to vote his, her,
or its Shares at any meeting of the shareholders of Company called with respect
to any of the matters specified in, and in accordance and consistent with,
Section 1 hereof. Each Shareholder understands and acknowledges that Parent is
entering into the Combination Agreement and the Plan of Arrangement in reliance
upon the Shareholder's execution and delivery of this Agreement. Each
Shareholder hereby affirms that the irrevocable proxy set forth in this Section
2 is given in connection with the execution of the Combination Agreement, and
that such irrevocable proxy is given to secure the performance of the duties of
such Shareholder under this Agreement. Except as otherwise provided for herein,
each Shareholder hereby (i) affirms that the irrevocable proxy is coupled with
an interest and may under no circumstances be revoked, (ii) ratifies and
confirms all that the proxies appointed hereunder may lawfully do or cause to be
done by virtue hereof, and (iii) affirms that such irrevocable proxy is executed
and intended to be irrevocable. Notwithstanding any other provisions of this
Agreement, the irrevocable proxy granted hereunder shall automatically terminate
upon the termination of this Agreement.
Section 3. Transfer of Shares. Each Shareholder covenants and agrees
that, until the termination of this Agreement in accordance with the terms
hereof, such Shareholder will not, directly or indirectly, (i) sell, assign,
transfer (including by merger, combination, testamentary disposition,
interspousal disposition pursuant to a domestic relations proceeding, or
otherwise by operation of law), pledge, encumber, or otherwise dispose of any of
the Shares; (ii) deposit any of the Shares into a voting trust or enter into a
voting agreement or arrangement with respect to the Shares or grant any proxy or
power of attorney with respect thereto that is inconsistent with this Agreement;
or (iii) enter into any contract, option, or other arrangement or undertaking
with respect to the direct or indirect sale, assignment, transfer (including by
merger, combination, testamentary disposition, interspousal disposition pursuant
to a domestic relations proceeding, or otherwise by operation of law), or other
disposition of any Shares. Notwithstanding the foregoing in this Section 3, any
shareholder may sell, assign or transfer any Shares for estate planning or other
tax purposes, provided that, on or prior to the date of such sale, assignment or
transfer, the transferee executes and delivers to Parent a Shareholder Voting
Agreement in the same form as this Agreement.
Section 4. Power of Attorney. The Shareholder hereby appoints Parent as
attorney in fact (which is unconditional, irrevocable and is coupled with an
interest) for and on its behalf to execute pursuant to Section 110 of the OBCA a
proxy appointing such Person designated by Parent to attend and act on behalf of
the Shareholder at any meeting of Company shareholders in respect of any of the
matters referred to in Section 1 hereof and to act on behalf of the Shareholder
on every action or approval by written consent of Company Shareholders in
respect of such matters. Notwithstanding any other provisions of this Agreement,
the irrevocable proxy granted hereunder shall automatically terminate upon the
termination of this Agreement.
2
Section 5. Representations and Warranties of the Shareholders. Each
Shareholder, on its own behalf, hereby severally represents and warrants to
Parent with respect to itself and its, his, or her ownership of the Shares,
except as otherwise disclosed on the applicable signature page hereto, as
follows:
(a) Ownership of Shares. The Shareholder beneficially owns all of the
Shares as set forth on the applicable signature page hereto and has good and
marketable title to such Shares, free and clear of any claims, liens,
encumbrances, and security interests whatsoever. The Shareholder owns no shares
of Company Common Shares other than the Shares as set forth on the signature
page. The Shareholder has sole voting power, without restrictions, with respect
to all of the Shares.
(b) Power, Binding Agreement. The Shareholder has the legal capacity
and all requisite power and authority to enter into and perform all of its
obligations under this Agreement. This Agreement has been duly and validly
executed and delivered by the Shareholder and constitutes a valid and binding
obligation of the Shareholder, enforceable against the Shareholder in accordance
with its terms.
(c) No Conflicts. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby will not, conflict
with or result in any violation of, or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancellation,
or acceleration of any obligation or to loss of a material benefit under, any
provision of any loan or credit agreement, note, bond, mortgage, indenture,
lease, or other agreement, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule, or regulation applicable
to the Shareholder, the Shares, or any of the Shareholder's properties or
assets. Except as expressly contemplated hereby and the Shareholder is not a
party to, and the Shares are not subject to or bound in any manner by, any
contract or agreement relating to the Shares, including without limitation, any
voting agreement, option agreement, purchase agreement, shareholders' agreement,
partnership agreement, or voting trust. No consent, approval, order, or
authorization of, or registration, declaration, or filing with, any court,
administrative agency, or commission or other governmental authority or
instrumentality, domestic, foreign, or supranational, is required by or with
respect to the Shareholder in connection with the execution and delivery of this
Agreement or the consummation by the Shareholder of the transactions
contemplated hereby.
(d) Voting. Neither the Shareholder nor any registered holder of the
Shareholder's Shares has previously granted or agreed to grant any ongoing proxy
in respect of the Shareholder's Shares or entered into any voting trust, vote
pooling or other agreement with respect to the right to vote, call meetings of
shareholders or give consents or approvals of any kind as to the Shareholder's
Shares.
(e) No Proceeding Pending. There is no claim, action, lawsuit,
arbitration, mediation or other proceeding pending or, to the best of the
knowledge, information and belief of the Shareholder, threatened against the
Shareholder, which relates to this Agreement or otherwise materially impairs the
ability of the Shareholder to consummate the transactions contemplated hereby.
3
Section 6. Termination. This Agreement shall terminate upon the
termination of the Combination Agreement in accordance with its terms; provided
that no such termination of this Agreement shall relieve any party of liability
for a willful breach hereof prior to termination.
Section 7. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
Section 8. Fiduciary Duties. Each Shareholder is signing this Agreement
solely in such Shareholder's capacity as an owner of his, her, or its respective
Shares, and nothing herein shall prohibit, prevent, or preclude such Shareholder
from taking or not taking any action in his or her capacity as an officer or
director of Company (it being understood that the Combination Agreement may
prohibit or restrict such action).
Section 9. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, both written and oral,
between the parties with respect thereto. This Agreement may not be amended,
modified, or rescinded except by an instrument in writing signed by each of the
parties hereto.
Section 10. Severability. If any term or other provision of this
Agreement is invalid, illegal, or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect. Upon such determination that
any term or other provision is invalid, illegal, or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible to the
fullest extent permitted by applicable law in a mutually acceptable manner in
order that the terms of this Agreement remain as originally contemplated to the
fullest extent possible.
Section 11. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the Province of Ontario
without regard to the principles of conflicts of law thereof.
Section 12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
Section 13. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed duly delivered (i) four business days
after being sent by registered or certified mail, return receipt requested,
postage prepaid, or (ii) one business day after being sent for next business day
delivery, fees prepaid, via a reputable nationwide overnight courier service, in
each case to the intended recipient as set forth below:
(i) if to a Shareholder to the address set forth on the respective
signature page of this Agreement
4
with copies to:
Goodmans LLP
250 Yonge Street
Toronto, Ontario M5B 2M6
Attention: Stephen Halperin
Facsimile: 416-979-1234
and
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02110
Attention: F. George Davitt
Facsimile: 617-248-7100
and
McCarthy Tetrault LLP
Suite 4700
Toronto Dominion Bank Tower
Toronto Dominion Center
Toronto, Ontario M5K 1E6
Attention: David E. Woollcombe
Facsimile: 416-868-0673
(ii) if to Parent to:
divine, inc.
1301 N. Elston Avenue
Chicago, Illinois 60622
Attention: Chief Financial Officer and General Counsel
Facsimile: (773) 394-6604
with a copy to:
Bell, Boyd & Lloyd LLC
70 West Madison Street
Suite 3300
Chicago, Illinois 60602
Attention: D. Mark McMillan, Esq.
Facsimile: (312) 827-8001
Section 14. No Third Party Beneficiaries. This Agreement is not
intended, and shall not be deemed, to confer any rights or remedies upon any
person other than the parties hereto and their respective successors and
permitted assigns, to create any agreement of employment with any person or to
otherwise create any third-party beneficiary hereto.
5
Section 15. Assignment. Neither this Agreement nor any of the rights,
interests, or obligations under this Agreement may be assigned or delegated, in
whole or in part, by operation of law or otherwise by any of the parties hereto
without the prior written consent of the other parties, and any such assignment
without such prior written consent shall be null and void, except that Parent
may assign this Agreement to any direct or indirect wholly owned subsidiary of
Parent without consent of Company or the Shareholder, provided that Parent shall
remain liable for all of its obligations under this Agreement. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns.
Section 16. Interpretation. When reference is made in this Agreement to
an Article or a Section, such reference shall be to an Article or Section of
this Agreement, unless otherwise indicated. The headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement. The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any party. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine, or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and vice
versa. Any reference to any federal, state, provincial, local, or foreign
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". No summary of
this Agreement prepared by the parties shall affect in any way the meaning or
interpretation of this Agreement.
Section 17. Submission to Jurisdiction. Each of the parties to this
Agreement (a) consents to submit itself to the jurisdiction of the Ontario
Superior Court of Justice (Commercial List) in any action or proceeding arising
out of or relating to this Agreement or any of the transactions contemplated by
this Agreement, (b) agrees that all claims in respect of such action or
proceeding may be heard and determined in any such court, (c) agrees that it
will not attempt to deny or defeat personal jurisdiction by motion or other
request for leave from any such court, and (d) agrees not to bring any action or
proceeding arising out of or relating to this Agreement or any of the
transaction contemplated by this Agreement in any other court. Each of the
parties hereto waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Any
party hereto may make service on another party by sending or delivering a copy
of the process to the party to be served at the address and in the manner
provided for the giving of notices in Section 13. Nothing in this Section,
however, shall affect the right of any party to serve legal process in any other
manner permitted by law.
Section 18. Waiver of Jury Trial. EACH OF PARENT, AND EACH SHAREHOLDER
HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING,
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE
ACTIONS OF PARENT, COMPANY, OR EACH SHAREHOLDER IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE, AND ENFORCEMENT OF THIS AGREEMENT.
6
IN WITNESS WHEREOF, each of the parties hereto has caused this
Shareholder Voting Agreement to be signed individually or by its respective duly
authorized officer as of the date first written above.
PARENT:
DIVINE, INC.
By: /s/ Jude M. Sullivan
------------------------------------------
Name: Jude M. Sullivan
Its: Senior Vice President, General
Counsel and Secretary
[Signature Page to Shareholder Voting Agreement.]
[Additional Signature Pages Follow]
7
IN WITNESS WHEREOF, the undersigned has caused this Shareholder Voting
Agreement to be duly executed as of the date first written above.
CARIDA INVESTMENTS INC.
By: /s/ Dennis Bennie
------------------------------------------
Name: Dennis Bennie
Its: Sole Shareholder
Address: 52 Owen Blvd
-------------------------------------
Toronto
-------------------------------------
Number of Shares Beneficially Owned:
918,578 Shares
[Signature Page to Shareholder Voting Agreement.]
[Additional Signature Pages Follow]
8
IN WITNESS WHEREOF, the undersigned has caused this Shareholder Voting
Agreement to be duly executed as of the date first written above.
GHI LIMITED PARTNERSHIP
By: 1329347 Ontario, Inc., as
General Partner of GHI
Limited Partnership
By: /s/ Bahman Koohestani
------------------------------------------
Name: Bahman Koohestani
Its: Sole Shareholder
Address: 3 Brookfield Rd.
-------------------------------------
Toronto, ON M2P 1B1
-------------------------------------
Number of Shares Beneficially Owned:
3,500,000 Shares
[Signature Page to Shareholder Voting Agreement.]
[Additional Signature Pages Follow]
9
IN WITNESS WHEREOF, the undersigned has caused this Shareholder Voting
Agreement to be duly executed as of the date first written above.
/s/ Vikas Kapoor
----------------------------------------------
Vikas Kapoor
Address: 91 Central Park West, Apt 12D
-------------------------------------
New York, NY 10023
-------------------------------------
Number of Shares Beneficially Owned:
4,230,000 Shares(#)
(#) Only those Shares for which Vikas Kapoor is
entitled to vote under that certain Restricted
Share Agreement between Vikas Kapoor and the
Company will be subject to this Agreement.
[Signature Page to Shareholder Voting Agreement.]
10
ANNEX B
INTERIM ORDER AND NOTICE OF APPLICATION
Court File No. 02-CL-4475
ONTARIO SUPERIOR COURT OF JUSTICE
[SEAL]
COMMERCIAL LIST
THE HONOURABLE MADAM ) MONDAY, THE 22ND DAY
)
JUSTICE GREER ) OF APRIL, 2002
IN THE MATTER OF AN APPLICATION UNDER SECTION 182 OF THE
BUSINESS CORPORATIONS ACT, R.S.O. 1990, B.16, AS AMENDED,
AND RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL
PROCEDURE
AND IN THE MATTER OF A PROPOSED PLAN OF ARRANGEMENT OF
DELANO TECHNOLOGY CORPORATION, CONCERNING A COMBINATION OF
DELANO TECHNOLOGY CORPORATION WITH DIVINE, INC.
DELANO TECHNOLOGY CORPORATION
Applicant
ORDER
THIS MOTION made by the Applicant, Delano Technology Corporation ("Delano"
or the "Company"), pursuant to section 182(5) of the Business Corporations Act,
R.S.O. 1990, B.16, as amended (the "OBCA"), for an interim order for advice and
directions in connection with the within application (the "Application"), was
heard this day at 393 University Avenue, Toronto, Ontario.
ON READING the Notice of Application, Notice of Motion and the Affidavit
of David Leis sworn April 17, 2002 (the "Lewis Affidavit"), and the exhibits
attached thereto, and on hearing the submissions of counsel for Delano and
counsel for divine, inc.,
-2-
DEFINITIONS
1. THIS COURT ORDERS that all capitalized terms not otherwise defined in this
Order shall have the meanings ascribed thereto in the Plan of Arrangement,
which is attached as Annex C to the draft Company Circular, which is attached
as Exhibit "A" to the Lewis Affidavit.
THE MEETING
2. THIS COURT ORDERS that Delano shall be permitted to call, hold and conduct
the Company Meeting, at which holders of common shares of Delano will be asked
to, among other things, consider and, if deemed advisable, pass, with or
without variation, the Arrangement Resolution, a copy of which is attached as
Annex F to the draft Company Circular, to authorize, approve and adopt the
Arrangement and Plan of Arrangement.
3. THIS COURT ORDERS that the Company Meeting shall be called, held and
conducted in accordance with the notice of the Company Meeting forming part of
the Company Circular (the "Notice"), the OBCA, the articles and by-laws of
Delano (including the quorum requirements thereof) and the terms of this Order
and any further Order of this Honourable Court.
AMENDMENTS
4. THIS COURT ORDERS that Delano is authorized to make such amendments,
revisions and/or supplements to the Plan of Arrangement as it may determine,
subject to the terms of the Combination Agreement, and the Plan of Arrangement
as so amended, revised and/or supplemented shall be the Plan of Arrangement to
be submitted to the Company Shareholders at the Company Meeting and shall be
the subject of the Arrangement Resolution.
ADJOURNMENTS AND POSTPONEMENTS
5. THIS COURT ORDERS that Delano, if it deems advisable, is specifically
authorized to adjourn or postpone the Company Meeting on one or more occasions,
without the necessity of first convening the Company Meeting or first obtaining
any vote of Company Shareholders respecting the adjournment or postponement.
-3-
NOTICE OF THE MEETING
6. THIS COURT ORDERS that Delano shall give notice of the Company Meeting,
substantially in the form of the Notice, subject to Delano's ability to change
dates and other relevant information in the final form of Notice. The Notice
shall be mailed or delivered in accordance with paragraph 9 of this Order.
Failure or omission to give notice in accordance with paragraph 9 of this Order,
as a result of mistake or of events beyond the control of Delano, shall not
constitute a breach of this Order or a defect in the calling of the Company
Meeting and shall not invalidate any resolution passed or proceedings taken at
the Company Meeting, but if any such failure or omission is brought to the
attention of Delano, then Delano shall use its best efforts to rectify it by the
method and in the time most reasonably practicable in the circumstances.
THE COMPANY CIRCULAR
7. THIS COURT ORDERS that Delano is hereby authorized and directed to
distribute the Company Circular, subject to such amendments, revisions or
supplements as Delano may determine. The Company Circular shall be mailed or
delivered in accordance with paragraphs 9 and 10 of this Order. The Company
Circular shall have the within Notice of Application and this Order attached as
schedules thereto. Failure or omission to distribute the Company Circular in
accordance with paragraphs 9 and 10 of this Order as a result of mistake or of
events beyond the control of Delano, shall not constitute a breach of this
Order and shall not invalidate any resolution passed or proceedings taken at
the Company Meeting, but if any such failure or omission is brought to the
attention of Delano, then Delano shall use its best efforts to rectify it by
the method and in the time most reasonably practicable in the circumstances.
SOLICITATION OF PROXIES
8. THIS COURT ORDERS that Delano is authorized to use proxies at the Company
Meeting, substantially in the forms accompanying the Company Circular, subject
to Delano's ability to insert dates and other relevant information in the final
forms of proxy. Delano is authorized, at its expense, to solicit proxies,
directly and through its officers, directors and employees, and through such
agents or representatives as it may retain for that purpose, and by mail or
such other forms of personal or electronic communication as it may determine.
Delano
-4-
may waive, in its discretion, the time limits for the deposit of proxies by
Company Shareholders if Delano deems it advisable to do so.
METHOD OF DISTRIBUTION OF MEETING MATERIALS
9. THIS COURT ORDERS that the Notice of Application, this Order, the Notice,
the Company Circular, the forms of proxy, and any other communications or
documents determined by Delano to be necessary or desirable (collectively, the
"Meeting Materials"), shall be distributed by Delano:
(a) to registered Company Shareholders, to the directors of Delano and to
the auditor of Delano, respectively, by mailing same by pre-paid
ordinary mail (or, alternatively, by delivery, in person or by
courier), not later than twenty-one (21) days prior to the date
established for the Company Meeting in the Notice. Distribution to
such persons shall be to their addresses as they appear on the books
and records of Delano as of April 16, 2002, or such later date as
Delano may determine in accordance with the OBCA (the "Record Date");
and
(b) to non-registered Company Shareholders by Delano complying with its
obligations under National Policy Statement No. 41 of the Canadian
Securities Administrators.
10. THIS COURT ORDERS that the Notice of Application, this Order, the Company
Circular, and any other communications or documents determined by Delano to be
necessary or desirable (collectively, the "Court Materials"), shall be
distributed by Delano to the holders of Company Options and to the holders of
Company Warrants, respectively, by mailing same by pre-paid ordinary mail (or,
alternatively, by delivery, in person or by courier), not later than three (3)
days after the date that this Order is granted. Distribution to such persons
shall be to their addresses as they appear on the books and records of Delano as
of the Record Date.
11. THIS COURT ORDERS that no one other than those listed in paragraph 9 of
this Order shall be entitled to receive the Meeting Materials or attend the
Company Meeting.
-5-
12. THIS COURT ORDERS that no other form of service of the Meeting Materials or
the Court Materials or any portion thereof need be made or notice given or other
material served in respect of these proceedings and/or the Company Meeting.
VOTING
13. THIS COURT ORDERS that the only persons entitled to vote in person or by
proxy on the Arrangement Resolution shall be the Company Shareholders as at the
close of business on the Record Date, subject to the provisions of the OBCA with
respect to the entitlement to vote of persons who become registered Company
Shareholders after the Record Date.
14. THIS COURT ORDERS that the Arrangement Resolution must be passed at the
Company Meeting by the affirmative vote of not less than two-thirds of the votes
cast in respect of the Arrangement Resolution by the Company Shareholders
present in person or represented by proxy at the Company Meeting (such that each
Company Shareholder is entitled to one vote for each Company Common Share
held). (For this purpose, illegible votes, spoiled votes, defective votes and
abstentions shall be deemed not to be votes cast.) Such votes shall be
sufficient to authorize and direct Delano to do all such acts and things as may
be necessary or desirable to give effect to the Arrangement and the Plan of
Arrangement on a basis consistent with what is provided for in the Company
Circular without the necessity of any further approval by the Company
Shareholders, subject only to final approval of the Arrangement and the Plan of
Arrangement by this Honourable Court.
DISSENT RIGHTS
15. THIS COURT ORDERS that each Company Shareholder shall be entitled to
exercise rights of dissent with respect to the Arrangement Resolution, in
accordance with and in compliance with section 185 of the OBCA, as varied by the
Plan of Arrangement, provided that, notwithstanding subsection 185(6) of the
OBCA, the written objection to the Arrangement Resolution referred to in
subsection 185(6) of the OBCA must be received by the Company (or the Company's
agents, if applicable) prior to 4:00 p.m. (Toronto time) on the Business Day
preceding the Company Meeting. Holders of Company Common Shares who duly
exercise such rights of dissent and who:
-6-
(a) are ultimately entitled to be paid fair value for their Company Common
Shares by Delano, shall be deemed to have transferred such Company
Common Shares immediately prior to the Effective Time to Delano,
without any further act or formality, and free and clear of all liens,
claims and encumbrances, and such shares shall be cancelled as of the
Effective Time, or
(b) are ultimately not entitled, for any reason, to be paid fair value for
their Company Common Shares, shall be deemed to have participated in
the Arrangement on the same basis as a non-dissenting holder of
Company Common Shares who did not make a valid election to receive
Exchangeable Shares and shall receive Parent Common Shares in exchange
for their Company Common Shares in accordance with the terms set forth
in section 2.2(a) of the Plan of Arrangement,
but in no case shall Delano, divine, inc., the Depositary or any other
Person be required to recognize such Dissenting Shareholders as holders of
Company Common Shares after the Effective Time, and the names of such
Dissenting Shareholders shall be deleted from the registers of holders of
Company Common Shares at Effective Time.
HEARING OF APPLICATION FOR APPROVAL OF THE ARRANGEMENT
16. THIS COURT ORDERS that, upon the passing of the Arrangement Resolution
pursuant to the provisions of paragraph 14 hereof, Delano shall be permitted to
apply to this Honourable Court for final approval of the Arrangement and the
Plan of Arrangement pursuant to the within Notice of Application.
17. THIS COURT ORDERS that the only persons entitled to appear and be heard at
the hearing of the within Application shall be:
(i) Delano;
(ii) divine, inc.; and
(iii) any person who has filed a Notice of Appearance herein in accordance
with the Notice of Application and the Rules of Civil Procedure.
-7-
18. THIS COURT ORDERS that any Notice of Appearance served in response to the
Notice of Application shall be served on counsel for Delano at the following
address: Goodmans LLP, 250 Yonge Street, Suite 2400, Toronto, Ontario, M5B 2M6,
Attention: Tom Friedland/Suzy Kauffman.
19. THIS COURT ORDERS that in the event the within Application for final
approval does not proceed on the date set forth in the Notice of Application,
and is adjourned, only those parties having previously filed a Notice of
Appearance shall be entitled to be given notice of the adjourned date.
20. THIS COURT ORDERS that Delano shall be entitled to seek leave to vary this
order upon such terms and upon the giving of such notice as this Honourable
Court may direct.
/s/ Greer
-------------------------
[Notary Stamp]
APR 22, 2002
DELANO TECHNOLOGY CORPORATION Court File: 02-CL-4475
IN THE MATTER OF AN APPLICATION UNDER
SECTION 182, BUSINESS CORPORATIONS ACT, R.S.O.
1990, B.16, AS AMENDED, AND RULES 14.05(2) AND
Applicant 14.05(3) OF THE RULES OF CIVIL PROCEDURE
- -------------------------------------------------------------------------------
ONTARIO SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Proceeding commenced at Toronto
-------------------------------------------
ORDER
-------------------------------------------
GOODMANS LLP
Barristers & Solicitors
250 Yonge Street
Suite 2400
Toronto, Ontario
M5B 2M6
TOM FRIEDLAND/LSUC #: 31848L
SUZY KAUFFMAN/LSUC #: 41703D
TEL: (416)979-2211
FAX: (416)979-1234
SOLICITORS FOR THE APPLICANT,
DELANO TECHNOLOGY CORPORATION
FILE NO. 01-6774
G25\KAUFFMAS\481869
Court File 02-CL-4475
DELANO TECHNOLOGY IN THE MATTER OF AN APPLICATION UNDER
CORPORATION SECTION 182, BUSINESS CORPORATIONS ACT, R.S.O.
1990, B.16, AS AMENDED, AND, RULES 14.05(2) AND
Applicant 14.05(3) OF THE RULES OF CIVIL PROCEDURE
- -------------------------------------------------------------------------------
April 22, 2002. ONTARIO SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Ms. Kauffman for Delano.
Ms. Fric for divine, inc. Proceeding commenced at Toronto
------------------------------------------------
Mr. Treeney, corporate counsel
also present. Order logo as MOTION RECORD
signed by me. (VOLUME 1 OF 3)
(RETURNABLE APRIL 22, 2002)
Order logo that the applicant ------------------------------------------------
may file a prem notice of
application with name GOODMANS LLP
02-CL-4475, with the correct Barristers & Solicitors
date inserted. 250 Yonge Street
Suite 2400
/s/ Greer Toronto, Ontario
M5B 2M6
TOM FRIEDLAND/LSUC#:31848L
SUZY KAUFFMAN/LSUC#:41703D
TEL: (416) 979-2211
FAX: (416) 979-1234
SOLICITORS FOR THE APPLICANT,
DELANO TECHNOLOGY CORPORATION
FILE NO. 01-6774
Commercial List Court File No. 02-CL-4475
ONTARIO SUPERIOR COURT OF JUSTICE
[SUPERIOR COURT
OF JUSTICE SEAL] COMMERCIAL LIST
IN THE MATTER OF AN APPLICATION UNDER SECTION 182 OF THE BUSINESS
CORPORATIONS ACT, R.S.O. 1990, B.16, AS AMENDED, AND RULES 14.05(2) AND
14.05(3) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED PLAN OF ARRANGEMENT OF DELANO TECHNOLOGY
CORPORATION, CONCERNING A COMBINATION OF DELANO TECHNOLOGY CORPORATION WITH
DIVINE, INC.
DELANO TECHNOLOGY CORPORATION
Applicant
NOTICE OF APPLICATION
TO THE RESPONDENTS:
A LEGAL PROCEEDING HAS BEEN COMMENCED by the applicant. The claim made by
the applicant appears on the following page.
THIS APPLICATION will come on for a hearing before a Judge presiding over
the Commercial List on Tuesday, July 30, 2002 at 10:00 a.m., or as soon after
that time as the application may be heard, at 393 University Avenue, Toronto,
Ontario.
IF YOU WISH TO OPPOSE THIS APPLICATION, to receive notice of any step in
the application or to be served with any documents in the application, you or
an Ontario lawyer acting for you must forthwith prepare a notice of appearance
in Form 38A prescribed by the Rules of Civil Procedure, serve it on the
applicant's lawyer or, where the applicant does not have a lawyer, serve it on
the applicant, and file it, with proof of service, in this court office, and
you or your lawyer must appear at the hearing.
IF YOU WISH TO PRESENT AFFIDAVIT OR OTHER DOCUMENTARY EVIDENCE TO THE COURT
OR TO EXAMINE OR CROSS-EXAMINE WITNESSES ON THE APPLICATION, you or your lawyer
must, in addition to serving your notice of appearance, serve a copy of the
evidence on the applicant's lawyer or, where the applicant does not have a
lawyer, serve it on the applicant, and file it, with proof of service, in the
court office where the application is to be heard as soon as possible, but not
later than 2 p.m. on the day before the hearing.
-2-
IF YOU FAIL TO APPEAR AT THE HEARING, JUDGMENT MAY BE GIVEN IN YOUR
ABSENCE AND WITHOUT FURTHER NOTICE TO YOU. IF YOU WISH TO OPPOSE THIS
APPLICATION BUT ARE UNABLE TO PAY LEGAL FEES, LEGAL AID MAY BE AVAILABLE TO YOU
BY CONTACTING A LOCAL LEGAL AID OFFICE.
Date April 22, 2002 Issued by /s/ [Signature Illegible]
-------------------------
Local registrar
Address of 393 University Avenue
court office Toronto, Ontario M5G 1E6
TO: ALL HOLDERS OF COMMON SHARES OF DELANO TECHNOLOGY CORPORATION AS AT
JUNE 27, 2002
AND TO: ALL HOLDERS OF OPTIONS TO PURCHASE COMMON SHARES OF DELANO TECHNOLOGY
CORPORATION GRANTED UNDER THE DELANO TECHNOLOGY CORPORATION STOCK
OPTION PLANS AS AT JUNE 17, 2002
AND TO: ALL HOLDERS OF WARRANTS OF DELANO TECHNOLOGY CORPORATION AS AT JUNE
17, 2002
AND TO: ALL DIRECTORS OF DELANO TECHNOLOGY CORPORATION AS AT JUNE 17, 2002
AND TO: KPMG LLP
4210 Yonge Street, Suite 500
Toronto, Ontario
M2P 2B8
Auditors for Delano Technology Corporation
AND TO: OSLER, HOSKIN & HARCOURT LLP
Box 50, 1 First Canadian Place
Toronto, Ontario
M5X 1B8
Larry Lowenstein LSUC# 23120C
Laura Fric LSUC# 36545Q
Tel: 416-362-2111
Fax: 416-862-6666
Solicitors for divine, inc.
-3-
APPLICATION
1. THE APPLICANT MAKES APPLICATION FOR:
a) an interim order for advice and directions pursuant to section
182(5) of the Business Corporations Act (Ontario), R.S.O. 1990,
B.16, as amended (the "OBCA") with respect to a proposed
arrangement (the "Arrangement") of Delano Technology Corporation
("Delano"), concerning a combination of Delano with divine, inc.;
and
b) an order approving the Arrangement pursuant to sections 182(3)
and 182(5) of the OBCA; and
c) such further and other relief as this Honourable Court may deem
just.
2. THE GROUNDS FOR THE APPLICATION ARE:
a) section 182 of the OBCA;
b) all statutory requirements under the OBCA have been fulfilled;
c) the Arrangement is fair and reasonable;
d) if made, the Order approving the Arrangement will constitute the
basis for an exemption from the registration requirements of the
United States Securities Act of 1993, as amended with respect to
the shares of common stock of divine, inc. to be issued pursuant
to the Arrangement;
e) certain of the holders of common shares of Delano and certain of
the holders of options to purchase common shares of Delano
granted under the Delano Stock Option Plans are resident outside
of Ontario and will be served at their addresses as they appear
on the books and records of Delano as at June 17, 2002 pursuant
to Rules 17.02(n) and 17.02(o) of the Rules of Civil Procedure
and the terms of any interim Order for advice and directions
granted by this Honourable Court.
f) rules 14.02, 14.05(3)(f) and 38 of the Rules of Civil Procedures;
and
-4-
g) such further and other grounds as counsel may advise and this
Honourable Court may permit.
3. THE FOLLOWING DOCUMENTARY EVIDENCE WILL BE USED AT THE HEARING OF THE
APPLICATION:
a) such interim Order as may be granted by this Honourable Court;
b) an Affidavit of David Lewis, to be sworn, with exhibits thereto;
c) a further Affidavit to be sworn on behalf of Delano, reporting as
to compliance with any interim Order and the results of any
meeting conducted pursuant to such interim Order, with exhibits
thereto; and
d) such further and others material as counsel may advise and this
Honourable Court may permit.
April 22, 2002 GOODMANS LLP
Barristers & Solicitors
250 Younge Street, Suite 2400
Toronto, Canada M5B 2M6
Tom Friedland LSUC#:31848L
Suzy Kauffman LSUC#:41703D
Kelly Friedman LSUC#:38228W
Tel: (416) 979-2211
Fax: (416) 979-1234
Solicitors for the Applicant,
Delano Technology Corporation
DELANO TECHNOLOGY IN THE MATTER OF AN APPLICATION UNDER Commercial List
CORPORATION SECTION 182, BUSINESS CORPORATIONS ACT, Court File
R.S.O. 1990, B.16, AS AMENDED, AND No: 02-CL-4475
Applicant RULES 14.05(2) AND 14.05(3) OF THE RULES
OF CIVIL PROCEDURE
- ------------------------------------------------------------------------------
ONTARIO SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Proceeding commenced at Toronto
---------------------------------
NOTICE OF APPLICATION
(RETURNABLE JULY 30, 2002)
---------------------------------
GOODMANS LLP
Barristers & Solicitors
250 Yonge Street, Suite 2400
Toronto, Canada M5B 2M6
Tom Friedland LSUC#: 31848L
Suzy Kauffman LSUC#: 41703D
Kelly Friedman LSUC#: 38228W
Tel: (416) 979-2211
Fax: (416) 979-1234
Solicitors for the Applicant,
Delano Technology Corporation
ANNEX C
FORM OF PLAN OF ARRANGEMENT
FINAL VERSION
PLAN OF ARRANGEMENT
UNDER SECTION 182
OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Plan of Arrangement, unless there is something in the subject matter or
context inconsistent therewith, the following terms shall have the respective
meanings set out below and grammatical variations of such terms shall have
corresponding meanings:
"AFFILIATE" has the meaning ascribed thereto in the OBCA.
"ARRANGEMENT" means an arrangement under section 182 of the OBCA on the
terms and subject to the conditions set out in this Plan of Arrangement
and subject to any amendments or variations thereto made in accordance
with the Combination Agreement, this Plan of Arrangement or made at the
direction of the Court in the Final Order.
"ARRANGEMENT RESOLUTION" means the special resolution of the Company
Shareholders, to be substantially in the form and content of Exhibit B
to the Combination Agreement.
"ARTICLES OF ARRANGEMENT" means the articles of arrangement of Company
in respect of the Arrangement that are required by the OBCA to be sent
to the Director after the Final Order is made.
"BUSINESS DAY" means any day on which commercial banks are open for
business in Toronto, Ontario and Chicago, Illinois other than a
Saturday, a Sunday or a day observed as a holiday in Toronto, Ontario
under applicable laws or in Chicago, Illinois under applicable laws.
"CANADIAN RESIDENT" means a resident of Canada for purposes of the ITA.
"CERTIFICATE" means the certificate of arrangement giving effect to the
Arrangement, issued pursuant to subsection 183(2) of the OBCA after the
Articles of Arrangement have been filed.
"CHANGE IN LAW EXCHANGE DATE" has the meaning ascribed thereto in
section 5.3(2).
"COMBINATION AGREEMENT" means the combination agreement dated as of
March 12, 2002 by and between Parent and Company, as further amended,
supplemented and/or restated in accordance therewith prior to the
Effective Date, providing for, among other things, the Arrangement.
"COMPANY" means Delano Technology Corporation, a corporation existing
under the laws of Ontario.
- 2 -
"COMPANY CIRCULAR" means the notice of the Company Meeting and
accompanying management information circular, including all appendices
thereto, to be sent to Company Shareholders in connection with the
Company Meeting.
"COMPANY COMMON SHARES" means the outstanding common shares in the
capital of Company.
"COMPANY MEETING" means the special meeting of Company Shareholders,
including any adjournment or postponement thereof, to be called and
held in accordance with the Interim Order to consider and vote upon the
Arrangement.
"COMPANY MEETING DATE" means the date of the Company Meeting.
"COMPANY OPTIONS" means the Company Common Share purchase options
granted under the Company Stock Option Plans.
"COMPANY SHAREHOLDERS" means holders of Company Common Shares.
"COMPANY STOCK OPTION PLANS" means the Company Employee Stock Purchase
Plans adopted by Company board of directors on January 25, 1999 and
also the Company Employee Stock Option Plan adopted by Company board of
directors on March 5, 1999 as amended and restated on July 20, 2000.
"COMPANY WARRANTS" means the share purchase warrants to purchase a
total of 36,723 Company Common Shares.
"COURT" means the Ontario Superior Court of Justice.
"CURRENT MARKET PRICE" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"DEPOSITARY" means [- ] at its offices set out in the Letter of
Transmittal and Election Form.
"DIRECTOR" means the Director appointed pursuant to section 278 of the
OBCA.
"DISSENT RIGHTS" has the meaning ascribed thereto in section 3.1.
"DISSENTING SHAREHOLDER" means a holder of Company Common Shares who
dissents in respect of the Arrangement in accordance with the Dissent
Rights.
"DIVIDEND AMOUNT" means an amount equal to the full amount of all
declared and unpaid dividends on an Exchangeable Share held by a holder
on any dividend record date which occurred prior to the date of
purchase of such share by Parent from such holder.
"EFFECTIVE DATE" means the date shown on the Certificate.
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date.
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"ELECTION DEADLINE" means 4:00 p.m. (Toronto time) at the place of
deposit on the date which is two Business Days prior to the Company
Meeting Date.
"EXCHANGE RATIO" means, subject to adjustment, if any, as provided
herein, 1.187.
"EXCHANGEABLE ELECTED SHARE" means any Company Common Share in respect
of which a Company Common Shareholder shall have validly elected, in a
duly completed Letter of Transmittal and Election Form deposited with
the Depositary no later than the Election Deadline, to exchange for
Exchangeable Shares (and certain ancillary rights) provided however
that in order for any such election to be valid only Company Common
Shareholders who are either, (1) Canadian Residents not exempt from tax
under Part I of the ITA holding Company Common Shares on their own
behalf or (2) Persons who hold Company Common Shares on behalf of one
or more Canadian Residents not exempt from tax under Part I of the ITA
shall be entitled to elect to receive Exchangeable Shares and any
election by any other Company Common Shareholder shall be invalid.
"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the
capital of the Company, having the rights, privileges, restrictions and
conditions set out in the Exchangeable Share Provisions.
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares, which
rights, privileges, restrictions and conditions shall be as set out in
Appendix 1.
"EXCHANGEABLE SHARE SUPPORT AGREEMENT" means an agreement made among
Parent and Company substantially in the form and content of Exhibit D
to the Combination Agreement, as amended pursuant to the terms of the
Exchangeable Share Support Agreement.
"EXCHANGEABLE SHARE VOTING EVENT" has the meaning ascribed thereto in
the Exchangeable Share Provisions.
"EXEMPT EXCHANGEABLE SHARE VOTING EVENT" has the meaning ascribed
thereto in the Exchangeable Share Provisions.
"FINAL ORDER" means the final order of the Court approving the
Arrangement as such order may be amended or varied at any time prior to
the Effective Date or, if appealed, then, unless such appeal is
withdrawn or denied, as affirmed or amended on appeal.
"GOVERNMENTAL ENTITY" means any court, administrative agency, tribunal,
bureau, board, commission, public authority, governmental or regulatory
authority, agency, ministry, crown corporation or other law, rule-or
regulation-making entity, domestic or foreign, or any
quasi-governmental body, self-regulatory organization or stock
exchange, including without limitation the TSE or the Nasdaq.
"HOLDERS" means, (a) when used with reference to any shares, the
holders of such shares shown from time to time in the register
maintained by or on behalf of the applicable corporation in respect
thereof and (b) when used with reference to Company Options, the
holders thereof from time to time.
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"INTERIM ORDER" means the interim order of the Court, as the same may
be amended, in respect of the Arrangement as contemplated by section
2.3 of the Combination Agreement.
"ITA" means the Income Tax Act (Canada), as amended.
"LETTER OF TRANSMITTAL AND ELECTION FORM" means the letter of
transmittal and election form for use by Company Shareholders in the
form accompanying the Company Circular.
"LIQUIDATION AMOUNT" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"LIQUIDATION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 5.1(1).
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in section
5.1(1).
"LIQUIDATION DATE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"NASDAQ" means the Nasdaq National Market or its successor.
"OBCA" means the Business Corporations Act (Ontario), as now in effect
and as it may be amended from time to time prior to the Effective Date.
"PARENT" means divine, Inc. a corporation existing under the laws of
Delaware.
"PARENT CALL RIGHT" has the meaning ascribed thereto in section 5.3(1).
"PARENT CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 5.3(1).
"PARENT COMMON SHARES" means the shares of common stock in the capital
of Parent and any other securities into which such shares may be
changed, and in the event of any transaction described in section 11.3
of the Exchangeable Share Provisions, the corresponding shares in the
capital of Parent Successor.
"PARENT CONTROL TRANSACTION" has the meaning ascribed thereto in the
Exchangeable Share Provisions. "PERSON" means any individual,
corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint
venture, estate, trust, company (including any limited liability
company or joint stock company), firm or other enterprise, association,
organization, entity or Governmental Entity.
"PLAN OF ARRANGEMENT", "HEREOF", "HEREUNDER" and similar expressions
means this Plan of Arrangement, including the appendices hereto and
includes any agreement or instrument supplementary or ancillary hereto
and any amendments or variations hereto made in accordance herewith or
made at the direction of the Court.
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 5.2(1).
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"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in section
5.2(1).
"REDEMPTION DATE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"REDEMPTION PRICE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"REPLACEMENT OPTION" has the meaning ascribed thereto in section
2.2(g).
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"REVISED WARRANT" has the meaning ascribed thereto in section 2.2(h).
"SPECIAL VOTING SHARE" has the meaning ascribed thereto in the Voting
and Exchange Trust Agreement.
"STAMP TAXES" means all stamp, registration and transfer taxes and
duties or their equivalents plus interest and penalties in respect
thereof in all jurisdictions where such taxes and duties are payable as
a result of any of the transactions contemplated by this Plan of
Arrangement.
"TRANSFER AGENT" means [- ] or such other person as may from time to
time be appointed by Company as the registrar and transfer agent for
the Exchangeable Shares.
"TRUSTEE" means the trustee chosen by Parent, acting reasonably, to act
as trustee under the Voting and Exchange Trust Agreement, being a
corporation organized and existing under the laws of Canada and
authorized to carry on the business of a trust company in all the
provinces of Canada, and any successor trustee appointed under the
Voting and Exchange Trust Agreement.
"TSE" means The Toronto Stock Exchange or its successors.
"VOTING AND EXCHANGE TRUST AGREEMENT" means an agreement made among
Parent, Company and the Trustee in connection with the Plan of
Arrangement substantially in the form and content of Exhibit E to the
Combination Agreement, as amended pursuant to the terms of the Voting
and Exchange Trust Agreement.
1.2 SECTIONS AND HEADINGS
The division of this Plan of Arrangement into articles and sections and the
insertion of headings are for reference purposes only and shall not affect the
interpretation of this Plan of Arrangement. Unless otherwise indicated, any
reference in this Plan of Arrangement to an article, a section or an exhibit
refers to the specified article or section of or exhibit to this Plan of
Arrangement.
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1.3 NUMBER, GENDER AND PERSONS
In this Plan of Arrangement, unless the context otherwise requires, words
importing the singular number include the plural and vice versa and words
importing any gender include all genders.
1.4 DATE FOR ANY ACTION
In the event that any date on which any action is required to be taken hereunder
by any Person is not a Business Day, such action shall be required to be taken
on the next succeeding day which is a Business Day.
ARTICLE 2
ARRANGEMENT
2.1 BINDING EFFECT
This Plan of Arrangement will become effective at, and be binding at and after,
the Effective Time on (i) Company and Parent, (ii) all holders and all
beneficial owners of Company Common Shares, Company Options and Replacement
Options, (iii) all holders and all beneficial owners of Exchangeable Shares from
time to time; and (iv) all holders and beneficial owners of Parent Common Shares
received in exchange for Company Common Shares or Exchangeable Shares or on
exercise of Replacement Options.
2.2 ARRANGEMENT
Commencing at the Effective Time, the following shall occur and shall be deemed
to occur in the following order (except that the exchange of shares pursuant to
section 2.2(c), and the entering into of the Exchangeable Share Support
Agreement and the Voting and Exchange Trust Agreement pursuant to section 2.2(f)
shall occur and shall be deemed to occur simultaneously) without any further act
or formality:
(a) each Company Common Share other than,
(i) Company Common Shares held by Parent or any Affiliate
thereof;
(ii) Exchangeable Elected Shares; and
(iii) Company Common Shares of Dissenting Shareholders
described in section 3.1(a) (which shall be cancelled
as of the Effective Time),
shall be transferred by the holder thereof to Parent, without
any further act or formality and free and clear of all liens,
claims and encumbrances, in exchange for a number of Parent
Common Shares equal to the Exchange Ratio;
(b) Company shall reorganize its share capital, by
(i) creating as a class of shares in the capital of
Company an unlimited number of Exchangeable Shares;
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(ii) eliminating as a class of shares in the capital of
Company the Class "A" Preferred Shares, Class "B"
Preferred Shares and Class "C" Preferred Shares, none
of which are outstanding, so that, immediately
thereafter, the authorized share capital of Company
shall consist of an unlimited number of Exchangeable
Shares and an unlimited number of Company Common
Shares;
(c) each Exchangeable Elected Share will be exchanged without any
further act or formality and free and clear of all liens,
claims and encumbrances, for a number of Exchangeable Shares
equal to the Exchange Ratio;
(d) the names of the holders of the Company Common Shares that are
transferred to Parent or exchanged for Exchangeable Shares
pursuant to sections 2.2(a) or (c), as the case may be, shall
be removed from the applicable register of holders of Company
Common Shares and added to the applicable register of holders
of Parent Common Shares or Exchangeable Shares (respectively),
and Parent shall be recorded as the registered holder of the
Company Common Shares so transferred under section 2.2(a) and
shall be deemed to be the legal and beneficial owner thereof;
(e) the stated capital accounts of Company shall be adjusted as
follows:
(i) there shall be deducted from the stated capital
account of Company maintained for the Company Common
Shares an amount obtained by multiplying the stated
capital of all of the Company Common Shares by the
number of Company Common Shares transferred to
Company pursuant to section 3.1(a) and dividing that
product by the total number of Company Common Shares
outstanding immediately before the transfer in
section 3.1(a);
(ii) there shall be deducted from the stated capital
account of Company maintained for the Company Common
Shares an amount obtained by multiplying the stated
capital of all of the Company Common Shares
immediately following the deduction in section
2.2(e)(i) by the number of Exchangeable Elected
Shares and dividing that product by the total number
of Company Common Shares outstanding immediately
before the exchange in section 2.2(c);
(iii) there shall be added to the stated capital account of
Company maintained for the Exchangeable Shares an
amount equal to the amount deducted pursuant to
section 2.2(e)(ii) from the stated capital account
maintained for the Company Common Shares;
(f) coincident with the share exchanges set out in section 2.2(c),
Parent and Company shall execute the Exchangeable Share
Support Agreement and Parent, Company and the Trustee shall
execute the Voting and Exchange Trust Agreement and Parent
shall issue to and deposit with the Trustee the Special Voting
Share, in consideration of the payment to Parent of US$1.00,
to be thereafter held of record by the Trustee as trustee for
and on behalf of, and for the use and benefit of, the
- 8 -
holders of the Exchangeable Shares in accordance with the
Voting and Exchange Trust Agreement. All rights of holders of
Exchangeable Shares under the Voting and Exchange Trust
Agreement shall be received by them as part of the rights
attaching to the Exchangeable Shares; and
(g) subject to applicable laws and regulatory requirements, each
outstanding Company Option outstanding at the Effective Time
that has not been cancelled, terminated or duly exercised
prior to the Effective Time shall be exchanged for an option
(a "REPLACEMENT OPTION") to purchase from Parent or the
Company, as Parent may determine, a number of Parent Common
Shares equal to the product of the Exchange Ratio multiplied
by the number of Company Common Shares subject to such Company
Option. Such Replacement Option shall provide for an exercise
price per Parent Common Share equal to the exercise price per
Company Common Share of such Company Option immediately prior
to the Effective Time divided by the Exchange Ratio. If the
foregoing calculation results in the total Replacement Options
of a particular holder being exercisable for a total number of
Parent Common Shares that includes a fraction of a Parent
Common Share, then the total number of Parent Common Shares
subject to such holder's total Replacement Options shall be
rounded down to the next whole number of Parent Common Shares
and the total exercise price for such Replacement Options
shall be reduced by the exercise price of the fractional
Parent Common Share rounded up to the nearest cent. The term
to expiry, conditions to and manner of exercising, vesting
schedule and all other terms and conditions of a Replacement
Option will be the same as the Company Option for which it is
exchanged, and any document or agreement previously evidencing
a Company Option shall thereafter evidence and be deemed to
evidence such Replacement Option.
(h) subject to applicable laws and regulatory requirements, each
outstanding Company Warrant outstanding at the Effective Time
shall be amended (a "Revised Warrant") to provide for the
purchase of the number of Parent Common Shares equal to the
product of the Exchange Ratio multiplied by the number of
Company Common Shares subject to such Company Warrant. Such
Revised Warrant shall provide for an exercise price per Parent
Common Share equal to the exercise price per Company Common
Share of such Company Warrant immediately prior to the
Effective Time divided by the Exchange Ratio. If the foregoing
calculation results in the total Revised Warrants of a
particular holder being exercisable for a total number of
Parent Common Shares that includes a fraction of a Parent
Common Share, then the total number of Parent Common Shares
subject to such holder's total Revised Warrants shall be
rounded down to the next whole number of Parent Common Shares
and the total exercise price for such Revised Warrants shall
be reduced by the exercise price of the fractional Parent
Common Share rounded up to the nearest cent. The term to
expiry, conditions to and manner of exercising, vesting
schedule and all other terms and conditions of a Revised
Warrant will be the same as they were prior to such
amendments, and any document or agreement previously
evidencing a Company Warrant shall thereafter evidence and be
deemed to evidence such Revised Warrant.
- 9 -
2.3 ADJUSTMENTS TO EXCHANGE RATIO
The Exchange Ratio shall be adjusted to reflect fully the effect of any stock
split, reverse split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Shares or Company Common Shares, other
than stock dividends paid in lieu of ordinary course dividends), merger,
consolidation, reorganization, recapitalization or other like change with
respect to Parent Common Shares or Company Common Shares occurring after the
date of the Combination Agreement and prior to the Effective Time.
ARTICLE 3
RIGHTS OF DISSENT
3.1 RIGHTS OF DISSENT
Holders of Company Common Shares may exercise rights of dissent with respect to
such shares pursuant to and in the manner set forth in section 185 of the OBCA
and this section 3.1 (the "DISSENT RIGHTS") in connection with the Arrangement;
provided that, notwithstanding subsection 185(6) of the OBCA, the written
objection to the Arrangement Resolution referred to in subsection 185(6) of the
OBCA must be received by Company not later than 4:00 p.m. (Toronto time) on the
Business Day preceding the Company Meeting. Holders of Company Common Shares who
duly exercise such rights of dissent and who:
(a) are ultimately determined to be entitled to be paid fair value
for their Company Common Shares, shall be deemed to have
transferred such Company Common Shares immediately prior to
the Effective Time to Company, without any further act or
formality, and free and clear of all liens, claims and
encumbrances, and such shares shall be cancelled as of the
Effective Time, or
(b) are ultimately determined not to be entitled, for any reason,
to be paid fair value for their Company Common Shares, shall
be deemed to have participated in the Arrangement on the same
basis as a non-dissenting holder of Company Common Shares who
did not make a valid election to receive Exchangeable Shares
and shall receive Parent Common Shares in exchange for their
Company Common Shares on the basis determined in accordance
with section 2.2(a) above;
but in no case shall Parent, Company, the Depositary or any other Person be
required to recognize such Dissenting Shareholders as holders of Company Common
Shares after the Effective Time, and the names of such Dissenting Shareholders
shall be deleted from the registers of holders of Company Common Shares at the
Effective Time.
ARTICLE 4
CERTIFICATES AND FRACTIONAL SHARES
4.1 ISSUANCE OF CERTIFICATES REPRESENTING EXCHANGEABLE SHARES
At or promptly after the Effective Time, Company shall deposit with the
Depositary, for the benefit of the holders of Company Common Shares who have
made a valid election to receive Exchangeable Shares in connection with the
Arrangement, certificates representing that number of whole Exchangeable Shares
to be delivered pursuant to section 2.2(c). Upon surrender to the
- 10 -
Depositary for cancellation of a certificate which immediately prior to the
Effective Time represented Company Common Shares which were exchanged for
Exchangeable Shares under the Arrangement, together with such other documents
and instruments as the Depositary may reasonably require, the holder of such
surrendered certificate shall be entitled to receive in exchange therefor, and
the Depositary shall deliver to such holder, a certificate representing that
number (rounded down to the nearest whole number) of Exchangeable Shares which
such holder has the right to receive (together with any dividends or
distributions with respect thereto pursuant to section 4.3 and any cash in lieu
of fractional Exchangeable Shares pursuant to section 4.4, in each case, less
any amounts withheld pursuant to section 4.7), and the certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of Company Common Shares that was not registered in the transfer
records of Company, a certificate representing the proper number of Exchangeable
Shares may, subject to section 2.2, be issued to the transferee if the
certificate which immediately prior to the Effective Time represented Company
Common Shares that were exchanged for Exchangeable Shares under the Arrangement,
is presented to the Depositary accompanied by all documents required to evidence
and effect such transfer. Until surrendered as contemplated by this section 4.1,
each certificate which immediately prior to the Effective Time represented one
or more outstanding Company Common Shares that were exchanged for Exchangeable
Shares under the Arrangement, shall be deemed at all times after the Effective
Time to represent only the right to receive upon such surrender (i) the
certificate representing Exchangeable Shares as contemplated by this section
4.1, (ii) a cash payment in lieu of any fractional Exchangeable Shares as
contemplated by section 4.4 and (iii) any dividends or distributions with a
record date after the Effective Time theretofore paid or payable with respect to
Exchangeable Shares as contemplated by section 4.3, in each case, less any
amounts withheld pursuant to section 4.7.
4.2 EXCHANGE OF CERTIFICATES FOR PARENT COMMON SHARES
At or promptly after the Effective Time, Parent shall deposit or cause the
deposit with the Depositary, for the benefit of the holders of Company Common
Shares who will receive Parent Common Shares on the Arrangement, certificates
representing that number of whole Parent Common Shares to be delivered pursuant
to section 2.2(a). Upon surrender to the Depositary for cancellation of a
certificate which immediately prior to the Effective Time represented one or
more Company Common Shares that were exchanged for Parent Common Shares under
the Arrangement, together with such other documents and instruments as would
have been required to effect the transfer of the Company Common Shares under the
OBCA and the bylaws of the Company, as applicable, and such other documents and
instruments as the Depositary may reasonably require, the holder of such
surrendered certificate shall be entitled to receive in exchange therefor, and
the Depositary shall deliver to such holder, a certificate representing that
number (rounded down to the nearest whole number) of Parent Common Shares which
such holder has the right to receive (together with any dividends or
distributions with respect thereto pursuant to section 4.3 and any cash in lieu
of fractional Parent Common Shares pursuant to section 4.4, less any amounts
withheld pursuant to section 4.7), and the certificate so surrendered shall
forthwith be cancelled. In the event of a transfer of ownership of Company
Common Shares that was not registered in the transfer records of Company, a
certificate representing the proper number of Parent Common Shares may, subject
to section 2.2, be issued to the transferee if the certificate which immediately
prior to the Effective Time represented Company Common Shares that were
exchanged for Parent Common Shares under the Arrangement, is presented to the
Depositary, accompanied by all documents reasonably required to evidence and
effect such
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transfer. Until surrendered as contemplated by this Section 4.2, each
certificate which immediately prior to the Effective Time represented one or
more outstanding Company Common Shares that were exchanged for Parent Common
Shares under the Arrangement, shall be deemed at all times after the Effective
Time to represent only the right to receive upon such surrender (i) a
certificate representing the Parent Common Shares as contemplated by this
section 4.2, (ii) a cash payment in lieu of fractional Parent Common Shares as
contemplated by section 4.4 and (iii) any dividends or distributions with a
record date after the Effective Time theretofore paid or payable with respect to
Parent Common Shares as contemplated by section 4.3, in each case, less any
amounts withheld pursuant to section 4.7.
4.3 DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES
No dividends or other distributions declared or made after the Effective Time
with respect to Exchangeable Shares or Parent Common Shares with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
certificate which immediately prior to the Effective Time represented
outstanding Company Common Shares that were exchanged pursuant to section 2.2(a)
or (c), and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to section 4.4, unless and until the holder of such
certificate shall surrender such certificate in accordance with section 4.1 or
4.2, as the case may be. Subject to applicable law, at the time of such
surrender of any such certificate (or, in the case of clause (iii) below, at the
appropriate payment date), there shall be paid to the holder of the certificates
representing Company Common Shares without interest, (i) the amount of any cash
payable in lieu of a fractional share to which such holder is entitled pursuant
to section 4.4, (ii) the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to the
Exchangeable Shares or Parent Common Shares, as the case may be, to which such
holder is entitled pursuant hereto and (iii) to the extent not paid under clause
(ii), on the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to surrender
and a payment date subsequent to surrender payable with respect to such
Exchangeable Shares or Parent Common Shares, as the case may be.
4.4 NO FRACTIONAL SHARES
No certificates representing fractional Exchangeable Shares or fractional Parent
Common Shares shall be issued upon the surrender for exchange of certificates
pursuant to sections 4.1 or 4.2 and no dividend, stock split or other change in
the capital structure of Company or Parent shall relate to any such fractional
security and such fractional interests shall not entitle the owner thereof to
exercise any rights as a security holder of Company or Parent. In lieu of any
such fractional securities, each Person otherwise entitled to a fractional
interest in an Exchangeable Share or a Parent Common Share will be entitled to
receive a cash payment equal to such Person's pro rata portion of the net
proceeds after expenses received by the Depositary upon the sale of whole shares
representing an accumulation of all fractional interests in Parent Common Shares
to which all such Persons would otherwise be entitled (either directly or upon
an exchange of all such fractional Exchangeable Shares for Parent Common
Shares). The Depositary will sell such Parent Common Shares on the Nasdaq as
soon as reasonably practicable following the Effective Date. The aggregate net
proceeds after expenses of such sale will be distributed by the Depositary, pro
rata in relation to the respective fractions, among Persons otherwise entitled
to receive such fractional interests. A holder of an Exchangeable Share shall
not be entitled to any fraction of a Parent Common Share upon the exercise by
Parent of the Liquidation Call Right,
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the Redemption Call Right or the Parent Call Right and no certificates
representing any such fractional interest shall be issued and such holder
otherwise entitled to a fractional interest will receive for such fractional
interest from Parent on the designated payment date a cash payment equal to such
fractional interest multiplied by the Current Market Price.
4.5 LOST CERTIFICATES
In the event any certificate which immediately prior to the Effective Time
represented one or more outstanding Company Common Shares that were exchanged
pursuant to section 2.2 shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such certificate to
be lost, stolen or destroyed, the Depositary will issue in exchange for such
lost, stolen or destroyed certificate, certificates representing Exchangeable
Shares or Parent Common Shares (and a cheque for any dividends or distributions
with respect thereto and any cash pursuant to section 4.4) deliverable in
accordance with section 2.2 and such holder's Letter of Transmittal and Election
Form. When authorizing such payment in exchange for any lost, stolen or
destroyed certificate, the Person to whom cash and/or certificates representing
Exchangeable Shares or Parent Common Shares are to be issued shall, as a
condition precedent to the issuance thereof, give a bond satisfactory to
Company, Parent and their respective transfer agents in such sum as Company or
Parent may direct or otherwise indemnify Company, Parent and the Depositary in a
manner satisfactory to Company and Parent against any claim that may be made
against Company, Parent and/or the Depositary with respect to the certificate
alleged to have been lost, stolen or destroyed.
4.6 EXTINCTION OF RIGHTS
Any certificate which immediately prior to the Effective Time represented
outstanding Company Common Shares that were exchanged pursuant to section 2.2(a)
or (c) that is not deposited with all other instruments required by section 4.1
or 4.2, as the case may be, on or prior to the third anniversary of the
Effective Date shall cease to represent a claim or interest of any kind or
nature as a shareholder of Company or Parent. On such date, the Exchangeable
Shares (and ancillary rights) or Parent Common Shares (and cash in lieu of
fractional interests therein, as provided in section 4.4) and any dividends or
distributions with respect to either the Exchangeable Shares or Parent Common
Shares to which the former holder of the certificate referred to in the
preceding sentence was ultimately entitled shall be deemed to have been
surrendered for no consideration to Parent. None of Parent, Company or the
Depositary shall be liable to any person in respect of any Exchangeable Shares
or Parent Common Shares (or dividends, distributions and interest in respect
thereof) delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
4.7 WITHHOLDING RIGHTS
Company, Parent, the Depositary and the Transfer Agent shall be entitled to
deduct and withhold from any dividend or consideration otherwise payable to any
holder of Company Common Shares, Parent Common Shares or Exchangeable Shares
such amounts as Company, Parent, the Depositary or the Transfer Agent (i) is
required to deduct and withhold with respect to such payment under the ITA, the
United States Internal Revenue Code of 1986 or any provision of federal,
provincial, territorial, state, local or foreign tax law, in each case, as
amended or succeeded; (ii) may be liable to pay in accordance with section 116
of the ITA or any
- 13 -
corresponding provisions of provincial law; or (iii) may reasonably incur as
costs or expenses in connection with such withholding. To the extent that
amounts are so withheld, such withheld amounts shall be treated for all purposes
as having been paid to the holder of the shares in respect of which such
deduction and withholding was made, provided (in the case of amounts withheld
under (i) or (ii) above) that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount to be withheld
hereunder from any payment to a holder exceeds the cash portion of the
consideration otherwise payable to the holder, Company, Parent, the Depositary
and the Transfer Agent are hereby authorized to sell or otherwise dispose of
such portion of the consideration as is necessary to provide sufficient funds to
Company, Parent, the Depositary or the Transfer Agent, as the case may be, to
enable it to effect such withholding in cash, and Company, Parent, the
Depositary or the Transfer Agent shall notify the holder thereof and remit to
such holder any unapplied balance of the net proceeds of such sale.
ARTICLE 5
CERTAIN RIGHTS OF PARENT TO ACQUIRE EXCHANGEABLE SHARES
5.1 PARENT LIQUIDATION CALL RIGHT
In addition to Parent's rights contained in the Exchangeable Share Provisions,
including, without limitation, the Retraction Call Right, Parent shall have the
following rights in respect of the Exchangeable Shares:
(1) Parent shall have the overriding right (the "LIQUIDATION CALL RIGHT"),
in the event of and notwithstanding the proposed liquidation,
dissolution or winding-up of Company or any other distribution of the
assets of Company for the purpose of winding up its affairs pursuant to
Article 5 of the Exchangeable Share Provisions, to purchase from all
but not less than all of the holders of Exchangeable Shares (other than
any holder of Exchangeable Shares that is Parent or an Affiliate of
Parent) on the Liquidation Date all but not less than all of the
Exchangeable Shares held by each such holder on payment by Parent to
each such holder of an amount per Exchangeable Share (the "LIQUIDATION
CALL PURCHASE PRICE") equal to the sum of (i) the Current Market Price
of a Parent Common Share on the last Business Day prior to the
Liquidation Date, which shall be satisfied in full by Parent delivering
or causing to be delivered to such holder one Parent Common Share, plus
(ii) any Dividend Amount. In the event of the exercise of the
Liquidation Call Right by Parent, each holder (other than Parent and
its Affiliates) shall be obligated to sell all the Exchangeable Shares
held by the holder to Parent on the Liquidation Date on payment by
Parent to the holder of the Liquidation Call Purchase Price for each
such share, and Company shall have no obligation to pay any Liquidation
Amount to the holders of such shares so purchased by Parent.
(2) To exercise the Liquidation Call Right, Parent must notify the Transfer
Agent, as agent for the holders of Exchangeable Shares, and Company of
Parent's intention to exercise such right at least 45 days before the
Liquidation Date in the case of a voluntary liquidation, dissolution or
winding-up of Company or any other distribution of the assets of
Company for the purpose of winding up its affairs and at least five
Business Days before the Liquidation Date in the case of an involuntary
liquidation, dissolution or winding-up of Company. The Transfer Agent
will notify the holders of Exchangeable
- 14 -
Shares as to whether or not Parent has exercised the Liquidation Call
Right forthwith after the expiry of the period during which the same
may be exercised by Parent. If Parent exercises the Liquidation Call
Right, then on the Liquidation Date, Parent will purchase and the
holders (other than Parent and its Affiliates) will sell all of the
Exchangeable Shares then outstanding for a price per Exchangeable Share
equal to the Liquidation Call Purchase Price.
(3) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, Parent shall deposit or cause
to be deposited with the Transfer Agent, on or before the Liquidation
Date, certificates representing the aggregate number of Parent Common
Shares deliverable by Parent and a cheque or cheques of Parent payable
at par at any branch of the bankers of Parent representing the
aggregate Dividend Amount, if any, in payment of the total Liquidation
Call Purchase Price for all holders of Exchangeable Shares (other than
Parent and its Affiliates), less any amounts withheld pursuant to
section 4.7. Provided that Parent has complied with the immediately
preceding sentence, on and after the Liquidation Date, each holder of
Exchangeable Shares (other than Parent and its Affiliates) shall cease
to be a holder of Exchangeable Shares and shall not be entitled to
exercise any of the rights of a holder of Exchangeable Shares
(including, without limitation, any rights under the Voting and
Exchange Trust Agreement), other than the right to receive, without
interest, its proportionate part of the total Liquidation Call Purchase
Price payable by Parent upon presentation and surrender by such holder
of certificates representing the Exchangeable Shares held by such
holder and the holder shall on and after the Liquidation Date be
considered and deemed for all purposes to be the holder of the Parent
Common Shares to which it is entitled. Upon surrender to the Transfer
Agent of a certificate or certificates representing Exchangeable
Shares, together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the OBCA and
the by-laws of Company and such additional documents, instruments and
payments (including, without limitation, any applicable Stamp Taxes) as
the Transfer Agent may reasonably require, the holder of such
surrendered certificate or certificates shall be entitled to receive in
exchange therefor, and the Transfer Agent on behalf of Parent shall
deliver to such holder, certificates representing the Parent Common
Shares to which the holder is entitled and a cheque or cheques of
Parent payable at par at any branch of the bankers of Parent in payment
of the remaining portion, if any, of the total Liquidation Call
Purchase Price, less any amounts withheld pursuant to section 4.7. If
Parent does not exercise the Liquidation Call Right in the manner
described above, on the Liquidation Date the holders of the
Exchangeable Shares will be entitled to receive in exchange therefor
the Liquidation Amount otherwise payable by Company in connection with
the liquidation, dissolution or winding-up of Company or any other
distribution of the assets of Company for the purpose of winding up its
affairs pursuant to Article 5 of the Exchangeable Share Provisions.
5.2 PARENT REDEMPTION CALL RIGHT
In addition to Parent's rights contained in the Exchangeable Share Provisions,
including, without limitation, the Retraction Call Right, Parent shall have the
following rights in respect of the Exchangeable Shares:
- 15 -
(1) Parent shall have the overriding right (the "REDEMPTION CALL RIGHT"),
notwithstanding the proposed redemption of the Exchangeable Shares by
Company pursuant to Article 7 of the Exchangeable Share Provisions, to
purchase from all but not less than all of the holders of Exchangeable
Shares (other than any holder of Exchangeable Shares that is Parent or
an Affiliate of Parent) on the Redemption Date all but not less than
all of the Exchangeable Shares held by each such holder on payment by
Parent to each such holder of an amount per Exchangeable Share (the
"REDEMPTION CALL PURCHASE PRICE") equal to the sum of (i) the Current
Market Price of a Parent Common Share on the last Business Day prior to
the Redemption Date, which shall be satisfied in full by Parent
delivering or causing to be delivered to such holder one Parent Common
Share, plus (ii) any Dividend Amount. In the event of the exercise of
the Redemption Call Right by Parent, each holder (other than Parent and
its Affiliates) shall be obligated to sell all the Exchangeable Shares
held by the holder to Parent on the Redemption Date on payment by
Parent to the holder of the Redemption Call Purchase Price for each
such share, and Company shall have no obligation to redeem, or to pay
any Dividend Amount in respect of, such shares so purchased by Parent.
(2) To exercise the Redemption Call Right, Parent must notify the Transfer
Agent, as agent for the holders of Exchangeable Shares, and Company of
Parent's intention to exercise such right at least 60 days before the
Redemption Date, except in the case of a redemption occurring as a
result of a Parent Control Transaction, an Exchangeable Share Voting
Event or an Exempt Exchangeable Share Voting Event, in which case
Parent shall so notify the Transfer Agent and Company on or before the
Redemption Date. The Transfer Agent will notify the holders of the
Exchangeable Shares as to whether or not Parent has exercised the
Redemption Call Right forthwith after the expiry of the period during
which the same may be exercised by Parent. If Parent exercises the
Redemption Call Right, on the Redemption Date, Parent will purchase and
the holders (other than Parent and its Affiliates) will sell all of the
Exchangeable Shares then outstanding for a price per Exchangeable Share
equal to the Redemption Call Purchase Price.
(3) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Redemption Call Right, Parent shall deposit or cause to
be deposited with the Transfer Agent, on or before the Redemption Date,
certificates representing the aggregate number of Parent Common Shares
deliverable by Parent and a cheque or cheques of Parent payable at par
at any branch of the bankers of Parent representing the aggregate
Dividend Amount, if any, in payment of the total Redemption Call
Purchase Price for all holders of Exchangeable Shares (other than
Parent and its Affiliates), less any amounts withheld pursuant to
section 4.7. Provided that Parent has complied with the immediately
preceding sentence, on and after the Redemption Date each holder of
Exchangeable Shares (other than Parent and its Affiliates) shall cease
to be a holder of the Exchangeable Shares and shall not be entitled to
exercise any of the rights of holders of Exchangeable Shares
(including, without limitation, any rights under the Voting and
Exchange Trust Agreement), other than the right to receive, without
interest, its proportionate part of the total Redemption Call Purchase
Price payable by Parent upon presentation and surrender by such holder
of certificates representing the Exchangeable Shares held by such
holder and the holder shall on and after the Redemption Date be
considered and deemed for all purposes to be the holder of the Parent
Common Shares to which it is entitled. Upon surrender to the Transfer
Agent of a certificate or certificates
- 16 -
representing Exchangeable Shares, together with such other documents
and instruments as may be required to effect a transfer of Exchangeable
Shares under the OBCA and the by-laws of Company and such additional
documents, instruments and payments (including, without limitation, any
applicable Stamp Taxes) as the Transfer Agent may reasonably require,
the holder of such surrendered certificate or certificates shall be
entitled to receive in exchange therefor, and the Transfer Agent on
behalf of Parent shall deliver to such holder, certificates
representing the Parent Common Shares to which the holder is entitled
and a cheque or cheques of Parent payable at par at any branch of the
bankers of Parent in payment of the remaining portion, if any, of the
total Redemption Call Purchase Price, less any amounts withheld
pursuant to section 4.7. If Parent does not exercise the Redemption
Call Right in the manner described above, on the Redemption Date the
holders of the Exchangeable Shares will be entitled to receive in
exchange therefor the Redemption Price otherwise payable by Company in
connection with the redemption of the Exchangeable Shares pursuant to
Article 7 of the Exchangeable Share Provisions, together with accrued
and unpaid dividends on such Exchangeable Shares held by the holder on
any dividend record date prior to the Redemption Date.
5.3 PARENT CALL RIGHT
In addition to Parent's rights contained in the Exchangeable Share Provisions,
including, without limitation, the Retraction Call Right, Parent shall have the
following rights in respect of the Exchangeable Shares:
(1) Parent will have the right (the "PARENT CALL RIGHT") to purchase from
all but not less than all of the holders of Exchangeable Shares (other
than Parent and its Affiliates) on the Change in Law Exchange Date all
but not less than all of the Exchangeable Shares held by each such
holder on payment by Parent of an amount per Exchangeable Share (the
"PARENT CALL PURCHASE PRICE") equal to the sum of (i) the Current
Market Price of a Parent Common Share on the last Business Day prior to
the Change in Law Exchange Date, which shall be satisfied in full by
Parent delivering or causing to be delivered to such holder one Parent
Common Share, plus, (ii) any Dividend Amount. In the event of the
exercise of the Parent Call Right by Parent each holder (other than
Parent and its Affiliates) shall be obligated to sell all of the
Exchangeable Shares held by such holder to Parent on the Change in Law
Exchange Date on payment by Parent to the holder of the Parent Call
Purchase Price for each such share.
(2) To exercise the Parent Call Right, (i) Parent must notify the Transfer
Agent, as agent for the holders of Exchangeable Shares, and Company of
Parent's intention to exercise such right at least 45 days before the
Business Day on which the purchase of such Exchangeable Shares shall
occur (the "CHANGE IN LAW EXCHANGE DATE") and (ii) Parent must deliver
to the Trustee an opinion in writing signed by Canadian counsel to
Parent (which counsel must be acceptable to the Trustee) stating that
since the Effective Date there has been a change enacted to the ITA and
any corresponding Ontario legislation to the effect that the sale of
Exchangeable Shares to Parent pursuant to the Parent Call Right by
beneficial owners of Exchangeable Shares (other than Parent and its
Affiliates) who are Canadian Residents and who hold their Exchangeable
Shares as capital property for the purposes of the ITA and any
corresponding Ontario legislation will qualify as a tax deferred
transaction for purposes of the ITA and any corresponding Ontario
legislation,
- 17 -
which opinion, for greater certainty, shall take into account in
determining the tax deferred nature of such sale pursuant to the Parent
Call Right the disposition and receipt of any rights pursuant to a
shareholder rights plan of Company or Parent. The Transfer Agent will
notify the holders of Exchangeable Shares that the Parent Call Right
has been exercised by Parent. If Parent exercises the Parent Call
Right, then on the Change in Law Exchange Date Parent will purchase and
the holders (other than Parent and its Affiliates) will sell to Parent
all of the Exchangeable Shares held by such holders for a price per
share equal to the Parent Call Purchase Price.
(3) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Parent Call Right, Parent shall deposit or cause to be
deposited with the Transfer Agent, on or before the Change in Law
Exchange Date, certificates representing the aggregate number of Parent
Common Shares deliverable by Parent and a cheque or cheques of Parent
payable at par at any branch of the bankers of Parent representing the
aggregate Dividend Amount, if any, in payment of the total Parent Call
Purchase Price for all holders of Exchangeable Shares (other than
Parent and its Affiliates) less any amounts withheld pursuant to
section 4.7. Provided that Parent has complied with the immediately
preceding sentence, on and after the Change in Law Exchange Date, each
holder of Exchangeable Shares (other than Parent and its Affiliates)
shall cease to be a holder of Exchangeable Shares and shall not be
entitled to exercise any of the rights of a holder of Exchangeable
Shares (including, without limitation, any rights under the Voting and
Exchange Trust Agreement) other than the right to receive, without
interest, its proportionate part of the total Parent Call Purchase
Price payable by Parent upon presentation and surrender by such holder
of certificates representing the Exchangeable Shares held by such
holder and the holder shall on and after the Change in Law Exchange
Date be considered and deemed for all purposes to be the holder of the
Parent Common Shares to which it is entitled. Upon surrender to the
Transfer Agent of a certificate or certificates representing
Exchangeable Shares, together with such other documents and instruments
as may be required to effect a transfer of Exchangeable Shares under
the OBCA and the by-laws of Company and such additional documents,
instruments and payments (including, without limitation, any applicable
Stamp Taxes) as the Transfer Agent may reasonably require, the holder
of such surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf of
Parent shall deliver to such holder, certificates representing the
Parent Common Shares to which the holder is entitled and a cheque or
cheques of Parent payable at par at any branch of the bankers of Parent
in payment of the remaining portion, if any, of the Parent Call
Purchase Price less any amounts withheld pursuant to section 4.7
hereof.
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5.4 Parent shall have the right at its sole discretion to cause an
Affiliate of Parent that is a wholly-owned entity disregarded for
United States federal income tax purposes to exercise the Liquidation
Call Right, Redemption Call Right or Parent Call Right in any
circumstance in which Parent is entitled to exercise any of such
rights, and in such event references to Parent herein in respect of any
such exercise of such rights shall be read as a reference to such
Affiliate, as appropriate in the circumstances.
ARTICLE 6
AMENDMENTS
6.1 AMENDMENTS TO PLAN OF ARRANGEMENT
(1) Company reserves the right to amend, modify or supplement this Plan of
Arrangement at any time and from time to time prior to the Effective
Date, provided that each such amendment, modification or supplement
must be (i) set out in writing, (ii) approved by Parent, (iii) filed
with the Court and, if made following the Company Meeting, approved by
the Court, and (iv) communicated to Company Shareholders if and as
required by the Court.
(2) Any amendment, modification or supplement to this Plan of Arrangement
may be proposed by Company at any time prior to the Company Meeting
(provided that Parent shall have consented thereto) with or without any
other prior notice or communication, and if so proposed and accepted by
the Persons voting at the Company Meeting (subject to the requirements
of the Interim Order), shall become part of this Plan of Arrangement
for all purposes.
(3) Any amendment, modification or supplement to this Plan of Arrangement
that is approved or directed by the Court following the Company Meeting
shall be effective only (i) if it is consented to by each of Company
and Parent and (ii) if required by the Court, it is consented to by
Company Shareholders voting in the manner directed by the Court.
(4) Any amendment, modification or supplement to this Plan of Arrangement
may be made following the Effective Date unilaterally by Parent,
provided that it concerns a matter which, in the reasonable opinion of
Parent, is of an administrative nature required to better give effect
to the implementation of this Plan of Arrangement and is not adverse to
the financial or economic interests of any holder of Exchangeable
Shares.
ARTICLE 7
FURTHER ASSURANCES
7.1 FURTHER ASSURANCES
Each of the parties to the Combination Agreement shall make, do and execute, or
cause to be made, done and executed, all such further acts, deeds, agreements,
transfers, assurances, instruments or documents as may reasonably be required by
any of them in order further to document or evidence any of the transactions or
events set out herein.
APPENDIX 1 TO THE PLAN OF ARRANGEMENT
PROVISIONS ATTACHING TO THE EXCHANGEABLE SHARES
FINAL VERSION
APPENDIX 1
TO THE PLAN OF ARRANGEMENT
PROVISIONS ATTACHING TO THE
EXCHANGEABLE SHARES
The Exchangeable Shares shall have the following rights, privileges,
restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these share provisions:
"AFFILIATE" has the meaning ascribed thereto in the OBCA.
"ARRANGEMENT" means an arrangement under section 182 of the OBCA on the
terms and subject to the conditions set out in the Plan of Arrangement, to
which Plan of Arrangement these share provisions are attached as Appendix
1 and which Plan of Arrangement (other than Appendix 1 thereto) is
attached to these share provisions as Exhibit A.
"BOARD OF DIRECTORS" means the Board of Directors of the Company.
"BUSINESS DAY" means any day on which commercial banks are open for
business in Toronto, Ontario and Chicago, Illinois other than a Saturday,
a Sunday or a day observed as a holiday in Toronto, Ontario under
applicable laws or in Chicago, Illinois under applicable laws.
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed in a
currency other than Canadian dollars (the "FOREIGN CURRENCY AMOUNT") at
any date the product obtained by multiplying:
(a) the Foreign Currency Amount; by
(b) the noon spot exchange rate on such date for such foreign currency
expressed in Canadian dollars as reported by the Bank of Canada or,
in the event such spot exchange rate is not available, such spot
exchange rate on such date for such foreign currency expressed in
Canadian dollars as may be determined by the Board of Directors to
be appropriate for such purpose.
"COMBINATION AGREEMENT" means the combination agreement dated as of March
12, 2002 between Parent and the Company, as further amended, supplemented
and/or restated in accordance with its terms prior to the Effective Date,
providing for, among other things, the Arrangement.
"COMMON SHARES" means the common shares in the capital of the Company.
"COMPANY" means Delano Technology Corporation, a corporation existing
under the OBCA.
2
"CURRENT MARKET PRICE" means, in respect of a Parent Common Share on any
date, the Canadian Dollar Equivalent of the average of the closing prices
of Parent Common Shares during a period of 20 consecutive trading days
ending not more than three trading days before such date on the Nasdaq or,
if the Parent Common Shares are not then quoted on the Nasdaq, on such
other stock exchange or automated quotation system on which the Parent
Common Shares are listed or quoted, as the case may be, as may be selected
by the Board of Directors for such purpose; provided, however, that if in
the opinion of the Board of Directors the public distribution or trading
activity of Parent Common Shares during such period does not create a
market which reflects the fair market value of a Parent Common Share, then
the Current Market Price of a Parent Common Share shall be determined by
the Board of Directors, in good faith and in its sole discretion, and
provided further that any such selection, opinion or determination by the
Board of Directors shall be conclusive and binding.
"DEPOSITARY" means any trust company in Canada selected by the Company for
purposes of holding some or all of the total Liquidation Amount or total
Redemption Price in accordance with Article 5 or 7, respectively.
"DIRECTOR" means the Director appointed pursuant to section 278 of the
OBCA.
"DIVIDEND AMOUNT" means an amount equal to the full amount of all declared
and unpaid dividends on an Exchangeable Share held by a holder on any
dividend record date which occurred prior to the date of purchase of such
share by Parent from such holder.
"EFFECTIVE DATE" means the date shown on the certificate of arrangement to
be issued by the Director giving effect to the Arrangement.
"EXCHANGE RATIO" has the meaning ascribed thereto in the Plan of
Arrangement.
"EXCHANGEABLE SHARE SUPPORT AGREEMENT" means the Exchangeable Share
Support Agreement made between Parent and the Company substantially in the
form and content of Exhibit D to the Combination Agreement, as amended
pursuant to the terms of the Exchangeable Share Support Agreement.
"EXCHANGEABLE SHARE VOTING EVENT" means any matter in respect of which
holders of Exchangeable Shares are entitled to vote as shareholders of the
Company, other than an Exempt Exchangeable Share Voting Event, and, for
greater certainty, excluding any matter in respect of which holders of
Exchangeable Shares are entitled to vote (or instruct the Trustee to vote)
in their capacity as Beneficiaries under (and as that term is defined in)
the Voting and Exchange Trust Agreement.
"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the
capital of the Company, having the rights, privileges, restrictions and
conditions set forth herein.
"EXEMPT EXCHANGEABLE SHARE VOTING EVENT" means any matter in respect of
which holders of Exchangeable Shares are entitled to vote as shareholders
of the Corporation in order to approve or disapprove, as applicable, any
change to, or in the rights of the holders of, the Exchangeable Shares,
where the approval or disapproval, as applicable, of
3
such change would be required to maintain the economic equivalence of the
Exchangeable Shares and the Parent Common Shares.
"GOVERNMENTAL ENTITY" means any court, administrative agency, tribunal,
bureau, board, commission, public authority, governmental or regulatory
authority, agency, ministry, crown corporation or other law, rule-or
regulation-making entity, domestic or foreign, or any quasi-governmental
body, self-regulatory organization or stock exchange.
"HOLDER" means, when used with reference to the Exchangeable Shares, a
holder of Exchangeable Shares shown from time to time in the register
maintained by or on behalf of the Company in respect of the Exchangeable
Shares.
"ITA" means Income Tax Act (Canada), as amended.
"LIQUIDATION AMOUNT" has the meaning ascribed thereto in section 5.1 of
these share provisions.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the Plan of
Arrangement.
"LIQUIDATION DATE" has the meaning ascribed thereto in section 5.1 of
these share provisions.
"NASDAQ" means the Nasdaq National Market or its successor.
"OBCA" means the Business Corporations Act (Ontario), as amended from time
to time.
"PARENT" means divine, Inc. a corporation existing under the laws of
Delaware.
"PARENT CALL RIGHT" has the meaning ascribed thereto in the Plan of
Arrangement.
"PARENT COMMON SHARE" means a share of Class A common stock in the capital
of Parent and any other securities into which such shares may be changed
and, in the event of any transaction described in Section 11.3, the
corresponding shares in the capital of Parent Successor.
"PARENT CONTROL TRANSACTION" means any merger, amalgamation, arrangement,
tender offer, material sale of shares or rights or interests therein or
thereto or similar transactions involving Parent, or any proposal to do
so.
"PARENT DIVIDEND DECLARATION DATE" means the date on which the board of
directors of Parent declares any dividend on the Parent Common Shares.
"PERSON" means any individual, corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization, entity or Governmental Entity.
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of the Company under section 182 of the OBCA, which plan of
arrangement (other than Appendix 1) is attached to these share provisions
as Exhibit A, and any amendments or
4
variations thereto made in accordance with the Plan of Arrangement or made
at the direction of the Court.
"PURCHASE PRICE" has the meaning ascribed thereto in section 6.3 of these
share provisions.
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in the
Plan of Arrangement. "REDEMPTION CALL RIGHT" has the meaning ascribed
thereto in the Plan of Arrangement.
"REDEMPTION DATE" means the date, if any, established by the Board of
Directors for the redemption by the Company of all but not less than all
of the outstanding Exchangeable Shares (other than any such shares then
held by Parent or an Affiliate of Parent) pursuant to Article 7 of these
share provisions, which date shall be no earlier than the third
anniversary of the Effective Date, unless:
(a) at any time after the first anniversary of the Effective Date, there
are fewer than - [INSERT NUMBER CALCULATED AS 30% OF THE
EXCHANGEABLE SHARES (AS DETERMINED AS AT THE EFFECTIVE DATE)]
outstanding (other than Exchangeable Shares held by Parent and its
Affiliates, and as such number of shares may be adjusted as deemed
appropriate by the Board of Directors to give effect to any
subdivision or consolidation of or stock dividend on the
Exchangeable Shares, any issue or distribution of rights to acquire
Exchangeable Shares or securities exchangeable for or convertible
into Exchangeable Shares, any issue or distribution of other
securities or rights or evidences of indebtedness or assets, or any
other capital reorganization or other transaction affecting the
Exchangeable Shares), in which case the Board of Directors may
accelerate such redemption date to such date as they may determine,
upon at least 60 days' prior written notice to the holders of the
Exchangeable Shares and the Trustee;
(b) at any time, there are fewer than - [INSERT NUMBERS CALCULATED AS
10% OF THE EXCHANGEABLE SHARES (AS DETERMINED AS AT THE EFFECTIVE
DATE)] outstanding (other than Exchangeable Shares held by Parent
and its Affiliates, and as such number of shares may be adjusted as
deemed appropriate by the Board of Directors to give effect to any
subdivision or consolidation of or stock dividend on the
Exchangeable Shares, any issue or distribution of rights to acquire
Exchangeable Shares or securities exchangeable for or convertible
into Exchangeable Shares, any issue or distribution of other
securities or rights or evidences of indebtedness or assets, or any
other capital reorganization or other transaction affecting the
Exchangeable Shares), in which case the Board of Directors may
accelerate such redemption date to such date as it may determine,
upon at least 60 days' prior written notice to the holders of the
Exchangeable Shares and the Trustee;
(c) a Parent Control Transaction occurs, in which case, provided that
the Board of Directors determines, in good faith and in its sole
discretion, that the Parent Control Transaction involves a bona fide
third party and is not for the primary purpose of causing the
occurrence of a Redemption Date and that the redemption
5
of all but not less than all of the outstanding Exchangeable Shares
is necessary to enable the completion of such Parent Control
Transaction in accordance with its terms, the Board of Directors may
accelerate such redemption date to such date as it may determine,
upon such number of days' prior written notice to the holders of the
Exchangeable Shares as the Trustee and the Board of Directors may
determine to be reasonably practicable in such circumstances;
(d) an Exchangeable Share Voting Event is proposed and (i) the Board of
Directors has determined, in good faith and in its sole discretion,
that it is not reasonably practicable to accomplish the business
purpose intended by the Exchangeable Share Voting Event, which
business purpose must be bona fide and not for the primary purpose
of causing the occurrence of a Redemption Date, in any other
commercially reasonable manner that does not result in an
Exchangeable Share Voting Event, and (ii) the holders of the
Exchangeable Shares fail to take the necessary action, at a meeting
or other vote of holders of Exchangeable Shares, to approve or
disapprove, as applicable, the Exchangeable Share Voting Event, in
which case the redemption date shall be the Business Day following
the day on which the holders of the Exchangeable Shares failed to
take such action; or
(e) an Exempt Exchangeable Share Voting Event is proposed and the
holders of Exchangeable Shares fail to take the necessary action at
a meeting or other vote of holders of Exchangeable Shares, to
approve or disapprove, as applicable, the Exempt Exchangeable Share
Voting Event, in which case the redemption date shall be the
Business Day following the day on which the holders of the
Exchangeable Shares failed to take such action,
provided, however, that the failure or omission to give any notice of
redemption under clauses (a), (b), (c), or (d) above to less than 20% of
such holders of Exchangeable Shares shall not affect the validity of any
such redemption.
"REDEMPTION PRICE" has the meaning ascribed thereto in section 7.1 of
these share provisions.
"RETRACTED SHARES" has the meaning ascribed thereto in section 6.1(a) of
these share provisions.
"RETRACTION CALL NOTICE" has the meaning ascribed thereto in section 6.3
of these share provisions.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in section 6.1(c)
of these share provisions.
"RETRACTION DATE" has the meaning ascribed thereto in section 6.1(b) of
these share provisions.
"RETRACTION PRICE" has the meaning ascribed thereto in section 6.1 of
these share provisions.
6
"RETRACTION REQUEST" has the meaning ascribed thereto in section 6.1 of
these share provisions.
"TRANSFER AGENT" means [ - ] or such other Person as may from time to time
be appointed by the Company as the registrar and transfer agent for the
Exchangeable Shares.
"TRUSTEE" means the trustee chosen by Parent, acting reasonably, to act as
trustee under the Voting and Exchange Trust Agreement, being a corporation
organized and existing under the laws of Canada and authorized to carry on
the business of a trust company in all the provinces of Canada, and any
successor trustee appointed under the Voting and Exchange Trust Agreement.
"VOTING AND EXCHANGE TRUST AGREEMENT" means the agreement made among
Parent, the Company and the Trustee in connection with the Plan of
Arrangement substantially in the form and content of Exhibit E to the
Combination Agreement, as amended pursuant to the terms of the Voting and
Exchange Trust Agreement.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over the Common
Shares and any other shares ranking junior to the Exchangeable Shares with
respect to the payment of all dividends provided for in Article 3 of these
share provisions and the distribution of assets in the event of the
liquidation, dissolution or winding-up of the Company, whether voluntary
or involuntary, or any other distribution of the assets of the Company
among its shareholders for the purpose of winding up its affairs.
ARTICLE 3
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Parent
Dividend Declaration Date, declare a dividend on each Exchangeable Share:
(a) in the case of a cash dividend declared on the Parent Common Shares,
in an amount in cash for each Exchangeable Share equal to and in the
currency of or the Canadian Dollar Equivalent of the cash dividend
declared on each Parent Common Share on the Parent Dividend
Declaration Date;
(b) in the case of a stock dividend declared on the Parent Common Shares
to be paid in Parent Common Shares, by the issue by the Company of
such number of Exchangeable Shares for each Exchangeable Share as is
equal to the number of Parent Common Shares to be paid on each
Parent Common Share unless in lieu of such stock dividend the
Company elects to effect a corresponding and contemporaneous and
economically equivalent (as determined by the Board of Directors in
accordance with section 3.5 hereof) subdivision of the outstanding
Exchangeable Shares; or
7
(c) in the case of a dividend declared on the Parent Common Shares in
property other than cash or Parent Common Shares, in such type and
amount of property for each Exchangeable Share as is the same as or
economically equivalent to (to be determined by the Board of
Directors as contemplated by section 3.5 hereof) the type and amount
of property declared as a dividend on each Parent Common Share.
Such dividends shall be paid out of money, assets or property of the
Company properly applicable to the payment of dividends, or out of
authorized but unissued shares of the Company, or through the subdivision
of outstanding Exchangeable Shares, as applicable. The holders of
Exchangeable Shares shall not be entitled to any dividends other than or
in excess of the dividends referred to in this section 3.1.
3.2 Cheques of the Company payable at par at any branch of the bankers of the
Company shall be issued in respect of any cash dividends contemplated by
section 3.1(a) hereof and the sending of such a cheque to each holder of
an Exchangeable Share shall satisfy the cash dividend represented thereby
unless the cheque is not paid on presentation. Certificates registered in
the name of the registered holder of Exchangeable Shares shall be issued
or transferred in respect of any stock dividends contemplated by section
3.1(b) hereof and the sending of such a certificate to each holder of an
Exchangeable Share shall satisfy the stock dividend represented thereby.
Such other type and amount of property in respect of any dividends
contemplated by section 3.1(c) hereof shall be issued, distributed or
transferred by the Company in such manner as it shall determine and the
issuance, distribution or transfer thereof by the Company to each holder
of an Exchangeable Share shall satisfy the dividend represented thereby.
No holder of an Exchangeable Share shall be entitled to recover by action
or other legal process against the Company any dividend that is
represented by a cheque that has not been duly presented to the Company's
bankers for payment or that otherwise remains unclaimed for a period of
six years from the date on which such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any
dividend declared on the Exchangeable Shares under section 3.1 hereof
shall be the same dates as the record date and payment date, respectively,
for the corresponding dividend declared on the Parent Common Shares.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under section 3.1 hereof the dividends are not paid in full on all
of the Exchangeable Shares then outstanding, any such dividends that
remain unpaid shall be paid on a subsequent date or dates determined by
the Board of Directors on which the Company shall have sufficient moneys,
assets or property properly applicable to the payment of such dividends.
3.5 The Board of Directors shall determine, in good faith and in its sole
discretion, economic equivalence for the purposes of section 3.1 hereof,
and each such determination shall be conclusive and binding on the Company
and its shareholders. In making each such determination, the following
factors shall, without excluding other factors determined by the Board of
Directors to be relevant, be considered by the Board of Directors:
8
(a) in the case of any stock dividend or other distribution payable in
Parent Common Shares, the number of such shares issued as a result
of such dividend or distribution in proportion to the number of
Parent Common Shares previously outstanding;
(b) in the case of the issuance or distribution of any rights, options
or warrants to subscribe for or purchase Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights
to acquire Parent Common Shares), the relationship between the
exercise price of each such right, option or warrant and the Current
Market Price of a Parent Common Share;
(c) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of
Parent of any class other than Parent Common Shares, any rights,
options or warrants other than those referred to in section 3.5(b)
hereof, any evidences of indebtedness of Parent or any assets of
Parent), the relationship between the fair market value (as
determined by the Board of Directors) of such property to be issued
or distributed with respect to each outstanding Parent Common Share
and the Current Market Price of a Parent Common Share;
(d) in the case of any subdivision, redivision or change of the then
outstanding Parent Common Shares into a greater number of Parent
Common Shares or the reduction, combination, consolidation or change
of the then outstanding Parent Common Shares into a lesser number of
Parent Common Shares or any amalgamation, merger, reorganization or
other transaction affecting Parent Common Shares, the effect thereof
upon the then outstanding Parent Common Shares; and
(e) in all such cases, the general taxation consequences of the relevant
event to beneficial owners of Exchangeable Shares to the extent that
such consequences may differ from the taxation consequences to such
owners determined as if they owned Parent Common Shares at the
relevant time as a result of differing tax treatment under the laws
of Canada and the United States (except for any differing
consequences arising as a result of differing marginal taxation
rates or the fact that Exchangeable Shares will not be listed on any
stock exchange and without regard to the individual circumstances of
beneficial owners of Exchangeable Shares).
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the Company
shall not at any time without, but may at any time with, the approval of
the holders of the Exchangeable Shares given as specified in section 10.2
of these share provisions:
(a) pay any dividends on the Common Shares or any other shares ranking
junior to the Exchangeable Shares, other than stock dividends
payable in Common Shares or any such other shares ranking junior to
the Exchangeable Shares, as the case may be;
9
(b) redeem or purchase or make any capital distribution in respect of
Common Shares or any other shares ranking junior to the Exchangeable
Shares;
(c) redeem or purchase any other shares of the Company ranking equally
with the Exchangeable Shares with respect to the payment of
dividends or on any liquidating distribution; or
(d) issue any Exchangeable Shares or any other shares of the Company
ranking equally with, or superior to, the Exchangeable Shares other
than pursuant to a shareholders rights plan adopted by the Company
or by way of stock dividends to the holders of such Exchangeable
Shares.
The restrictions in this Section 4.1 shall not apply if all dividends on
the outstanding Exchangeable Shares corresponding to dividends declared
and paid on the Parent Common Shares shall have been declared and paid on
the Exchangeable Shares.
ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of the Company
or any other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs, subject to the
exercise by Parent of the Liquidation Call Right, a holder of Exchangeable
Shares shall be entitled, subject to applicable law, to receive from the
assets of the Company in respect of each Exchangeable Share held by such
holder on the effective date (the "LIQUIDATION DATE") of such liquidation,
dissolution or winding-up or other distribution, before any distribution
of any part of the assets of the Company among the holders of the Common
Shares or any other shares ranking junior to the Exchangeable Shares, an
amount per share (the "LIQUIDATION AMOUNT") equal to the sum of: (i) the
Current Market Price of a Parent Common Share on the last Business Day
prior to the Liquidation Date, which shall be satisfied in full by the
Company delivering or causing to be delivered to such holder one Parent
Common Share, and (ii) an amount equal to all declared and unpaid
dividends on each such Exchangeable Share held by such holder on any
dividend record date which occurred prior to the Liquidation Date.
5.2 On or promptly after the Liquidation Date, and provided the Liquidation
Call Right has not been exercised by Parent, the Company shall pay or
cause to be paid to the holders of the Exchangeable Shares the Liquidation
Amount for each such Exchangeable Share upon presentation and surrender of
the certificates representing such Exchangeable Shares, together with such
other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the OBCA and the by-laws of the Company and such
additional documents, instruments and payments as the Transfer Agent and
the Company may reasonably require, at the registered office of the
Company or at any office of the Transfer Agent as may be specified by the
Company by notice to the holders of the Exchangeable Shares. Payment of
the total Liquidation Amount for such Exchangeable Shares shall be made by
transferring or causing to be transferred to each holder the Parent Common
Shares to which such holder is entitled and by delivering to such holder,
at the address of such holder recorded in the register of shareholders of
the Company for the Exchangeable Shares or by holding for pick-up by such
holder at the registered office of the Company or at any office of the
Transfer Agent as may be
10
specified by the Company by notice to the holders of Exchangeable Shares,
on behalf of the Company certificates representing Parent Common Shares
(which shares shall be fully paid and non-assessable and shall be free and
clear of any lien, claim or encumbrance) and a cheque of the Company
payable at par at any branch of the bankers of the Company in respect of
the remaining portion, if any, of the total Liquidation Amount (in each
case, less any amounts withheld on account of tax pursuant to section
13.3). On and after the Liquidation Date, each holder of Exchangeable
Shares shall cease to be a holder of Exchangeable Shares and shall not be
entitled to exercise any of the rights of a holder of Exchangeable Shares
(including, without limitation, any rights under the Voting and Exchange
Trust Agreement), other than the right to receive its proportionate part
of the total Liquidation Amount, unless payment of the total Liquidation
Amount for such Exchangeable Shares shall not be made upon presentation
and surrender of share certificates in accordance with the foregoing
provisions, in which case the rights of the holder shall remain unaffected
until the total Liquidation Amount has been paid in the manner
hereinbefore provided. The Company shall have the right at any time after
the Liquidation Date to transfer or cause to be issued or transferred to,
and deposited with, the Depositary the total Liquidation Amount in respect
of the Exchangeable Shares represented by certificates that have not at
the Liquidation Date been surrendered by the holders thereof, such
Liquidation Amount to be held by the Depositary as trustee for and on
behalf of, and for the use and benefit of, such holders. Upon such deposit
being made, the rights of a holder of Exchangeable Shares after such
deposit shall be limited to receiving its proportionate part of the total
Liquidation Amount for such Exchangeable Shares so deposited, without
interest, (in each case less any amounts withheld on account of tax
pursuant to section 13.3) against presentation and surrender of the
certificates for the Exchangeable Shares held by them in accordance with
the foregoing provisions. Upon such payment or deposit of the total
Liquidation Amount, the holders of Exchangeable Shares shall thereafter be
considered and deemed for all purposes to be holders of the Parent Common
Shares delivered to them or the Depositary on their behalf.
5.3 After the Company has satisfied its obligations to pay the holders of the
Exchangeable Shares the Liquidation Amount per Exchangeable Share pursuant
to section 5.1 of these share provisions, such holders shall not be
entitled to share in any further distribution of the assets of the
Company.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time, subject to
the exercise by Parent of the Retraction Call Right and otherwise upon
compliance with, and subject to, the provisions of this Article 6, to
require the Company to redeem any or all of the Exchangeable Shares
registered in the name of such holder for an amount per share equal to the
sum of: (i) the Current Market Price of a Parent Common Share on the last
Business Day prior to the Retraction Date (the "RETRACTION PRICE"), which
shall be satisfied in full by the Company delivering or causing to be
delivered to such holder one Parent Common Share for each Exchangeable
Share presented and surrendered by the holder, and (ii) on the designated
payment date therefor, the full amount of all declared and unpaid
dividends on any such Exchangeable Share held by such holder on any
11
dividend record date which occurred prior to the Retraction Date. To
effect such redemption, the holder shall present and surrender at the
registered office of the Company or at any office of the Transfer Agent as
may be specified by the Company by notice to the holders of Exchangeable
Shares the certificate or certificates representing the Exchangeable
Shares which the holder desires to have the Company redeem, together with
such other documents and instruments as may be required to effect a
transfer of Exchangeable Shares under the OBCA and the by-laws of the
Company and such additional documents, instruments and payments as the
Transfer Agent and the Company may reasonably require, and together with a
duly executed statement (the "RETRACTION REQUEST") in the form of Schedule
A hereto or in such other form as may be acceptable to the Company:
(a) specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "RETRACTED SHARES") redeemed by the
Company;
(b) stating the Business Day on which the holder desires to have the
Company redeem the Retracted Shares (the "RETRACTION DATE"),
provided that the Retraction Date shall be not less than 7 Business
Days nor more than 10 Business Days after the date on which the
Retraction Request is received by the Company and further provided
that, in the event that no such Business Day is specified by the
holder in the Retraction Request, the Retraction Date shall be
deemed to be the 10th Business Day after the date on which the
Retraction Request is received by the Company;
(c) acknowledging the overriding right (the "RETRACTION CALL RIGHT") of
Parent to purchase all but not less than all the Retracted Shares
directly from the holder and that the Retraction Request shall be
deemed to be a revocable offer by the holder to sell the Retracted
Shares to Parent in accordance with the Retraction Call Right on the
terms and conditions set out in section 6.3 hereof; and
(d) stating whether the holder is a resident or non-resident of Canada
for the purposes of the ITA.
6.2 Subject to the exercise by Parent of the Retraction Call Right, upon
receipt by the Company or the Transfer Agent in the manner specified in
section 6.1 of a certificate or certificates representing the number of
Retracted Shares, together with a Retraction Request, and provided that
the Retraction Request is not revoked by the holder in the manner
specified in section 6.7, the Company shall redeem the Retracted Shares
effective at the close of business on the Retraction Date and shall
transfer or cause to be issued or transferred to such holder the Parent
Common Shares to which such holder is entitled and shall comply with
section 6.4 hereof. If only a part of the Exchangeable Shares represented
by any certificate is redeemed (or purchased by Parent pursuant to the
Retraction Call Right), a new certificate for the balance of such
Exchangeable Shares shall be issued to the holder at the expense of the
Company.
6.3 Upon receipt by the Company of a Retraction Request, the Company shall
immediately notify Parent thereof and shall provide to Parent a copy of
the Retraction Request. In order to exercise the Retraction Call Right,
Parent must notify the Company of its
12
determination to do so (the "RETRACTION CALL NOTICE") within five Business
Days of notification to Parent by the Company of the receipt by the
Company of the Retraction Request. If Parent does not so notify the
Company within such five Business Day period, the Company will notify the
holder as soon as possible thereafter that Parent will not exercise the
Retraction Call Right. If Parent delivers the Retraction Call Notice
within such five Business Day period, and provided that the Retraction
Request is not revoked by the holder in the manner specified in section
6.7, the Retraction Request shall thereupon be considered only to be an
offer by the holder to sell the Retracted Shares to Parent in accordance
with the Retraction Call Right. In such event, the Company shall not
redeem the Retracted Shares and Parent shall purchase from such holder and
such holder shall sell to Parent on the Retraction Date the Retracted
Shares for a purchase price (the "PURCHASE PRICE") per share equal to the
sum of: (i) the Retraction Price per share, and (ii) on the designated
payment date therefor, to the extent not paid by the Company on or before
the designated payment date therefor, any Dividend Amount. To the extent
that Parent pays the Dividend Amount in respect of the Retracted Shares,
the Company shall no longer be obligated to pay any declared and unpaid
dividends on such Retracted Shares. Provided that Parent has complied with
section 6.4 hereof, the closing of the purchase and sale of the Retracted
Shares pursuant to the Retraction Call Right shall be deemed to have
occurred as at the close of business on the Retraction Date and, for
greater certainty, no redemption by the Company of such Retracted Shares
shall take place on the Retraction Date. In the event that Parent does not
deliver a Retraction Call Notice within such five Business Day period, and
provided that the Retraction Request is not revoked by the holder in the
manner specified in section 6.7, the Company shall redeem the Retracted
Shares on the Retraction Date and in the manner otherwise contemplated in
this Article 6.
6.4 The Company or Parent, as the case may be, shall deliver or cause the
Transfer Agent to deliver to the relevant holder, at the address of the
holder recorded in the register of shareholders of the Company for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick-up by the holder at the registered office
of the Company or at any office of the Transfer Agent as may be specified
by the Company by notice to the holders of Exchangeable Shares,
certificates representing the Parent Common Shares (which shares shall be
fully paid and non-assessable and shall be free and clear of any lien,
claim or encumbrance) registered in the name of the holder or in such
other name as the holder may request, and, if applicable and on or before
the payment date therefor, a cheque payable at par at any branch of the
bankers of the Company or Parent, as applicable, in an amount equal to
declared and unpaid dividends or the aggregate Dividend Amount, as the
case may be, in payment of the total Retraction Price or the total
Purchase Price, as the case may be, in each case, less any amounts
withheld on account of tax pursuant to section 13.3, and such delivery of
such certificates and cheques on behalf of the Company or by Parent, as
the case may be, or by the Transfer Agent shall be deemed to be payment of
and shall satisfy and discharge all liability for the total Retraction
Price or total Purchase Price, as the case may be, to the extent that the
same is represented by such share certificates and cheques (plus any tax
deducted and withheld therefrom and remitted to the proper tax authority).
6.5 On and after the close of business on the Retraction Date, the holder of
the Retracted Shares shall cease to be a holder of such Retracted Shares
and shall not be entitled to
13
exercise any of the rights of a holder in respect thereof (including,
without limitation, any rights under the Voting and Exchange Trust
Agreement), other than the right to receive its proportionate part of the
total Retraction Price or total Purchase Price, as the case may be, unless
upon presentation and surrender of certificates in accordance with the
foregoing provisions, payment of the total Retraction Price or the total
Purchase Price, as the case may be, shall not be made as provided in
section 6.4 hereof, in which case the rights of such holder shall remain
unaffected until the total Retraction Price or the total Purchase Price,
as the case may be, has been paid in the manner hereinbefore provided. On
and after the close of business on the Retraction Date, provided that
presentation and surrender of certificates and payment of the total
Retraction Price or the total Purchase Price, as the case may be, has been
made in accordance with the foregoing provisions, the holder of the
Retracted Shares so redeemed by the Company or purchased by Parent shall
thereafter be a holder of the Parent Common Shares delivered to it.
6.6 Notwithstanding any other provision of this Article 6, the Company shall
not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares
would be contrary to solvency requirements or other provisions of
applicable law. If the Company believes that on any Retraction Date it
would not be permitted by any of such provisions to redeem the Retracted
Shares tendered for redemption on such date, and provided that Parent
shall not have exercised the Retraction Call Right with respect to the
Retracted Shares, the Company shall only be obligated to redeem Retracted
Shares specified by a holder in a Retraction Request to the extent of the
maximum number that may be so redeemed (rounded down to a whole number of
shares) as would not be contrary to such provisions and shall notify the
holder and the Trustee at least two Business Days prior to the Retraction
Date as to the number of Retracted Shares which will not be redeemed by
the Company. In any case in which the redemption by the Company of
Retracted Shares would be contrary to solvency requirements or other
provisions of applicable law, the Company shall redeem Retracted Shares in
accordance with section 6.2 of these share provisions on a pro rata basis
and shall issue to each holder of Retracted Shares a new certificate, at
the expense of the Company, representing the Retracted Shares not redeemed
by the Company pursuant to section 6.2 hereof. Provided that the
Retraction Request is not revoked by the holder in the manner specified in
section 6.7 and that Parent has not exercised the Retraction Call Right
with respect to the Retracted Shares, the holder of such Retracted Shares
not redeemed by the Company pursuant to section 6.2 as a result of
solvency requirements or other provisions of applicable law shall be
deemed by giving the Retraction Request to constitute notice by the holder
to the Trustee instructing the Trustee to require Parent to, subject to
applicable law, purchase such Retracted Shares from such holder on the
Retraction Date or as soon as practicable thereafter on payment by Parent
to such holder of the Purchase Price for each such Retracted Share, all as
more specifically provided in the Voting and Exchange Trust Agreement.
6.7 A holder of Retracted Shares may, by notice in writing given by the holder
to the Company before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction
Request, in which event such Retraction Request shall be null and void
and, for greater certainty, the revocable offer constituted by the
Retraction Request to sell the Retracted Shares to Parent shall be deemed
to have been revoked.
14
6.8 Parent shall have the right at its sole discretion to cause an Affiliate
of Parent that is a wholly-owned entity disregarded for United States
federal income tax purposes to exercise the Retraction Call Right in any
circumstance in which Parent is entitled to exercise the Retraction Call
Right, and in such event all references to Parent herein in respect of any
such exercise of such right by any such Affiliate shall be read as a
reference to such Affiliate, as appropriate in the circumstances.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY THE COMPANY
7.1 Subject to applicable law, and provided Parent has not exercised the
Redemption Call Right, the Company shall on the Redemption Date redeem all
but not less than all of the then outstanding Exchangeable Shares (other
than any such shares then held by Parent or an Affiliate of Parent) for an
amount per share equal to the sum of: (i) the Current Market Price of a
Parent Common Share on the last Business Day prior to the Redemption Date
(the "REDEMPTION PRICE"), which shall be satisfied in full by the Company
causing to be delivered to each holder of Exchangeable Shares one Parent
Common Share for each Exchangeable Share held by such holder, together
with (ii) the full amount of all declared and unpaid dividends on each
such Exchangeable Share held by such holder on any dividend record date
which occurred prior to the Redemption Date, less any amounts withheld on
account of tax pursuant to section 13.3.
7.2 In any case of a redemption of Exchangeable Shares under this Article 7,
the Company shall, at least 60 days before the Redemption Date (other than
a Redemption Date established in connection with a Parent Control
Transaction, an Exchangeable Share Voting Event or an Exempt Exchangeable
Share Voting Event), send or cause to be sent to each holder of
Exchangeable Shares a notice in writing of the redemption by the Company
or the purchase by Parent under the Redemption Call Right, as the case may
be, of the Exchangeable Shares held by such holder. In the case of a
Redemption Date established in connection with a Parent Control
Transaction, an Exchangeable Share Voting Event or an Exempt Exchangeable
Share Voting Event, the written notice of the redemption by the Company or
the purchase by Parent under the Redemption Call Right will be sent on or
before the Redemption Date, on as many days prior written notice as may be
determined by the Board of Directors to be reasonably practicable in the
circumstances. In any such case, such notice shall set out the formula for
determining the Redemption Price or the Redemption Call Purchase Price, as
the case may be, the Redemption Date and, if applicable, particulars of
the Redemption Call Right.
7.3 On or after the Redemption Date and subject to the exercise by Parent of
the Redemption Call Right, the Company shall pay or cause to be paid to
the holders of the Exchangeable Shares to be redeemed the Redemption Price
for each such Exchangeable Share, together with the full amount of all
declared and unpaid dividends on each such Exchangeable Share held by such
holder on any dividend record date which occurred prior to the Redemption
Date, less any amounts withheld on account of tax pursuant to section
13.3, upon presentation and surrender (at the registered office of the
Company or at any office of the Transfer Agent as may be specified by the
Company in such notice) of the certificates representing such Exchangeable
Shares, together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the OBCA and
the by-laws of the Company and such additional documents, instruments and
15
payments as the Transfer Agent and the Company may reasonably require.
Payment of the total Redemption Price for such Exchangeable Shares,
together with payment of such dividends, shall be made by transferring or
causing to be issued or transferred to each holder the Parent Common
Shares to which such holder is entitled and by delivering to such holder,
at the address of such holder recorded in the register of shareholders of
the Company for the Exchangeable Shares or by holding for pick-up by such
holder at the registered office of the Company or at any office of the
Transfer Agent as may be specified by the Company in such notice, on
behalf of the Company certificates representing Parent Common Shares
(which shares shall be fully paid and non-assessable and shall be free and
clear of any lien, claim or encumbrance) and, if applicable, a cheque of
the Company payable at par at any branch of the bankers of the Company in
payment of any such dividends, in each case, less any amounts withheld on
account of tax pursuant to section 13.3. On and after the Redemption Date,
the holders of the Exchangeable Shares called for redemption shall cease
to be holders of such Exchangeable Shares and shall not be entitled to
exercise any of the rights of holders in respect thereof (including,
without limitation, any rights under the Voting and Exchange Trust
Agreement), other than the right to receive their proportionate part of
the total Redemption Price and any such dividends, unless payment of the
total Redemption Price and any such dividends for such Exchangeable Shares
shall not be made upon presentation and surrender of certificates in
accordance with the foregoing provisions, in which case the rights of the
holders shall remain unaffected until the total Redemption Price and any
such dividends have been paid in the manner hereinbefore provided. The
Company shall have the right at any time after the sending of notice of
its intention to redeem the Exchangeable Shares as aforesaid to transfer
or cause to be issued or transferred to, and deposited with, the
Depositary named in such notice the total Redemption Price for and the
full amount of such dividends on the Exchangeable Shares (except as
otherwise provided in this section 7.3) so called for redemption, or of
such of the said Exchangeable Shares represented by certificates that have
not at the date of such deposit been surrendered by the holders thereof in
connection with such redemption, less any amounts withheld on account of
tax pursuant to section 13.3, such Redemption Price to be held by the
Depositary as trustee for and on behalf of, and for the use and benefit
of, such holders. Upon the later of such deposit being made and the
Redemption Date, the Exchangeable Shares in respect whereof such deposit
shall have been made shall be redeemed and the rights of the holders
thereof after such deposit or Redemption Date, as the case may be, shall
be limited to receiving their proportionate part of the total Redemption
Price and such dividends for such Exchangeable Shares, without interest,
and when received by the Depositary, all dividends and other distributions
with respect to the Parent Common Shares to which such holder is entitled
with a record date after the later of the date of such deposit and the
Redemption Date and before the date of transfer of such Parent Common
Shares to such holder (in each case less any amounts withheld on account
of tax pursuant to section 13.3), without interest, against presentation
and surrender of the certificates for the Exchangeable Shares held by them
in accordance with the foregoing provisions. Upon such payment or deposit
of the total Redemption Price and the full amount of such dividends, the
holders of Exchangeable Shares shall thereafter be considered and deemed
for all purposes to be holders of the Parent Common Shares delivered to
them or the Depositary on their behalf.
16
ARTICLE 8
PURCHASE FOR CANCELLATION
8.1 Subject to applicable law and notwithstanding section 8.2 hereof, the
Company may at any time and from time to time purchase for cancellation
all or any part of the Exchangeable Shares by private agreement with any
holder of Exchangeable Shares.
8.2 Subject to applicable law, the Company may at any time and from time to
time purchase for cancellation all or any part of the outstanding
Exchangeable Shares at any price by tender to all the holders of record of
Exchangeable Shares then outstanding. If in response to an invitation for
tenders under the provisions of this section 8.2, more Exchangeable Shares
are tendered at a price or prices acceptable to the Company than the
Company is prepared to purchase, the Exchangeable Shares to be purchased
by the Company shall be purchased as nearly as may be pro rata according
to the number of shares tendered by each holder who submits a tender to
the Company, provided that when shares are tendered at different prices,
the pro rating shall be effected (disregarding fractions) only with
respect to the shares tendered at the price at which more shares were
tendered than the Company is prepared to purchase after the Company has
purchased all the shares tendered at lower prices. If part only of the
Exchangeable Shares represented by any certificate shall be purchased, a
new certificate for the balance of such shares shall be issued at the
expense of the Company.
ARTICLE 9
VOTING RIGHTS
9.1 Except as required by applicable law and by article 10 hereof, the holders
of the Exchangeable Shares shall not be entitled as such to receive notice
of or to attend any meeting of the shareholders of the Company or to vote
at any such meeting.
ARTICLE 10
AMENDMENT AND APPROVAL
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but only with the
approval of the holders of the Exchangeable Shares given as hereinafter
specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching
to the Exchangeable Shares or any other matter requiring the approval or
consent of the holders of the Exchangeable Shares shall be deemed to have
been sufficiently given if it shall have been given in accordance with
applicable law subject to a minimum requirement that such approval be
evidenced by resolution passed by not less than two-thirds of the votes
cast on such resolution at a meeting of holders of Exchangeable Shares
duly called and held at which the holders of at least 10% of the
outstanding Exchangeable Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 10% of
the outstanding Exchangeable Shares at that time are not present or
represented by proxy within one-half hour after the time appointed for
such meeting, then the meeting shall be adjourned to such date not less
than five days thereafter and to such time and place as may be designated
by the chairman of such meeting. At such adjourned
17
meeting the holders of Exchangeable Shares present or represented by proxy
thereat may transact the business for which the meeting was originally
called and a resolution passed thereat by the affirmative vote of not less
than two-thirds of the votes cast on such resolution at such meeting shall
constitute the approval or consent of the holders of the Exchangeable
Shares.
ARTICLE 11
RECIPROCAL CHANGES, ETC. IN RESPECT OF PARENT COMMON SHARES
11.1 Each holder of an Exchangeable Share acknowledges that the Exchangeable
Share Support Agreement provides, in part, that so long as any
Exchangeable Shares not owned by Parent or its Affiliates are outstanding,
Parent will not without the prior approval of the Company and the prior
approval of the holders of the Exchangeable Shares given in accordance
with section 10.2 of these share provisions:
(a) issue or distribute Parent Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Parent Common
Shares) to the holders of all or substantially all of the then
outstanding Parent Common Shares by way of stock dividend or other
distribution, other than an issue of Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights
to acquire Parent Common Shares) to holders of Parent Common Shares
(i) who exercise an option to receive dividends in Parent Common
Shares (or securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Shares) in lieu of
receiving cash dividends, or (ii) pursuant to any dividend
reinvestment plan;
(b) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Parent Common
Shares entitling them to subscribe for or to purchase Parent Common
Shares (or securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Shares); or
(c) issue or distribute to the holders of all or substantially all of
the then outstanding Parent Common Shares:
(i) shares or securities of Parent of any class other than Parent
Common Shares (other than shares or securities convertible
into or exchangeable for or carrying rights to acquire Parent
Common Shares);
(ii) rights, options or warrants other than those referred to in
section 11.1(b) above;
(iii) evidences of indebtedness of Parent; or
(iv) assets of Parent,
unless the economic equivalent on a per share basis of such rights,
options, warrants, securities, shares, evidences of indebtedness or other
assets is issued or distributed simultaneously to holders of the
Exchangeable Shares; provided that, for greater certainty, the above
restrictions shall not apply to any securities issued or distributed by
18
Parent in order to give effect to and consummate the transactions
contemplated by, and in accordance with, the Combination Agreement.
11.2 Each holder of an Exchangeable Share acknowledges that the Exchangeable
Share Support Agreement further provides, in part, that so long as any
Exchangeable Shares not owned by Parent or its Affiliates are outstanding,
Parent will not without the prior approval of the Company and the prior
approval of the holders of the Exchangeable Shares given in accordance
with section 10.2 of these share provisions:
(a) subdivide, redivide or change the then outstanding Parent Common
Shares into a greater number of Parent Common Shares;
(b) reduce, combine, consolidate or change the then outstanding Parent
Common Shares into a lesser number of Parent Common Shares; or
(c) reclassify or otherwise change the Parent Common Shares or effect an
amalgamation, merger, reorganization or other transaction affecting
the Parent Common Shares,
unless the same or an economically equivalent change shall simultaneously
be made to, or in, the rights of the holders of the Exchangeable Shares,
provided that, for greater certainty, the above restrictions shall not
apply to any securities issued or distributed by Parent in order to give
effect to and consummate the transactions contemplated by, and in
accordance with, the Combination Agreement. The Exchangeable Share Support
Agreement further provides, in part, that the aforesaid provisions of the
Exchangeable Share Support Agreement shall not be changed without the
approval of the holders of the Exchangeable Shares given in accordance
with section 10.2 of these share provisions.
11.3 If Parent, at any time after the date hereof, consummates any transaction
(whether by way of reconstruction, reorganization, consolidation,
arrangement, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other Person or, in the case of a merger, of the
continuing corporation or other entity resulting therefrom (such other
person or continuing corporation (or, in the event of a merger,
amalgamation or similar transaction pursuant to which holders of shares in
the capital of Parent are entitled to receive shares or other ownership
interests in the capital of any corporation or other legal entity other
than such other person or continuing corporation, then such corporation or
other legal entity in which holders of shares in the capital of Parent are
entitled to receive an interest) is herein called the "PARENT SUCCESSOR")
then, provided that the Parent Successor is bound, or has agreed to be
bound, by the provisions of the Voting and Exchange Trust Agreement and
Exchangeable Share Support Agreement and to assume the obligations of
Parent thereunder to the satisfaction of the Board of Directors, all
references in these share provisions to Parent Common Shares shall be
deemed to be references to the shares of the Parent Successor which has
assumed the obligations of Parent and all references to Parent shall be to
Parent Successor, without amendment to these share provisions or any
further action whatsoever. For greater certainty, if a transaction
described in this section 11.3 results in holders of Exchangeable Shares
being entitled to exchange their Exchangeable Shares for shares of a
Parent Successor in a different ratio than that set out
19
in these share provisions, then these share provisions shall be deemed to
be amended to refer to such different ratio(s).
ARTICLE 12
ACTIONS BY THE COMPANY UNDER EXCHANGEABLE SHARE SUPPORT AGREEMENT
12.1 The Company will take all such actions and do all such things as shall be
necessary or advisable to perform and comply with and to ensure
performance and compliance by Parent and the Company with all provisions
of the Exchangeable Share Support Agreement applicable to Parent and the
Company, respectively, in accordance with the terms thereof including,
without limitation, taking all such actions and doing all such things as
shall be necessary or advisable to enforce to the fullest extent possible
for the direct benefit of the Company all rights and benefits in favour of
the Company under or pursuant to such agreement.
12.2 The Company shall not propose, agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under,
the Exchangeable Share Support Agreement without the approval of the
holders of the Exchangeable Shares given in accordance with section 10.2
of these share provisions other than such amendments, waivers and/or
forgiveness as may be necessary or advisable for the purposes of:
(a) adding to the covenants of the other parties to such agreement for
the protection of the Company or the holders of the Exchangeable
Shares thereunder;
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters
or questions arising thereunder which, in the good faith opinion of
the Board of Directors, it may be expedient to make, provided that
the Board of Directors shall be of the good faith opinion, after
consultation with counsel, that such provisions and modifications
will not be prejudicial to the interests of the holders of the
Exchangeable Shares; or
(c) making such changes in or corrections to such agreement which, on
the advice of counsel to the Company, are required for the purpose
of curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error
contained therein, provided that the Board of Directors shall be of
the good faith opinion, after consultation with counsel, that such
changes or corrections will not be prejudicial to the interests of
the holders of the Exchangeable Shares.
ARTICLE 13
LEGEND; CALL RIGHTS; WITHHOLDING RIGHTS
13.1 The certificates evidencing the Exchangeable Shares shall contain or have
affixed thereto a legend in form and on terms approved by the Board of
Directors, with respect to the Exchangeable Share Support Agreement, the
provisions of the Plan of Arrangement relating to the Liquidation Call
Right, the Redemption Call Right and the Parent Call Right, the Voting and
Exchange Trust Agreement (including the provisions with respect
20
to the voting rights, exchange right and automatic exchange rights
thereunder) and the Retraction Call Right.
13.2 Each holder of an Exchangeable Share, whether of record or beneficial, by
virtue of becoming and being such a holder shall be deemed to acknowledge
each of the Liquidation Call Right, the Retraction Call Right, the
Redemption Call Right and the Parent Call Right, in each case, in favour
of Parent and in the case of the Liquidation Call Right, the Retraction
Call Right and the Redemption Call Right, the overriding nature thereof in
connection with the liquidation, dissolution or winding-up of the Company
or other distribution of the assets of the Company among its shareholders
for the purpose of winding up its affairs or the retraction or redemption
of Exchangeable Shares, as the case may be, and to be bound thereby in
favour of Parent as therein provided.
13.3 The Company, Parent, the Depositary and the Transfer Agent shall be
entitled to deduct and withhold from any dividend or consideration
otherwise payable to any holder of Exchangeable Shares such amounts as the
Company, Parent, the Depositary or the Transfer Agent (i) is required to
deduct and withhold with respect to such payment under the ITA, the United
States Internal Revenue Code of 1986 or any provision of federal,
provincial, territorial, state, local or foreign tax law, in each case, as
amended or succeeded; (ii) may be liable to pay in accordance with section
116 of the ITA or any corresponding provision of provincial laws; or (iii)
may reasonably incur as costs or expenses in connection with such
withholding. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes as having been paid to the
holder of the Exchangeable Shares in respect of which such deduction and
withholding was made, provided (in the case of amounts withheld under (i)
or (ii) above) that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount to be withheld
hereunder from any payment to a holder exceeds the cash portion of the
consideration otherwise payable to the holder, the Company, Parent, the
Depositary and the Transfer Agent are hereby authorized to sell or
otherwise dispose of such portion of the consideration as is necessary to
provide sufficient funds to the Company, Parent, the Depositary or the
Transfer Agent, as the case may be, to enable it to effect such
withholding in cash and the Company, Parent, the Depositary or the
Transfer Agent shall notify the holder thereof and remit to such holder
any unapplied balance of the net proceeds of such sale.
ARTICLE 14
NOTICES
14.1 Any notice, request or other communication to be given to the Company by a
holder of Exchangeable Shares shall be in writing and shall be valid and
effective if given by mail (postage prepaid) or by telecopy or by delivery
to the registered office of the Company and addressed to the attention of
the Secretary of the Company. Any such notice, request or other
communication, if given by mail, telecopy or delivery, shall only be
deemed to have been given and received upon actual receipt thereof by the
Company.
14.2 Any presentation and surrender by a holder of Exchangeable Shares to the
Company or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of
the Company or other distribution of the assets of the Company for the
purpose of winding up its affairs or the retraction or
21
redemption of Exchangeable Shares shall be made by registered mail
(postage prepaid) or by delivery to the registered office of the Company
or to such office of the Transfer Agent as may be specified by the
Company, in each case, addressed to the attention of the Secretary of the
Company. Any such presentation and surrender of certificates shall only be
deemed to have been made and to be effective upon actual receipt thereof
by the Company or the Transfer Agent, as the case may be. Any such
presentation and surrender of certificates made by registered mail shall
be at the sole risk of the holder mailing the same.
14.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Company shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by
delivery to the address of the holder recorded in the register of
shareholders of the Company or, in the event of the address of any such
holder not being so recorded, then at the last known address of such
holder. Any such notice, request or other communication, if given by mail,
shall be deemed to have been given and received on the third Business Day
following the date of mailing and, if given by delivery, shall be deemed
to have been given and received on the date of delivery. Accidental
failure or omission to give any notice, request or other communication to
one or more holders of Exchangeable Shares shall not invalidate or
otherwise alter or affect any action or proceeding to be taken by the
Company pursuant thereto.
14.4 If the Company determines that mail service is or is threatened to be
interrupted at the time when the Company is required or elects to give any
notice to the holders of Exchangeable Shares hereunder, the Company shall,
notwithstanding the provisions hereof, give such notice by means of
publication in The Globe and Mail, national edition, or any other English
language daily newspaper or newspapers of general circulation in Canada
once in each of two successive weeks, and notice so published shall be
deemed to have been given on the latest date on which the first
publication has taken place.
ARTICLE 15
DISCLOSURE OF INTERESTS IN EXCHANGEABLE SHARES
15.1 The Company shall be entitled to require any holder of an Exchangeable
Share or any Person who the Company knows or has reasonable cause to
believe holds any interest whatsoever in an Exchangeable Share to confirm
that fact or to give such details as to who has an interest in such
Exchangeable Share as would be required (if the Exchangeable Shares were a
class of "equity shares" of the Company) under section 101 of the
Securities Act (Ontario) or as would be required under the charter or
certificate of incorporation of Parent or any laws or regulations, or
pursuant to the rules or regulations of any regulatory authority, of
Canada or the United States if the Exchangeable Shares were Parent Common
Shares. Any holder of Exchangeable Shares who is or (after acquiring such
shares) becomes a non-resident of Canada for purposes of the ITA shall be
required to so notify the Company in writing as soon as practicable.
ARTICLE 16
NO FRACTIONAL SHARES
16.1 A holder of Exchangeable Shares shall not be entitled to any fraction of a
Parent Common Share upon the exchange or purchase of such holder's
Exchangeable Shares
22
pursuant to Articles 5, 6 or 7 and no certificates representing any such
fractional interest shall be issued and such holder otherwise entitled to
a fractional interest will receive for such fractional interest from the
Company or Parent as the case may be on the designated payment date a cash
payment equal to such fractional interest multiplied by the Current Market
Price.
SCHEDULE A
NOTICE OF RETRACTION
To: Delano Technology Corporation (the "Company"),[ -- ] and divine, Inc.
("Parent").
This notice is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the Exchangeable Shares of the Company represented by
this certificate and all capitalized words and expressions used in this notice
that are defined in the Share Provisions have the meanings ascribed to such
words and expressions in such Share Provisions.
The undersigned hereby notifies the Company that, subject to the Retraction Call
Right referred to below, the undersigned desires to have the Company redeem in
accordance with section 6 of the Share Provisions:
[ ] all share(s) represented by this certificate; or
[ ] _____________ share(s) only represented by this certificate.
The undersigned hereby notifies the Company that the Retraction Date shall
be ______________________.
NOTE: The Retraction Date must be a Business Day and must not be less than 7
Business Days nor more than 10 Business Days after the date upon which this
notice is received by the Company. If no such Business Day is specified above,
the Retraction Date shall be deemed to be the 10th Business Day after the date
on which this notice is received by the Company.
The undersigned acknowledges the overriding Retraction Call Right of Parent to
purchase all but not less than all the Retracted Shares from the undersigned and
that this notice is and shall be deemed to be a revocable offer by the
undersigned to sell the Retractable Shares to Parent in accordance with the
Retraction Call Right on the Retraction Date for the Purchase Price and on the
other terms and conditions set out in Article 6 of the Share Provisions. This
notice of retraction, and this offer to sell the Retracted Shares to Parent, may
be revoked and withdrawn by the undersigned only by notice in writing given to
the Company at any time before the close of business on the Business Day
immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency provisions of
applicable law, the Company is unable to redeem all Retracted Shares, and
provided that Parent shall not have exercised the Retraction Call Right with
respect to the Retracted Shares, the undersigned will be deemed to have
exercised the Exchange Right (as defined in the Voting and Exchange Trust
Agreement) pursuant to which Parent will purchase the unredeemed Retracted
Shares.
2
The undersigned hereby represents and warrants to Parent and the Company that
the undersigned:
[ ] is
(select one)
[ ] is not
a non-resident of Canada for purposes of the Income Tax Act (Canada).
THE UNDERSIGNED ACKNOWLEDGES THAT IN THE ABSENCE OF AN INDICATION THAT THE
UNDERSIGNED IS NOT A NON-RESIDENT OF CANADA, DEDUCTION AND WITHHOLDING ON
ACCOUNT OF CANADIAN TAX MAY BE MADE FROM AMOUNTS PAYABLE TO THE UNDERSIGNED ON
THE REDEMPTION OR PURCHASE OF THE RETRACTED SHARES, AND FURTHER THAT SOME OR ALL
OF THE PARENT COMMON SHARES OTHERWISE RECEIVABLE BY THE UNDERSIGNED MAY BE SOLD
AND THE PROCEEDS REMITTED TO THE CANADA CUSTOMS AND REVENUE AGENCY ON THE
UNDERSIGNED'S ACCOUNT. IN SOME CASES, WITHHOLDING MAY BE REDUCED OR ELIMINATED
IF THE NON-RESIDENT PRESENTS THE COMPANY WITH A CERTIFICATE FROM THE CANADA
CUSTOMS AND REVENUE AGENCY UNDER SECTION 116 OF THE INCOME TAX ACT (CANADA)
BEFORE THE RETRACTION DATE. NON-RESIDENTS OF CANADA SHOULD CONSULT THEIR
CANADIAN TAX ADVISORS CONCERNING CANADIAN WITHHOLDING TAX AND THEIR OBLIGATIONS
IN RESPECT THEREOF.
The undersigned hereby represents and warrants to Parent and the Company that
the undersigned has good title to, and owns, the share(s) represented by this
certificate to be acquired by Parent or the Company, as the case may be, free
and clear of all liens, claims and encumbrances.
________________ _________________________ _______________________
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for
pick-up by the shareholder from the Transfer Agent, failing which the
securities and any cheque(s) will be mailed to the last address of the
shareholder as it appears on the register.
NOTE: This panel must be completed and this certificate, together with
such additional documents as the Transfer Agent may require, must
be deposited with the Transfer Agent. The securities and any
cheque(s) resulting from the retraction or purchase of the
Retracted Shares will be issued and registered in, and made
payable to, respectively, the name of the shareholder as it
appears on the register of the Company and the securities and any
cheque(s) resulting from such retraction or purchase will be
delivered to such shareholder as indicated above, unless the form
appearing immediately below is duly completed.
Date: ______________________
Name of Person in Whose Name Securities or Cheque(s) Are to be Registered,
Issued or Delivered (please print):
3
Street Address or P.O. Box: _______________________________________
Signature of Shareholder: _______________________________________
City, Province and Postal Code: _______________________________________
Signature Guaranteed by: _______________________________________
NOTE: If this notice of retraction is for less than all of the shares
represented by this certificate, a certificate representing the remaining
share(s) of the Company represented by this certificate will be issued and
registered in the name of the shareholder as it appears on the register of the
Company, unless the Share Transfer Power on the share certificate is duly
completed in respect of such share(s).
ANNEX D
FORM OF EXCHANGEABLE SHARE SUPPORT AGREEMENT
FINAL VERSION
EXCHANGEABLE SHARE SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 12th day of March, 2002, between
divine, Inc., a corporation existing under the laws of Delaware (hereinafter
referred to as "PARENT") and Delano Technology Corporation, a corporation
existing under the laws of Ontario (hereinafter referred to as "COMPANY").
RECITALS:
(a) In connection with a combination agreement (the "COMBINATION
AGREEMENT") dated as of March 12, 2002 between Parent and
Company, as further amended, supplemented and/or restated, the
common shares of Company held by certain persons are to be
exchanged for exchangeable shares (the "EXCHANGEABLE SHARES")
of Company upon a reorganization of Company's share capital
pursuant to the plan of arrangement contemplated by the
Combination Agreement; and
(b) Pursuant to the Combination Agreement, Parent and Company are
required to execute a support agreement substantially in the
form of this agreement.
In consideration of the foregoing and the mutual agreements contained
herein (the receipt and adequacy of which are acknowledged), the parties agree
as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINED TERMS
Each term denoted herein by initial capital letters and not otherwise
defined herein shall have the meaning ascribed thereto in the rights,
privileges, restrictions and conditions (collectively, the "SHARE PROVISIONS")
attaching to the Exchangeable Shares as set out in the articles of arrangement
of Company, which Share Provisions shall be as set out in Appendix 1 to the Plan
of Arrangement, unless the context requires otherwise.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS
The division of this agreement into Articles, sections and other
portions and the insertion of headings are for convenience of reference only and
shall not affect the construction or interpretation of this agreement. Unless
otherwise indicated, all references to an "ARTICLE" or "SECTION" followed by a
number or a letter refer to the specified Article or section of this agreement.
The terms "THIS AGREEMENT", "HEREOF", "HEREIN" and "HEREUNDER" and similar
expressions refer to this agreement and not to any particular Article, section
or other portion hereof and include any agreement or instrument supplementary or
ancillary hereto.
1.3 NUMBER, GENDER
Words importing the singular number only shall include the plural and
vice versa. Words importing any gender shall include all genders.
- 2 -
1.4 DATE FOR ANY ACTION
If any date on which any action is required to be taken under this
agreement is not a Business Day, such action shall be required to be taken on
the next succeeding Business Day.
ARTICLE 2
COVENANTS OF PARENT AND COMPANY
2.1 COVENANTS REGARDING EXCHANGEABLE SHARES
So long as any Exchangeable Shares not owned by Parent or its
Affiliates are outstanding, Parent will:
(a) not declare or pay any dividend on the Parent Common Shares
unless (i) Company shall simultaneously declare or pay, as the
case may be, an equivalent dividend (as provided for in the
Share Provisions) on the Exchangeable Shares (an "EQUIVALENT
DIVIDEND") and (ii) Company shall have sufficient money or
other assets or authorized but unissued securities available
to enable the due declaration and the due and punctual
payment, in accordance with applicable law, of any Equivalent
Dividend; or, if the dividend is a stock dividend, in lieu of
such dividend Company effects an economically equivalent (as
determined in accordance with section 2.7(d)) subdivision of
the outstanding Exchangeable Shares (an "EQUIVALENT STOCK
SUBDIVISION");
(b) advise Company sufficiently in advance of the declaration by
Parent of any dividend on Parent Common Shares and take all
such other actions as are reasonably necessary, in
co-operation with Company, to ensure that the respective
declaration date, record date and payment date for an
Equivalent Dividend shall be the same as the declaration date,
record date and payment date for the corresponding dividend on
the Parent Common Shares; or, the record date and the
effective date for the Equivalent Stock Subdivision shall be
the same as the record date and payment date for the
corresponding stock dividend on the Parent Common Shares;
(c) ensure that the record date for any dividend declared on
Parent Common Shares is not less than 10 Business Days after
the declaration date of such dividend;
(d) take all such actions and do all such things as are reasonably
necessary or desirable to enable and permit Company, in
accordance with applicable law, to pay and otherwise perform
its obligations with respect to the satisfaction of the
Liquidation Amount, the Retraction Price or the Redemption
Price in respect of each issued and outstanding Exchangeable
Share (other than Exchangeable Shares owned by Parent or its
Affiliates) upon the liquidation, dissolution or winding-up of
Company, the delivery of a Retraction Request by a holder of
Exchangeable Shares or a redemption of Exchangeable Shares by
Company, as the case may be, including without limitation all
such actions and all such things as are necessary or desirable
to enable and permit Company to cause to be delivered Parent
Common Shares to the holders of Exchangeable Shares in
accordance with the provisions of Article 5, 6 or 7, as the
case may be, of the Share Provisions; and
- 3 -
(e) take all such actions and do all such things as are reasonably
necessary or desirable to perform its obligations upon
exercise of the Parent Call Right, the Liquidation Call Right,
the Retraction Call Right and the Redemption Call Right,
including without limitation all such actions and all such
things as are necessary or desirable to deliver or cause to be
delivered Parent Common Shares to the holders of Exchangeable
Shares in accordance with the provisions of the Liquidation
Call Right, the Retraction Call Right, the Parent Call Right
or the Redemption Call Right, as the case may be; and
(f) not exercise its vote as a shareholder to initiate the
voluntary liquidation, dissolution or winding up of Company or
any other distribution of assets of Company among its
shareholders for the purpose of winding up its affairs nor
take any action or omit to take any action that is designed to
result in the liquidation, dissolution or winding up of
Company or any other distribution of the assets of Company
among its shareholders for the purpose of winding up its
affairs.
2.2 SEGREGATION OF FUNDS
Parent will cause Company to deposit a sufficient amount of funds in a
separate account of Company and segregate a sufficient amount of such other
assets and property as is necessary to enable Company to pay dividends when due
and to pay or otherwise satisfy its respective obligations under Article 5, 6 or
7 of the Share Provisions, as applicable.
2.3 RESERVATION OF PARENT COMMON SHARES
Parent hereby represents, warrants and covenants in favour of Company
that Parent has reserved for issuance and will, at all times while any
Exchangeable Shares (other than Exchangeable Shares held by Parent or its
Affiliates) are outstanding, keep available, free from pre-emptive and other
rights, out of its authorized and unissued capital stock such number of Parent
Common Shares (or other shares or securities into which Parent Common Shares may
be reclassified or changed as contemplated by section 2.7) without duplication:
(a) as is equal to the sum of (i) the number of Exchangeable Shares issued and
outstanding from time to time and (ii) the number of Exchangeable Shares
issuable upon the exercise of all rights to acquire Exchangeable Shares
outstanding from time to time; and (b) as are now and may hereafter be required
to enable and permit Parent to meet its obligations under the Voting and
Exchange Trust Agreement and under any other security or commitment pursuant to
which Parent may now or hereafter be required to issue Parent Common Shares, to
meet its obligations under each of the Liquidation Call Right, the Retraction
Call Right, the Redemption Call Right or the Parent Call Right with respect to
the transfer and delivery of Parent Common Shares and to enable and permit
Company to meet its obligations hereunder and under the Share Provisions.
2.4 NOTIFICATION OF CERTAIN EVENTS
In order to assist Parent to comply with its obligations hereunder
Company will notify Parent of each of the following events at the time set forth
below:
(a) in the event of any determination by the Board of Directors of
Company to institute voluntary liquidation, dissolution or
winding-up proceedings with respect
- 4 -
to Company or to effect any other distribution of the assets
of Company among its shareholders for the purpose of winding
up its affairs, at least 60 days prior to the proposed
effective date of such liquidation, dissolution, winding-up or
other distribution;
(b) promptly, upon the earlier of receipt by Company of notice of
and Company otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or
winding-up of Company or to effect any other distribution of
the assets of Company among its shareholders for the purpose
of winding up its affairs;
(c) immediately, upon receipt by Company of a Retraction Request;
(d) on the same date on which notice of redemption is given to
holders of Exchangeable Shares, upon the determination of a
Redemption Date in accordance with the Share Provisions; and
(e) as soon as practicable upon the issuance by Company of any
Exchangeable Shares or rights to acquire Exchangeable Shares
(other than the issuance of Exchangeable Shares and rights to
acquire Exchangeable Shares in exchange for Common Shares
pursuant to the Arrangement).
2.5 DELIVERY OF PARENT COMMON SHARES TO COMPANY
In furtherance of its obligations under section 2.1(d) and section
2.1(e), upon notice from Company of any event that requires Company to cause
Parent Common Shares to be delivered to any holder of Exchangeable Shares,
Parent shall forthwith issue and deliver or cause to be delivered to Company
(unless Company already has sufficient Parent Common Shares) the requisite
number of Parent Common Shares to be received by, and issued to or to the order
of, the former holder of the surrendered Exchangeable Shares, as Company may
direct. All such Parent Common Shares shall be duly authorized and validly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim or encumbrance.
2.6 QUALIFICATION OF PARENT COMMON SHARES
If any Parent Common Shares (or other shares or securities into which
Parent Common Shares may be reclassified or changed as contemplated by section
2.7) to be issued and delivered hereunder require registration or qualification
with or approval of or the filing of any document, including any prospectus or
similar document, or the taking of any proceeding with or the obtaining of any
order, ruling or consent from any governmental or regulatory authority under any
United States or Canadian federal, provincial or state securities or other law
or regulation or pursuant to the rules and regulations of any securities or
other regulatory authority or the fulfillment of any other United States or
Canadian legal requirement before such shares (or such other shares or
securities) may be issued by Parent and delivered by Parent at the direction of
Company, if applicable, to the holder of surrendered Exchangeable Shares or in
order that such shares (or such other shares or securities) may be freely traded
thereafter (other than any restrictions of general application on transfer by
reason of a holder being a "control person" for purposes of Canadian provincial
securities law or an "affiliate" of Parent for purposes of United States federal
or state securities law), Parent will in good faith expeditiously take all such
actions
- 5 -
and do all such things as are reasonably necessary or desirable to cause such
Parent Common Shares (or such other shares or securities) to be and remain duly
registered, qualified or approved under United States or Canadian law, as the
case may be. Parent will in good faith expeditiously take all such actions and
do all such things as are reasonably necessary or desirable to cause all Parent
Common Shares (or such other shares or securities) to be delivered hereunder to
be listed, quoted or posted for trading on all stock exchanges and quotation
systems on which outstanding Parent Common Shares (or such other shares or
securities) have been listed by Parent and remain listed and are quoted or
posted for trading at such time.
2.7 ECONOMIC EQUIVALENCE
So long as any Exchangeable Shares not owned by Parent or its
Affiliates are outstanding:
(a) Parent will not without prior approval of Company and the
prior approval of the holders of the Exchangeable Shares given
in accordance with section 10.2 of the Share Provisions:
(i) issue or distribute Parent Common Shares (or
securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Shares) to
the holders of all or substantially all of the then
outstanding Parent Common Shares by way of stock
dividend or other distribution, other than an issue
of Parent Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire
Parent Common Shares) to holders of Parent Common
Shares (i) who exercise an option to receive
dividends in Parent Common Shares (or securities
exchangeable for or convertible into or carrying
rights to acquire Parent Common Shares) in lieu of
receiving cash dividends, or (ii) pursuant to any
dividend reinvestment plan; or
(ii) issue or distribute rights, options or warrants to
the holders of all or substantially all of the then
outstanding Parent Common Shares entitling them to
subscribe for or to purchase Parent Common Shares (or
securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Shares); or
(iii) issue or distribute to the holders of all or
substantially all of the then outstanding Parent
Common Shares (A) shares or securities of Parent of
any class other than Parent Common Shares (other than
shares or securities convertible into or exchangeable
for or carrying rights to acquire Parent Common
Shares), (B) rights, options or warrants other than
those referred to in section 2.7(a)(ii), (C)
evidences of indebtedness of Parent or (D) assets of
Parent;
unless in each case the economic equivalent on a per share
basis of such rights, options, warrants, securities, shares,
evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable
Shares; provided that, for greater certainty, the above
restrictions shall not apply to any shares or securities
issued or distributed by Parent in order to give effect to and
to
- 6 -
consummate the transactions contemplated by, and in accordance
with, the Combination Agreement.
(b) Parent will not without the prior approval of Company and the
prior approval of the holders of the Exchangeable Shares given
in accordance with section 10.2 of the Share Provisions:
(i) subdivide, redivide or change the then outstanding
Parent Common Shares into a greater number of Parent
Common Shares; or
(ii) reduce, combine, consolidate or change the then
outstanding Parent Common Shares into a lesser number
of Parent Common Shares; or
(iii) reclassify or otherwise change Parent Common Shares
or effect an amalgamation, merger, reorganization or
other transaction affecting Parent Common Shares;
unless the same or an economically equivalent change shall
simultaneously be made to, or in the rights of the holders of,
the Exchangeable Shares; provided that, for greater certainty,
the above restrictions shall not apply to any shares or other
securities issued or distributed by Parent in order to give
effect to and to consummate the transactions contemplated by,
and in accordance with, the Combination Agreement.
(c) Parent will ensure that the record date for any event referred
to in section 2.7(a) or section 2.7(b), or (if no record date
is applicable for such event) the effective date for any such
event, is not less than five Business Days after the date on
which such event is declared or announced by Parent (with
contemporaneous notification thereof by Parent to Company).
(d) The Board of Directors of Company shall determine, in good
faith and in its sole discretion, economic equivalence for the
purposes of any event referred to in section 2.7(a) or section
2.7(b) and each such determination shall be conclusive and
binding on Parent. In making each such determination, the
following factors shall, without excluding other factors
determined by the Board of Directors of Company to be
relevant, be considered by the Board of Directors of Company:
(i) in the case of any stock dividend or other
distribution payable in Parent Common Shares, the
number of such shares issued as a result of such
dividend or distribution in proportion to the number
of Parent Common Shares previously outstanding;
(ii) in the case of the issuance or distribution of any
rights, options or warrants to subscribe for or
purchase Parent Common Shares (or securities
exchangeable for or convertible into or carrying
rights to acquire Parent Common Shares), the
relationship between the exercise price of each such
right, option or warrant, the number of such rights,
options or warrants, and the Current Market Price of
a Parent Common Share;
- 7 -
(iii) in the case of the issuance or distribution of any
other form of property (including without limitation
any shares or securities of Parent of any class other
than Parent Common Shares, any rights, options or
warrants other than those referred to in section
2.7(d)(ii), any evidences of indebtedness of Parent
or any assets of Parent), the relationship between
the fair market value (as determined by the Board of
Directors of Company in the manner above
contemplated) of such property to be issued or
distributed with respect to each outstanding Parent
Common Share and the Current Market Price of a Parent
Common Share;
(iv) in the case of any subdivision, redivision or change
of the then outstanding Parent Common Shares into a
greater number of Parent Common Shares or the
reduction, combination, consolidation or change of
the then outstanding Parent Common Shares into a
lesser number of Parent Common Shares or any
amalgamation, merger, reorganization or other
transaction affecting Parent Common Shares, the
effect thereof upon the then outstanding Parent
Common Shares; and
(v) in all such cases, the general taxation consequences
of the relevant event to beneficial owners of
Exchangeable Shares to the extent that such
consequences may differ from the taxation
consequences to such beneficial owners determined as
if they owned Parent Common Shares at the relevant
time as a result of differing tax treatment under the
laws of Canada and the United States (except for any
differing consequences arising as a result of
differing marginal taxation rates or the fact that
the Exchangeable Shares will not be listed on any
stock exchange, and without regard to the individual
circumstances of beneficial owners of Exchangeable
Shares).
(e) Company agrees that, to the extent required, upon due notice
from Parent, Company will use its best efforts to take or
cause to be taken such steps as may be necessary for the
purposes of ensuring that appropriate dividends are paid or
other distributions are made by Company, or subdivisions,
redivisions or changes are made to the Exchangeable Shares, in
order to implement the required economic equivalence with
respect to the Parent Common Shares and Exchangeable Shares as
provided for in this section 2.7.
2.8 TENDER OFFERS
So long as any Exchangeable Shares not owned by Parent or its
Affiliates are outstanding, in the event that a tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to Parent
Common Shares (an "OFFER") is proposed by Parent or is proposed to Parent or its
shareholders and is recommended by the Board of Directors of Parent, or is
otherwise effected or to be effected with the consent or approval of the Board
of Directors of Parent, and the Exchangeable Shares are not redeemed by Company
or purchased by Parent pursuant to the Redemption Call Right, Parent will use
its reasonable efforts expeditiously and in good faith to take all such actions
and do all such things as are necessary or desirable to enable and permit
holders of Exchangeable Shares (other than Parent and its Affiliates) to
participate in such Offer to the same extent and on an economically equivalent
basis as the
- 8 -
holders of Parent Common Shares. Without limiting the generality of the
foregoing, Parent will use its reasonable efforts expeditiously and in good
faith to ensure that a retraction of Exchangeable Shares to so participate may
be effective only upon, and conditional upon, the closing of such Offer and only
to the extent necessary to tender or deposit to the Offer. Nothing herein shall
affect the rights of Company to redeem (or Parent to purchase pursuant to the
Redemption Call Right) Exchangeable Shares, as applicable, in the event of a
Parent Control Transaction.
2.9 OWNERSHIP OF OUTSTANDING SHARES
Parent covenants and agrees in favour of Company that, without the
prior approval of Company and the prior approval of the holders of the
Exchangeable Shares given in accordance with section 10.2 of the Share
Provisions, as long as any outstanding Exchangeable Shares are owned by any
Person other than Parent or any of its Affiliates, Parent will be and remain the
direct or indirect beneficial owner of all issued and outstanding voting shares
in the capital of Company.
2.10 PARENT AND AFFILIATES NOT TO VOTE EXCHANGEABLE SHARES
Parent covenants and agrees that it will appoint and cause to be
appointed proxyholders with respect to all Exchangeable Shares held by it and
its Affiliates for the sole purpose of attending each meeting of holders of
Exchangeable Shares in order to be counted as part of the quorum for each such
meeting. Parent further covenants and agrees that it will not, and will cause
its Affiliates not to, exercise any voting rights which may be exercisable by
holders of Exchangeable Shares from time to time pursuant to the Share
Provisions or pursuant to the provisions of the OBCA (or any successor or other
corporate statute by which Company may in the future be governed) with respect
to any Exchangeable Shares held by it or by its Affiliates in respect of any
matter considered at any meeting of holders of Exchangeable Shares.
2.11 ORDINARY MARKET PURCHASES
For greater certainty, nothing contained in this agreement, including
without limitation the obligations of Parent contained in section 2.8, shall
limit the ability of Parent (or any of its Affiliates including, without
limitation, Company) to make a "Rule 10b-18 Purchase" of Parent Common Shares in
compliance with Rule 10b-18 of the U.S. Securities and Exchange Act of 1934, as
amended, or any successor provisions thereof, or to make ordinary market or
privately negotiated purchases of Parent Common Shares and otherwise in
accordance with applicable laws and regulatory or stock exchange requirements.
ARTICLE 3
PARENT SUCCESSORS
3.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC.
As long as any outstanding Exchangeable Shares are owned by any Person
other than Parent or any of its Affiliates, Parent shall not consummate any
transaction (whether by way of reconstruction, reorganization, consolidation,
arrangement, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become
- 9 -
the property of any other Person or, in the case of a merger, of the continuing
corporation or other entity resulting therefrom unless, but may do so if:
(a) such other Person or continuing corporation or, in the event
of any merger, amalgamation or similar transaction pursuant to
which holders of shares in Parent are entitled to receive
shares in the capital of any corporation or other legal entity
other than such other Person or continuing corporation, then
such corporation or legal entity (in each case, the "PARENT
SUCCESSOR") by operation of law, becomes, without more, bound
by the terms and provisions of this agreement or, if not so
bound, executes, prior to or contemporaneously with the
consummation of such transaction, an agreement supplemental
hereto or otherwise agrees to become bound by the terms and
provisions of this agreement, in either case together with
such other instruments (if any) as are reasonably necessary or
advisable to evidence the assumption by the Parent Successor
of liability for all moneys payable and property deliverable
hereunder and the covenant of such Parent Successor to pay and
deliver or cause to be delivered the same and its agreement to
observe and perform all the covenants and obligations of
Parent under this agreement; and
(b) such transaction shall be upon such terms and conditions as
substantially to preserve and not to impair in any material
respect any of the rights, duties, powers and authorities of
Company or the holders of the Exchangeable Shares.
3.2 VESTING OF POWERS IN SUCCESSOR
Whenever the conditions of section 3.1 have been duly observed and
performed, the parties, if required by section 3.1, shall execute and deliver
the supplemental agreement provided for in section 3.1(a) and thereupon the
Parent Successor shall possess and from time to time may exercise each and every
right and power of Parent under this agreement in the name of Parent or
otherwise and any act or proceeding by any provision of this agreement required
to be done or performed by the Board of Directors of Parent or any officers of
Parent may be done and performed with like force and effect by the directors or
officers of such Parent Successor.
3.3 WHOLLY-OWNED SUBSIDIARIES
Nothing herein shall be construed as preventing the amalgamation or
merger of any wholly-owned direct or indirect subsidiary of Parent with or into
Parent or the winding-up, liquidation or dissolution of any wholly-owned direct
or indirect subsidiary of Parent (if all of the assets of such subsidiary are
transferred to Parent or another wholly-owned direct or indirect subsidiary of
Parent) or any other distribution of the assets of any wholly-owned direct or
indirect subsidiary of Parent among the shareholders of such subsidiary for the
purpose of winding up its affairs, and any such transactions are expressly
permitted by this Article 3.
- 10 -
ARTICLE 4
GENERAL
4.1 TERM
This agreement shall come into force and be effective as of the date
hereof and shall terminate and be of no further force and effect at such time as
no Exchangeable Shares (or securities or rights convertible into or exchangeable
for or carrying rights to acquire Exchangeable Shares) are held by any Person
other than Parent and any of its Affiliates.
4.2 CHANGES IN CAPITAL OF PARENT AND COMPANY
At all times after the occurrence of any event contemplated pursuant to
section 2.7 and section 2.8 or otherwise, as a result of which either Parent
Common Shares or the Exchangeable Shares or both are in any way changed, this
agreement shall forthwith be amended and modified as necessary in order that it
shall apply with full force and effect, mutatis mutandis, to all new securities
into which Parent Common Shares or the Exchangeable Shares or both are so
changed and the parties hereto shall execute and deliver an agreement in writing
giving effect to and evidencing such necessary amendments and modifications.
4.3 SEVERABILITY
If any term or other provision of this agreement is invalid, illegal or
incapable of being enforced by any rule or law, or public policy, all other
conditions and provisions of this agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the fullest extent possible.
4.4 AMENDMENTS, MODIFICATIONS
(a) Subject to sections 4.2, 4.3 and 4.5, this agreement may not
be amended or modified except by an agreement in writing
executed by Company and Parent and approved by the holders of
the Exchangeable Shares in accordance with section 10.2 of the
Share Provisions.
(b) No amendment or modification or waiver of any of the
provisions of this agreement otherwise permitted hereunder
shall be effective unless made in writing and signed by all of
the parties hereto.
4.5 MINISTERIAL AMENDMENTS
Notwithstanding the provisions of section 4.4, the parties to
this agreement may in writing at any time and from time to time,
without the approval of the holders of the Exchangeable Shares, amend
or modify this agreement for the purposes of:
- 11 -
(a) adding to the covenants of any or all parties provided that
the Board of Directors of each of Company and Parent shall be
of the good faith opinion that such additions will not be
prejudicial to the rights or interests of the holders of the
Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with
this agreement as may be necessary or desirable with respect
to matters or questions which, in the good faith opinion of
the Board of Directors of each of Company and Parent, it may
be expedient to make, provided that each such Board of
Directors shall be of the good faith opinion that such
amendments or modifications will not be prejudicial to the
rights or interests of the holders of the Exchangeable Shares;
or
(c) making such changes or corrections which, on the advice of
counsel to Company and Parent, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error,
provided that the Boards of Directors of each of Company and
Parent shall be of the good faith opinion that such changes or
corrections will not be prejudicial to the rights or interests
of the holders of the Exchangeable Shares.
4.6 MEETING TO CONSIDER AMENDMENTS
Company, at the request of Parent, shall call a meeting or meetings of
the holders of the Exchangeable Shares for the purpose of considering any
proposed amendment or modification requiring approval pursuant to section 4.4.
Any such meeting or meetings shall be called and held in accordance with this
Agreement, the bylaws of Company, the Share Provisions and all applicable laws.
4.7 ENUREMENT
This agreement shall be binding upon and enure to the benefit of the
parties hereto and their respective successors and assigns.
4.8 NOTICES TO PARTIES
(a) All notices and other communications between the parties to
this agreement shall be in writing and shall be deemed to have
been given if delivered personally or by confirmed telecopy to
the parties at the following addresses (or at such other
address for any such party as shall be specified in like
notice):
To Parent or Company,
c/o 1301 N. Elston Avenue
Chicago, IL 60622
USA
Attention: General Counsel
with a copy (which shall not constitute notice) to:
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Bell, Boyd & Lloyd LLC
70 West Madison Street
Three First National Plaza
Chicago, IL 60602-4207
USA
Attention: D. Mark McMillan
-and-
Osler, Hoskin & Harcourt
1 First Canadian Place
Box 50
Toronto, Ontario M5X 1B8
Attention: Linda Robinson
-and-
Goodmans LLP
250 Yonge Street
Suite 2400
Toronto, ON M5B 2M6
Attention: Stephen Halperin
(b) Any notice or other communication given personally shall be
deemed to have been given and received upon delivery thereof
and if given by telecopy shall be deemed to have been given
and received on the date of confirmed receipt thereof unless
such day is not a Business Day, in which case it shall be
deemed to have been given and received upon the immediately
following Business Day.
4.9 COUNTERPARTS
This agreement may be executed in counterparts, each of which shall be
deemed an original, and all of which taken together shall constitute one and the
same instrument.
4.10 JURISDICTION
This agreement shall be construed and enforced in accordance with the
laws of the Province of Ontario and the laws of Canada applicable therein.
4.11 ATTORNMENT
Each of the parties hereto agrees that any action or proceeding arising
out of or relating to this agreement may be instituted in the courts of Ontario,
waives any objection which it may have now or hereafter to the venue of any such
action or proceeding, irrevocably submits to the jurisdiction of the said courts
in any such action or proceeding, agrees to be bound by any judgment of the said
courts and not to seek, and hereby waives, any review of the merits of any
- 13 -
such judgment by the courts of any other jurisdiction, and Parent hereby
appoints Company at its registered office in the Province of Ontario as attorney
for service of process.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
duly executed as of the date first above written.
divine, Inc.
By: _________________________________
Name:
Title:
Delano Technology Corporation
By: _________________________________
Name:
Title:
ANNEX E
FORM OF VOTING AND EXCHANGE TRUST AGREEMENT
-------------------------------------------
FINAL VERSION
VOTING AND EXCHANGE TRUST AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 12th day of March, 2002, by and
among divine, Inc., a corporation existing under the laws of Delaware
(hereinafter referred to as "PARENT"), Delano Technology Corporation, a
corporation existing under the laws of Ontario (hereinafter referred to as
"COMPANY"), and [--], a trust company incorporated under the laws of Canada
(hereinafter referred to as "TRUSTEE").
RECITALS:
(a) In connection with a combination agreement ("COMBINATION AGREEMENT")
dated as of March 12, 2002 by and between Parent and Company as
further amended, supplemented and/or restated, the common shares of
Company held by certain persons are to be exchanged for exchangeable
shares of Company upon a reorganization of Company's share capital
pursuant to the plan of arrangement contemplated in the Combination
Agreement; and
(b) Pursuant to the Combination Agreement, Parent and Company are
required to execute a voting and exchange trust agreement
substantially in the form of this Agreement.
In consideration of the foregoing and the mutual agreements contained
herein (the receipt and adequacy of which are acknowledged), the parties agree
as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement, the following terms shall have the following meanings:
"AFFILIATE" has the meaning ascribed thereto in the OBCA.
"ARRANGEMENT" means the arrangement under section 182 of the OBCA on the
terms and subject to the conditions set out in the Plan of Arrangement,
subject to any amendments or variations thereto made in accordance with
the Combination Agreement, the Plan of Arrangement or made at the
direction of the Court.
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of Parent
to effect the automatic exchange of Exchangeable Shares for Parent Common
Shares pursuant to section 5.12.
"BENEFICIARIES" means the registered holders from time to time of
Exchangeable Shares, other than Parent and Parent's Affiliates.
"BENEFICIARY VOTES" has the meaning ascribed thereto in section 4.2.
2
"BOARD OF DIRECTORS" means the Board of Directors of Company.
"BUSINESS DAY" means any day on which commercial banks are open for
business in Toronto, Ontario and New York, New York other than a Saturday,
a Sunday or a day observed as a holiday in Toronto, Ontario under
applicable laws or in New York, New York under applicable laws.
"CANADIAN DOLLAR EQUIVALENT" means, in respect of an amount expressed in a
currency other than Canadian dollars (the "FOREIGN CURRENCY AMOUNT") at
any date, the product obtained by multiplying (a) the Foreign Currency
Amount by (b) the noon spot exchange rate on such date for such foreign
currency expressed in Canadian dollars as reported by the Bank of Canada
or, in the event such spot exchange rate is not available, such exchange
rate on such date for such foreign currency expressed in Canadian dollars
as may be determined by the Board of Directors to be appropriate for such
purpose.
"COURT" means the Ontario Superior Court of Justice.
"CURRENT MARKET PRICE" means, in respect of a Parent Common Share on any
date, the Canadian Dollar Equivalent of the average of the closing prices
of Parent Common Shares during a period of 20 consecutive trading days
ending not more than three trading days before such date on the Nasdaq,
or, if the Parent Common Shares are not then quoted on the Nasdaq, on such
other stock exchange or automated quotation system on which the Parent
Common Shares are listed or quoted, as the case may be, as may be selected
by the Board of Directors for such purpose; provided however, that if in
the opinion of the Board of Directors the public distribution or trading
activity of Parent Common Shares during such period does not create a
market which reflects the fair market value of a Parent Common Share, then
the Current Market Price of a Parent Common Share shall be determined by
the Board of Directors, in good faith and in its sole discretion, and
provided further that any such selection, opinion or determination by the
Board of Directors shall be conclusive and binding.
"EXCHANGE RIGHT" has the meaning ascribed thereto in section 5.1.
"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the
capital of Company, having the rights, privileges, restrictions and
conditions set out in Appendix 1 to the Plan of Arrangement.
"EXCHANGEABLE SHARE SUPPORT AGREEMENT" means the Exchangeable Share
Support Agreement made between Company and Parent substantially in the
form and content of Exhibit D to the Combination Agreement, as amended
pursuant to the terms of the Exchangeable Share Support Agreement.
"GOVERNMENTAL ENTITY" means any court, administrative agency, tribunal,
bureau, board, commission, public authority, governmental or regulatory
authority, agency, ministry, crown corporation or other law, rule-or
regulation-making entity, domestic or foreign, or any quasi-governmental
body, self-regulatory organization or stock exchange.
"INDEMNIFIED PARTIES" has the meaning ascribed thereto in section 9.1.
3
"INSOLVENCY EVENT" means (i) the institution by Company of any proceeding
to be adjudicated a bankrupt or insolvent or to be wound up, or the
consent of Company to the institution of bankruptcy, insolvency or
winding-up proceedings against it, or (ii) the filing of a petition,
answer or consent seeking dissolution or winding-up under any bankruptcy,
insolvency or analogous laws, including without limitation the Companies
Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency Act
(Canada), and the failure by Company to contest in good faith any such
proceedings commenced in respect of Company within 30 days of becoming
aware thereof, or the consent by Company to the filing of any such
petition or to the appointment of a receiver, or (iii) the making by
Company of a general assignment for the benefit of creditors, or the
admission in writing by Company of its inability to pay its debts
generally as they become due, or (iv) Company not being permitted,
pursuant to solvency requirements of applicable law, to redeem any
Retracted Shares pursuant to section 6.6 of the Share Provisions.
"ITA" means the Income Tax Act (Canada), as amended.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the Plan of
Arrangement.
"LIQUIDATION EVENT" has the meaning ascribed thereto in section 5.12.
"LIQUIDATION EVENT EFFECTIVE DATE" has the meaning ascribed thereto in
section 5.12.
"LIST" has the meaning ascribed thereto in section 4.6.
"NASDAQ" means the Nasdaq National Market or its successor.
"OBCA" means the Business Corporations Act (Ontario), as amended from time
to time.
"OFFICER'S CERTIFICATE" means, with respect to Parent or Company, as the
case may be, a certificate signed by any officer or director of Parent or
Company, as the case may be.
"PARENT CALL RIGHT" has the meaning ascribed thereto in the Plan of
Arrangement.
"PARENT COMMON SHARE" means a share of Class A common stock in the capital
of Parent and any other securities into which such shares may be changed
and, in the event of any transaction described in Section 11.1, the
corresponding shares in the capital of Parent Successor.
"PARENT CONSENT" has the meaning ascribed thereto in section 4.2.
"PARENT MEETING" has the meaning ascribed thereto in section 4.2.
"PARENT SUCCESSOR" has the meaning ascribed thereto in section 11.1(a).
"PERSON" means any individual, corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization, entity or Governmental Entity.
4
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of Company under section 182 of the OBCA and any amendments or
variations thereto made in accordance with the Plan of Arrangement or made
at the direction of the Court.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the Plan of
Arrangement.
"RETRACTED SHARES" has the meaning ascribed thereto in section 5.7.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the Share
Provisions.
"SHARE PROVISIONS" means the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares set forth in Appendix 1 to
the Plan of Arrangement.
"SPECIAL VOTING SHARE" means the share of Preferred Stock of Parent which
entitles the holder of record of such share to a number of votes at
meetings of holders of Parent Common Shares equal to the number of votes
that the holders of Exchangeable Shares outstanding from time to time
(other than Exchangeable Shares held by Parent or subsidiaries of Parent
or held by Persons directly or indirectly controlled by or under common
control with Parent, all as set out in the share provisions attaching to
such share of Preferred Stock would be entitled to if all such
Exchangeable Shares were exchanged by the holders thereof for Parent
Common Shares pursuant to the terms of the Exchangeable Shares, which
share is to be issued to, deposited with and voted by the Trustee as
described herein.
"TRUST" means the bare trust created by this Agreement under the laws of
the Province of Ontario.
"TRUST ESTATE" means the Special Voting Share, any other securities, the
Exchange Right, the Automatic Exchange Rights and any money or other
property which may be held by the Trustee from time to time pursuant to
this Agreement.
"TRUSTEE" means [--] and, subject to the provisions of Article 10,
includes any successor trustee.
"VOTING RIGHTS" means the voting rights attached to the Special Voting
Share.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into Articles, Sections and other portions
and the insertion of headings are for convenience of reference only and should
not affect the construction or interpretation of this Agreement. Unless
otherwise indicated, all references to an "ARTICLE" or "SECTION" followed by a
number or a letter refer to the specified Article or section of this Agreement.
The terms "THIS AGREEMENT", "HEREOF", "HEREIN" and "HEREUNDER" and similar
expressions refer to this Agreement and not to any particular Article, section
or other portion hereof and include any agreement or instrument supplementary or
ancillary hereto.
1.3 NUMBER, GENDER, ETC.
Words importing the singular number only shall include the plural and vice
versa. Words importing any gender shall include all genders.
5
1.4 DATE FOR ANY ACTION
If any date on which any action is required to be taken under this
Agreement is not a Business Day, such action shall be required to be taken on
the next succeeding Business Day.
ARTICLE 2
PURPOSE OF AGREEMENT
2.1 ESTABLISHMENT OF TRUST
The purpose of this Agreement is to create the Trust for the benefit of
the Beneficiaries, as herein provided. The Trustee will hold the Special Voting
Share in order to enable the Trustee to exercise the Voting Rights and will hold
the Exchange Right and the Automatic Exchange Rights in order to enable the
Trustee to exercise such rights, in each case as trustee for and on behalf of
the Beneficiaries as provided in this Agreement.
ARTICLE 3
SPECIAL VOTING SHARE
3.1 ISSUE AND OWNERSHIP OF THE SPECIAL VOTING SHARE
Immediately following execution of this Agreement, Parent shall issue to
and deposit with the Trustee the Special Voting Share (and shall deliver the
certificate representing such share to the Trustee) to be hereafter held of
record by the Trustee as trustee for and on behalf of, and for the use and
benefit of, the Beneficiaries and in accordance with the provisions of this
Agreement. Parent hereby acknowledges receipt from the Trustee as trustee for
and on behalf of the Beneficiaries of U.S.$1.00 and other good and valuable
consideration (and the adequacy thereof) for the issuance of the Special Voting
Share by Parent to the Trustee. During the term of the Trust and subject to the
terms and conditions of this Agreement, the Trustee shall possess and be vested
with full legal ownership of the Special Voting Share and shall be entitled to
exercise all of the rights and powers of an owner with respect to the Special
Voting Share, provided that the Trustee shall:
(a) hold the Special Voting Share and the legal title thereto as trustee
solely for the use and benefit of the Beneficiaries in accordance
with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power
or authority to sell, transfer, vote or otherwise deal in or with
the Special Voting Share and the Special Voting Share shall not be
used or disposed of by the Trustee for any purpose (including for
exercising dissent or appraisal rights relating to the Special
Voting Share) other than the purposes for which this Trust is
created pursuant to this Agreement.
3.2 LEGENDED SHARE CERTIFICATES
Company will cause each certificate representing Exchangeable Shares to
bear an appropriate legend notifying the Beneficiaries of their right to
instruct the Trustee with respect to
6
the exercise of the Voting Rights in respect of the Exchangeable Shares of the
Beneficiaries and the Automatic Exchange Rights.
3.3 SAFE KEEPING OF CERTIFICATE
The certificate representing the Special Voting Share shall at all times
be held in safe keeping by the Trustee.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 VOTING RIGHTS
The Trustee, as the holder of record of the Special Voting Share, shall be
entitled to all of the Voting Rights, including the right to vote in person or
by proxy the Special Voting Share on any matters, questions, proposals or
propositions whatsoever that may properly come before the stockholders of Parent
at a Parent Meeting or in connection with a Parent Consent. The Voting Rights
shall be and remain vested in and exercised by the Trustee subject to the terms
of this Agreement. Subject to section 7.15:
(a) the Trustee shall exercise the Voting Rights only on the basis of
instructions received pursuant to this Article 4 from Beneficiaries
on the record date established by Parent or by applicable law for
such Parent Meeting or Parent Consent who are entitled to instruct
the Trustee as to the voting thereof; and
(b) to the extent that no instructions are received from a Beneficiary
with respect to the Voting Rights to which such Beneficiary is
entitled, the Trustee shall not exercise or permit the exercise of
such Voting Rights.
4.2 NUMBER OF VOTES
With respect to all meetings of stockholders of Parent at which holders of
Parent Common Shares are entitled to vote (each, a "PARENT MEETING") and with
respect to all written consents sought by Parent from its stockholders including
the holders of Parent Common Shares (each, a "PARENT CONSENT"), each Beneficiary
shall be entitled to instruct the Trustee to cast and exercise the votes
comprised in the Voting Rights for each Exchangeable Share owned of record by
such Beneficiary on the record date established by Parent or by applicable law
for such Parent Meeting or Parent Consent, as the case may be (the "BENEFICIARY
VOTES"), in respect of each matter, question, proposal or proposition to be
voted on at such Parent Meeting or in connection with such Parent Consent.
4.3 MAILINGS TO STOCKHOLDERS
With respect to each Parent Meeting and Parent Consent, the Trustee will
promptly mail or cause to be mailed at the expense of Parent (or otherwise
communicate in the same manner as Parent utilizes in communications to holders
of Parent Common Shares, subject to applicable regulatory requirements and the
Trustee being advised in writing as to that manner of communications, and
provided that such manner of communications is reasonably available to the
Trustee) to each of the Beneficiaries named in the List, such mailing or
communication to
7
commence wherever practicable on the same day as the mailing or notice (or other
communication) with respect thereto is commenced by Parent to its stockholders:
(a) a copy of such notice, together with any related materials,
including, without limitation, any circular or information statement
or listing particulars, to be provided to stockholders of Parent in
connection with the Parent Meeting or Parent Consent;
(b) a statement that such Beneficiary is entitled to instruct the
Trustee as to the exercise of the Beneficiary Votes with respect to
such Parent Meeting or Parent Consent or, pursuant to section 4.7,
to attend such Parent Meeting and to exercise personally the
Beneficiary Votes thereat;
(c) a statement as to the manner in which such instructions may be given
to the Trustee, including an express indication that instructions
may be given to the Trustee to give:
(i) a proxy to such Beneficiary or his designee to exercise
personally the Beneficiary Votes; or
(ii) a proxy to a designated agent or other representative of the
management of Parent to exercise such Beneficiary Votes;
(d) a statement that if no such instructions are received from the
Beneficiary, the Beneficiary Votes to which such Beneficiary is
entitled will not be exercised;
(e) a form of direction whereby the Beneficiary may instruct the Trustee
as to voting and as otherwise contemplated herein; and
(f) a statement of the time and date by which such instructions must be
received by the Trustee in order to be binding upon it, which in the
case of a Parent Meeting shall not be earlier than the close of
business on the second Business Day prior to such meeting, and of
the method for revoking or amending such instructions.
The materials referred to in this section 4.3 are to be provided to the
Trustee by Parent, and the materials referred to in section 4.3(c), section
4.3(e) and section 4.3(f) shall be subject to reasonable comment by the Trustee
in a timely manner. Parent shall ensure that the materials to be provided to the
Trustee are provided in sufficient time to permit the Trustee to comment as
aforesaid and to send all materials to each Beneficiary at the same time as such
materials are first sent to holders of Parent Common Shares. Parent agrees not
to communicate with holders of Parent Common Shares with respect to the
materials referred to in this section 4.3 otherwise than by mail unless such
method of communication is also reasonably available to the Trustee for
communication with the Beneficiaries.
For the purpose of determining Beneficiary Votes to which a Beneficiary is
entitled in respect of any Parent Meeting or Parent Consent, the number of
Exchangeable Shares owned of record by the Beneficiary shall be determined at
the close of business on the record date established by Parent or by applicable
law for purposes of determining shareholders entitled to vote at such Parent
Meeting or in respect of such Parent Consent. Parent will notify the Trustee
8
of any decision of the Board of Directors of Parent with respect to the calling
of any Parent Meeting and shall provide all necessary information and materials
to the Trustee in each case promptly and in any event in sufficient time to
enable the Trustee to perform its obligations contemplated by this section 4.3.
4.4 COPIES OF SHAREHOLDER INFORMATION
Parent will deliver to the Trustee copies of all proxy materials
(including notices of Parent Meetings but excluding proxies to vote Parent
Common Shares), information statements, reports (including without limitation,
all interim and annual financial statements) and other written communications
that, in each case, are to be distributed by Parent from time to time to holders
of Parent Common Shares in sufficient quantities and in sufficient time so as to
enable the Trustee to send those materials to each Beneficiary at the same time
as such materials are first sent to holders of Parent Common Shares. The Trustee
will mail or otherwise send to each Beneficiary, at the expense of Parent,
copies of all such materials (and all materials specifically directed to the
Beneficiaries or to the Trustee for the benefit of the Beneficiaries by Parent)
received by the Trustee from Parent contemporaneously with the sending of such
materials to holders of Parent Common Shares. The Trustee will also make
available for inspection by any Beneficiary at the Trustee's principal office in
Toronto all proxy materials, information statements, reports and other written
communications that are:
(a) received by the Trustee as the registered holder of the Special
Voting Share and made available by Parent generally to the holders
of Parent Common Shares; or
(b) specifically directed to the Beneficiaries or to the Trustee for the
benefit of the Beneficiaries by Parent.
4.5 OTHER MATERIALS
As soon as reasonably practicable after receipt by Parent or shareholders
of Parent (if such receipt is known by Parent) of any material sent or given by
or on behalf of a third party to holders of Parent Common Shares generally,
including without limitation, dissident proxy and information circulars (and
related information and material) and take-over bid and securities exchange
take-over bid circulars (and related information and material), provided such
material has not been sent to the Beneficiaries by or on behalf of such third
party, Parent shall use its reasonable efforts to obtain and deliver to the
Trustee copies thereof in sufficient quantities so as to enable the Trustee to
forward such material (unless the same has been provided directly to
Beneficiaries by such third party) to each Beneficiary as soon as possible
thereafter. As soon as reasonably practicable after receipt thereof, the Trustee
will mail or otherwise send to each Beneficiary, at the expense of Parent,
copies of all such materials received by the Trustee from Parent. The Trustee
will also make available for inspection during regular business hours by any
Beneficiary at the Trustee's principal office in Toronto copies of all such
materials.
4.6 LIST OF PERSONS ENTITLED TO VOTE
Company shall, (a) prior to each annual, general and special Parent
Meeting or the seeking of any Parent Consent and (b) forthwith upon each request
made at any time by the Trustee in writing, prepare or cause to be prepared a
list (a "LIST") of the names and addresses of the Beneficiaries arranged in
alphabetical order and showing the number of Exchangeable Shares
9
held of record by each such Beneficiary, in each case at the close of business
on the date specified by the Trustee in such request or, in the case of a List
prepared in connection with a Parent Meeting or a Parent Consent, at the close
of business on the record date established by Parent or pursuant to applicable
law for determining the holders of Parent Common Shares entitled to receive
notice of or to vote at such Parent Meeting or to give consent in connection
with such Parent Consent. Each such List shall be delivered to the Trustee
promptly after receipt by Company of such request or the record date for such
meeting or seeking of consent, as the case may be, and in any event within
sufficient time as to permit the Trustee to perform its obligations under this
Agreement. Parent agrees to give Company notice (with a copy to the Trustee) of
the calling of any Parent Meeting or the seeking of any Parent Consent, together
with the record dates therefor, sufficiently prior to the date of the calling of
such meeting or seeking of such consent so as to enable Company to perform its
obligations under this section 4.6.
4.7 ENTITLEMENT TO DIRECT VOTES
Subject to sections 4.8 and 4.11, any Beneficiary named in a List prepared
in connection with any Parent Meeting or Parent Consent will be entitled (a) to
instruct the Trustee in the manner described in section 4.3 with respect to the
exercise of the Beneficiary Votes to which such Beneficiary is entitled or (b)
to attend such meeting and personally exercise thereat, as the proxy of the
Trustee, the Beneficiary Votes to which such Beneficiary is entitled.
4.8 VOTING BY TRUSTEE AND ATTENDANCE OF TRUSTEE REPRESENTATIVE AT MEETING
In connection with each Parent Meeting and Parent Consent, the Trustee
shall exercise, either in person or by proxy, in accordance with the
instructions received from a Beneficiary pursuant to section 4.3, the
Beneficiary Votes as to which such Beneficiary is entitled to direct the vote
(or any lesser number thereof as may be set forth in the instructions);
provided, however, that such written instructions are received by the Trustee
from the Beneficiary prior to the time and date fixed by the Trustee for receipt
of such instructions in the notice given by the Trustee to the Beneficiary
pursuant to section 4.3.
The Trustee shall cause a representative who is empowered by it to sign
and deliver, on behalf of the Trustee, proxies for Voting Rights to attend each
Parent Meeting. Upon submission by a Beneficiary (or its designee) of
identification satisfactory to the Trustee's representative, and at the
Beneficiary's request, such representative shall sign and deliver to such
Beneficiary (or its designee) a proxy to exercise personally the Beneficiary
Votes as to which such Beneficiary is otherwise entitled hereunder to direct the
vote, if such Beneficiary either (i) has not previously given the Trustee
instructions pursuant to section 4.3 in respect of such meeting or (ii) submits
to such representative written revocation of any such previous instructions. At
such meeting, the Beneficiary exercising such Beneficiary Votes shall have the
same rights as the Trustee to speak at the meeting in favour of any matter,
question, proposal or proposition, to vote by way of ballot at the meeting in
respect of any matter, question, proposal or proposition, and to vote at such
meeting by way of a show of hands in respect of any matter, question or
proposition.
4.9 DISTRIBUTION OF WRITTEN MATERIALS
Any written materials distributed by the Trustee pursuant to this
Agreement shall be sent by mail (or otherwise communicated in the same manner as
Parent utilizes in communications to holders of Parent Common Shares, subject to
applicable regulatory requirements and the Trustee
10
being advised in writing as to that manner of communications, and provided such
manner of communications is reasonably available to the Trustee) to each
Beneficiary at its address as shown on the books of Company. Company shall
provide or cause to be provided to the Trustee for purposes of communication, on
a timely basis and without charge or other expense:
(a) a current List; and
(b) upon the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this Agreement.
4.10 TERMINATION OF VOTING RIGHTS
All of the rights of a Beneficiary with respect to the Beneficiary Votes
exercisable in respect of the Exchangeable Shares held by such Beneficiary,
including the right to instruct the Trustee as to the voting of or to vote
personally such Beneficiary Votes, shall be deemed to be surrendered by the
Beneficiary to Parent or Company, as the case may be, and such Beneficiary Votes
and the Voting Rights represented thereby shall cease immediately upon (i) the
valid exercise by the Beneficiary of the Exchange Right, or the occurrence of
the automatic exchange of Exchangeable Shares for Parent Common Shares as
specified in Article 5 (unless, in either case, Parent shall not have delivered
or caused to be delivered the requisite Parent Common Shares issuable in
exchange therefor to the Trustee pending delivery to the Beneficiaries), or (ii)
the retraction or redemption of Exchangeable Shares pursuant to Article 6 or 7
of the Share Provisions, or (iii) the effective date of the liquidation,
dissolution or winding-up of Company pursuant to Article 5 of the Share
Provisions, or (iv) the purchase of Exchangeable Shares from the holder thereof
by Parent pursuant to the exercise of the Retraction Call Right, the Redemption
Call Right, the Liquidation Call Right or the Parent Call Right.
4.11 DISCLOSURE OF INTEREST IN EXCHANGEABLE SHARES
The Trustee or Company shall be entitled to require any Beneficiary or any
Person who the Trustee or Company know or have reasonable cause to believe to
hold any interest whatsoever in an Exchangeable Share to confirm that fact or to
give such details as to who has an interest in such Exchangeable Share as would
be required (if the Exchangeable Shares were a class of "equity shares" of
Company) under section 101 of the Securities Act (Ontario), as may be amended
from time to time, or as would be required under the charter or certificate of
incorporation of Parent or any laws or regulations, or pursuant to the rules or
regulations of any regulatory authority, of the United States if the
Exchangeable Shares were Parent Common Shares.
ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE RIGHTS
5.1 GRANT AND OWNERSHIP OF EXCHANGE RIGHTS
Parent hereby grants to the Trustee as trustee for and on behalf of, and
for the use and benefit of, the Beneficiaries, (1) the right (the "EXCHANGE
RIGHT"), upon the occurrence and during the continuance of an Insolvency Event,
to require Parent to purchase from each or any Beneficiary all or any part of
the Exchangeable Shares held by the Beneficiary, and (2) the Automatic Exchange
Rights, all in accordance with the provisions of this Agreement. Parent
11
hereby acknowledges receipt from the Trustee as trustee for and on behalf of the
Beneficiaries of good and valuable consideration (and the adequacy thereof) for
the grant of the Exchange Right and the Automatic Exchange Rights by Parent to
the Trustee. During the term of the Trust and subject to the terms and
conditions of this Agreement, the Trustee shall possess and be vested with full
legal ownership of the Exchange Right and the Automatic Exchange Rights and
shall be entitled to exercise all of the rights and powers of an owner with
respect to the Exchange Right and the Automatic Exchange Rights, provided that
the Trustee shall:
(a) hold the Exchange Right and the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of the
Beneficiaries in accordance with the provisions of this Agreement;
and
(b) except as specifically authorized by this Agreement, have no power
or authority to exercise or otherwise deal in or with the Exchange
Right or the Automatic Exchange Rights, and the Trustee shall not
exercise any such rights for any purpose other than the purposes for
which the Trust is created pursuant to this Agreement.
The obligations of Parent to issue Parent Common Shares pursuant to the
Exchange Right or the Automatic Exchange Rights are subject to all applicable
laws and regulatory and stock exchange requirements.
5.2 LEGENDED SHARE CERTIFICATES
Company will cause each certificate representing Exchangeable Shares to
bear an appropriate legend notifying the Beneficiaries of:
(a) their right to instruct the Trustee with respect to the exercise of
the Exchange Right in respect of the Exchangeable Shares held by a
Beneficiary;
(b) the Automatic Exchange Rights; and
(c) the notification and payment obligations applicable to non-residents
of Canada, for purposes of the ITA, under section 116 of the ITA, in
respect of a disposition of the Exchangeable Shares.
5.3 GENERAL EXERCISE OF EXCHANGE RIGHT
The Exchange Right shall be and remain vested in and exercisable by the
Trustee. Subject to section 7.15, the Trustee shall exercise the Exchange Right
only on the basis of instructions received pursuant to this Article 5 from
Beneficiaries entitled to instruct the Trustee as to the exercise thereof. To
the extent that no instructions are received from a Beneficiary with respect to
the Exchange Right, the Trustee shall not exercise or permit the exercise of the
Exchange Right.
5.4 PURCHASE PRICE
The purchase price payable by Parent for each Exchangeable Share to be
purchased by Parent under the Exchange Right shall be an amount per share equal
to the sum of (i) the Current Market Price of a Parent Common Share on the last
Business Day prior to the day of closing of
12
the purchase and sale of such Exchangeable Share under the Exchange Right, which
shall be satisfied in full by Parent delivering or causing to be delivered to
the Trustee on behalf of such holder one Parent Common Share, plus (ii) to the
extent not paid by Company on the designated payment date therefor, an
additional amount equal to the full amount of all declared and unpaid dividends
on each such Exchangeable Share held by such holder on any dividend record date
which occurred prior to the closing of the purchase and sale. In connection with
each exercise of the Exchange Right, Parent shall provide to the Trustee an
Officer's Certificate setting forth the calculation of the purchase price for
each Exchangeable Share. The total purchase price for each such Exchangeable
Share so purchased may be satisfied only by Parent delivering or causing to be
delivered to the Trustee, on behalf of the relevant Beneficiary, one Parent
Common Share and on the applicable payment date a cheque for the balance, if
any, of the purchase price without interest, less any amounts withheld pursuant
to section 5.13. Upon payment by Parent of such purchase price the relevant
Beneficiary shall cease to have any right to be paid by Company any amount in
respect of declared and unpaid dividends on each such Exchangeable Share and
Company shall cease to be obligated to pay any amount in respect of such
dividends.
5.5 EXERCISE INSTRUCTIONS
Subject to the terms and conditions herein set forth, a Beneficiary shall
be entitled, upon the occurrence and during the continuance of an Insolvency
Event, to instruct the Trustee to exercise the Exchange Right with respect to
all or any part of the Exchangeable Shares registered in the name of such
Beneficiary on the books of Company. To cause the exercise of the Exchange Right
by the Trustee, the Beneficiary shall deliver to the Trustee, in person or by
certified or registered mail, at its principal office in Toronto or at such
other places in Canada as the Trustee may from time to time designate by written
notice to the Beneficiaries, the certificates representing the Exchangeable
Shares which such Beneficiary desires Parent to purchase, duly endorsed in blank
for transfer, and accompanied by such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the OBCA and the
by-laws of Company and such additional documents and instruments as the Trustee,
Parent and Company may reasonably require together with (a) a duly completed
form of notice of exercise of the Exchange Right, contained on the reverse of or
attached to the Exchangeable Share certificates, stating (i) that the
Beneficiary thereby instructs the Trustee to exercise the Exchange Right so as
to require Parent to purchase from the Beneficiary the number of Exchangeable
Shares specified therein, (ii) that such Beneficiary has good title to and owns
all such Exchangeable Shares to be acquired by Parent free and clear of all
liens, claims and encumbrances, (iii) the names in which the certificates
representing Parent Common Shares transferable in connection with the exercise
of the Exchange Right are to be registered, (iv) the names and addresses of the
Persons to whom such new certificates should be delivered, and (v) whether the
Beneficiary is a resident of Canada within the meaning of the ITA, and (b)
payment (or evidence satisfactory to the Trustee, Company and Parent of payment)
of the taxes (if any) payable as contemplated by section 5.8. If only a part of
the Exchangeable Shares represented by any certificate or certificates delivered
to the Trustee are to be purchased by Parent under the Exchange Right, a new
certificate for the balance of such Exchangeable Shares shall be issued to the
holder at the expense of Company.
5.6 DELIVERY OF PARENT COMMON SHARES
Promptly after the receipt of the certificates representing the
Exchangeable Shares which the Beneficiary desires Parent to purchase under the
Exchange Right, together with such
13
documents and instruments of transfer and a duly completed form of notice of
exercise of the Exchange Right (and payment of taxes, if any, payable as
contemplated by section 5.8 or evidence thereof), duly endorsed for transfer to
Parent, the Trustee shall notify Parent and Company of its receipt of the same,
which notice to Parent and Company shall constitute exercise of the Exchange
Right by the Trustee on behalf of the holder of such Exchangeable Shares, and
Parent shall promptly thereafter deliver or cause to be delivered to the
Trustee, for delivery to the Beneficiary of such Exchangeable Shares (or to such
other Persons, if any, properly designated by such Beneficiary) certificates
representing the number of Parent Common Shares issuable in connection with the
exercise of the Exchange Right, and on the applicable payment date cheques
payable at par at any branch of the bankers of Parent for the balance, if any,
of the total purchase price therefor without interest (but in each case less any
amounts withheld pursuant to section 5.13); provided, however, that no such
delivery shall be made unless and until the Beneficiary requesting the same
shall have paid (or provided evidence satisfactory to the Trustee, Company and
Parent of the payment of) the taxes (if any) payable as contemplated by section
5.8 of this Agreement. Immediately upon the giving of notice by the Trustee to
Parent and Company of the exercise of the Exchange Right as provided in this
section 5.6, the closing of the transaction of purchase and sale contemplated by
the Exchange Right shall be deemed to have occurred and the holder of such
Exchangeable Shares shall be deemed to have transferred to Parent all of such
holder's right, title and interest in and to such Exchangeable Shares and the
related interest in the Trust Estate free and clear of any lien, claim or
encumbrance and shall cease to be a holder of such Exchangeable Shares and shall
not be entitled to exercise any of the rights of a holder in respect thereof,
other than the right to receive his proportionate part of the total purchase
price therefor, unless the requisite number of Parent Common Shares is not
delivered by, or on behalf of, Parent to the Trustee within five Business Days
of the date of the giving of such notice by the Trustee or the balance of the
purchase price, if any, is not paid by Parent on the applicable payment date
therefor (in both cases net of any withholding described in section 5.13), in
which case the rights of the Beneficiary shall remain unaffected until such
Parent Common Shares are so delivered, and the balance of the purchase price, if
any, has been paid, by Parent. Upon delivery by Parent to the Trustee of such
Parent Common Shares, and the balance of the purchase price, if any, (net of any
withholding described in section 5.13) the Trustee shall deliver such Parent
Common Shares and the balance of the purchase price, if any, to such Beneficiary
(or to such other Persons, if any, properly designated by such Beneficiary).
Concurrently with such Beneficiary ceasing to be a holder of Exchangeable
Shares, the Beneficiary shall be considered and deemed for all purposes to be
the holder of the Parent Common Shares delivered to it pursuant to the Exchange
Right.
5.7 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION
In the event that a Beneficiary has exercised its right under Article 6 of
the Share Provisions to require Company to redeem any or all of the Exchangeable
Shares held by the Beneficiary (the "RETRACTED SHARES") and is notified by
Company pursuant to section 6.6 of the Share Provisions that Company will not be
permitted as a result of solvency requirements of applicable law to redeem all
such Retracted Shares, and provided that Parent shall not have exercised the
Retraction Call Right with respect to the Retracted Shares and that the
Beneficiary has not revoked the retraction request delivered by the Beneficiary
to Company pursuant to section 6.7 of the Share Provisions and provided further
that the Trustee has received written notice of same from Company or Parent, the
retraction request will constitute and will be deemed to constitute notice from
the Beneficiary to the Trustee instructing the Trustee to exercise the
14
Exchange Right with respect to those Retracted Shares that Company is unable to
redeem. In any such event, Company hereby agrees with the Trustee and in favour
of the Beneficiary to promptly notify the Trustee of such prohibition against
Company redeeming all of the Retracted Shares and to promptly forward or cause
to be forwarded to the Trustee all relevant materials delivered by the
Beneficiary to Company or to the transfer agent of the Exchangeable Shares
(including without limitation, a copy of the retraction request delivered
pursuant to section 6.1 of the Share Provisions) in connection with such
proposed redemption of the Retracted Shares and the Trustee will thereupon
exercise the Exchange Right with respect to the Retracted Shares that Company is
not permitted to redeem and in respect of which Parent has not exercised its
Retraction Call Right and will require Parent to purchase such shares in
accordance with the provisions of this Article 5.
5.8 TAXES
Upon any sale of Exchangeable Shares to Parent pursuant to the Exchange
Right or the Automatic Exchange Rights, the share certificate or certificates
representing Parent Common Shares to be delivered in connection with the payment
of the total purchase price therefor shall be issued in the name of the
Beneficiary of the Exchangeable Shares so sold or in such names as such
Beneficiary may otherwise direct in writing, provided such direction is received
by Parent prior to the time such shares are issued, without charge to the holder
of the Exchangeable Shares so sold; provided, however, that such Beneficiary (a)
shall pay (and none of Parent, Company or the Trustee shall be required to pay)
any documentary, stamp, transfer or other taxes that may be payable in respect
of any transfer of such Exchangeable Shares to Parent or in respect of the
issuance or delivery of such Parent Common Shares to such Beneficiary or any
other Person including, without limitation, in the event that Parent Common
Shares are being issued or transferred in the name of a clearing service or
depositary or a nominee thereof, or (b) shall have evidenced to the satisfaction
of the Trustee, Parent and Company that such taxes, if any, have been paid.
5.9 NOTICE OF INSOLVENCY EVENT
As soon as practicable following the occurrence of an Insolvency Event or
any event that with the giving of notice or the passage of time or both would be
an Insolvency Event, Company and Parent shall give written notice thereof to the
Trustee. As soon as practicable following the receipt of notice from Company or
Parent of the occurrence of an Insolvency Event, or upon the Trustee becoming
aware of an Insolvency Event, the Trustee will mail to each Beneficiary, at the
expense of Parent (such funds to be received in advance), a notice of such
Insolvency Event in the form provided by Parent, which notice shall contain a
brief statement of the rights of the Beneficiaries with respect to the Exchange
Right.
5.10 QUALIFICATION OF PARENT COMMON SHARES
Parent covenants that if any Parent Common Shares to be issued and
delivered pursuant to the Exchange Right or the Automatic Exchange Rights
require registration or qualification with or approval of or the filing of any
document, including any prospectus or similar document, or the taking of any
proceeding with or the obtaining of any order, ruling or consent from any
governmental or regulatory authority or stock exchange under any Canadian or
United States federal, provincial or state law or regulation or pursuant to the
rules and regulations of any regulatory authority or the fulfillment of any
other Canadian or United States federal, provincial
15
or state legal requirement before such shares may be issued and delivered by
Parent to the initial holder thereof or in order that such shares may be freely
traded thereafter (other than any restrictions of general application on
transfer by reason of a holder being a "control person" of Parent for purposes
of Canadian provincial securities law or an "affiliate" of Parent for purposes
of United States federal or state securities law), Parent will in good faith
expeditiously take all such actions and do all such things as are reasonably
necessary or desirable to cause such Parent Common Shares to be and remain duly
registered, qualified or approved. Parent will in good faith expeditiously take
all such actions and do all such things as are reasonably necessary or desirable
to cause all Parent Common Shares to be delivered pursuant to the Exchange Right
or the Automatic Exchange Rights to be listed, quoted or posted for trading on
all stock exchanges and quotation systems on which issued Parent Common Shares
have been listed by Parent and remain listed and are quoted or posted for
trading at such time.
5.11 PARENT COMMON SHARES
Parent hereby represents, warrants and covenants that the Parent Common
Shares issuable as described herein will be duly authorized and validly issued
as fully paid and non-assessable and shall be free and clear of any lien, claim
or encumbrance.
5.12 AUTOMATIC EXCHANGE ON LIQUIDATION OF PARENT
Parent will give the Trustee written notice of each of the following
events at the time set forth below:
(a) in the event of any determination by the Board of Directors of
Parent to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Parent or to effect any other
distribution of assets of Parent among its stockholders for the
purpose of winding up its affairs, at least 60 days prior to the
proposed effective date of such liquidation, dissolution, winding-up
or other distribution; and
(b) as soon as practicable following the earlier of (A) receipt by
Parent of notice of, and (B) Parent otherwise becoming aware of, any
instituted claim, suit, petition or other proceedings with respect
to the involuntary liquidation, dissolution or winding-up of Parent
or to effect any other distribution of assets of Parent among its
stockholders for the purpose of winding up its affairs, in each case
where Parent has failed to contest in good faith any such proceeding
commenced in respect of Parent within 30 days of becoming aware
thereof.
As soon as practicable following receipt by the Trustee from Parent of
notice of any event (a "LIQUIDATION EVENT") contemplated by section 5.12(a) or
5.12(b), the Trustee will give notice thereof to the Beneficiaries. Such notice
shall be provided to the Trustee by Parent and shall include a brief description
of the automatic exchange of Exchangeable Shares for Parent Common Shares
provided for in this section 5.12.
In order that the Beneficiaries will be able to participate on a pro rata
basis with the holders of Parent Common Shares in the distribution of assets of
Parent in connection with a Liquidation Event, on the fifth Business Day prior
to the effective date (the "LIQUIDATION EVENT EFFECTIVE DATE") of a Liquidation
Event, all of the then outstanding Exchangeable Shares (other
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than those owned by Parent and its Affiliates) shall be automatically exchanged
for Parent Common Shares. To effect such automatic exchange, Parent shall
purchase on the fifth Business Day prior to the Liquidation Event Effective Date
each Exchangeable Share then outstanding and held by Beneficiaries, and each
Beneficiary shall sell the Exchangeable Shares held by it at such time, free and
clear of any lien, claim or encumbrance, for a purchase price per share equal to
the sum of: (i) the Current Market Price of a Parent Common Share on the fifth
Business Day prior to the Liquidation Event Effective Date, which shall be
satisfied in full by Parent delivering to the Beneficiary (net of any
withholding described in section 5.13) one Parent Common Share, and (ii) to the
extent not paid by Company on the designated payment date therefor, an
additional amount equal to the full amount of all declared and unpaid dividends
on each such Exchangeable Share held by such holder on any dividend record date
which occurred prior to the date of the exchange. Parent shall provide the
Trustee with an Officer's Certificate in connection with each automatic exchange
setting forth the calculation of the purchase price for each Exchangeable Share.
On the fifth Business Day prior to the Liquidation Event Effective Date,
the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for Parent Common Shares shall be
deemed to have occurred, and each Beneficiary shall be deemed to have
transferred to Parent all of the Beneficiary's right, title and interest in and
to such Beneficiary's Exchangeable Shares free and clear of any lien, claim or
encumbrance and the related interest in the Trust Estate, Company shall have no
liability to pay an amount in respect of declared and unpaid dividends to any
Beneficiary and each such Beneficiary shall cease to be a holder of such
Exchangeable Shares and Parent shall deliver or cause to be delivered to the
Beneficiary the Parent Common Shares deliverable upon the automatic exchange of
Exchangeable Shares for Parent Common Shares and on the applicable payment date
shall deliver to the Trustee for delivery to the Beneficiary a cheque for the
balance, if any, of the total purchase price for such Exchangeable Shares,
without interest, in each case less any amounts withheld pursuant to section
5.13. Concurrently with such Beneficiary ceasing to be a holder of Exchangeable
Shares, the Beneficiary shall be considered and deemed for all purposes to be
the holder of the Parent Common Shares issued pursuant to the automatic exchange
of such Beneficiary's Exchangeable Shares for Parent Common Shares and the
certificates held by the Beneficiary previously representing the Exchangeable
Shares exchanged by the Beneficiary with Parent pursuant to such automatic
exchange shall thereafter be deemed to represent Parent Common Shares issued to
the Beneficiary by Parent pursuant to such automatic exchange. Upon the request
of a Beneficiary and the surrender by the Beneficiary of Exchangeable Share
certificates deemed to represent Parent Common Shares, duly endorsed in blank
and accompanied by such instruments of transfer as Parent may reasonably
require, Parent shall deliver or cause to be delivered to the Beneficiary
certificates representing the Parent Common Shares of which the Beneficiary is
the holder.
5.13 WITHHOLDING RIGHTS
Parent, Company and the Trustee shall be entitled to deduct and withhold
from any purchase price, dividend or consideration otherwise payable under this
Agreement to any holder of Exchangeable Shares or Parent Common Shares such
amounts as Parent, Company or the Trustee (i) is required to deduct and withhold
with respect to such payment under the ITA, the United States Internal Revenue
Code of 1986 or any provision of federal, provincial, territorial, state, local
or foreign tax law, in each case as amended or succeeded, (ii) may be liable to
pay in
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accordance with section 116 of the ITA or any corresponding provisions of
provincial law; or (iii) may reasonably incur as costs or expenses in connection
with such withholding. The Trustee may act on the advice of counsel with respect
to such matters. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes as having been paid to the holder of
the shares in respect of which such deduction and withholding was made, provided
(in the case of amounts withheld under (i) or (ii) above) that such withheld
amounts are actually remitted to the appropriate taxing authority. To the extent
that the amount to be withheld hereunder from any payment to a holder exceeds
the cash portion of the consideration otherwise payable to the holder, Parent,
Company and the Trustee are hereby authorized to sell or otherwise dispose of
such portion of the consideration as is necessary to provide sufficient funds to
Parent, Company or the Trustee, as the case may be, to enable it to effect such
withholding in cash and Parent, Company or the Trustee shall notify the holder
thereof and remit to such holder any unapplied balance of the net proceeds of
such sale.
5.14 NO FRACTIONAL SHARES
A holder of an Exchangeable Share shall not be entitled to any fraction of
a Parent Common Share upon the exercise of the Exchange Right or Automatic
Exchange Rights hereunder and no certificates representing any such fractional
interest shall be issued and such holder otherwise entitled to a fractional
interest will receive for such fractional interest from Parent on the designated
payment date to the extent not paid by Company a cash payment equal to such
fractional interest multiplied by the Current Market Price.
5.15 PROHIBITION ON VOLUNTARY LIQUIDATION
Parent covenants that it shall not take any action relating to a voluntary
liquidation, dissolution or winding-up of Company or its successors prior to the
Redemption Date (as defined in the Share Provisions) that results in the
recognition under the Income Tax Act (Canada) of any accrued gain on a holder's
Exchangeable Shares, recognition of which was deferred on the consummation of
the transactions contemplated by the Combination Agreement.
ARTICLE 6
RESTRICTIONS ON ISSUE OF SPECIAL VOTING SHARES
6.1 ISSUE OF ADDITIONAL SHARES
During the term of this Agreement, Parent will not, without the consent of
the holders at the relevant time of Exchangeable Shares, given in accordance
with section 10.2 of the Share Provisions, issue any additional Special Voting
Shares with respect to any shares in the capital of or otherwise with respect to
Company.
ARTICLE 7
CONCERNING THE TRUSTEE
7.1 POWERS AND DUTIES OF THE TRUSTEE
The rights, powers, duties and authorities of the Trustee under this
Agreement, in its capacity as Trustee of the Trust, shall include:
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(a) receipt and deposit of the Special Voting Share from Parent as
Trustee for and on behalf of the Beneficiaries in accordance with
the provisions of this Agreement;
(b) granting proxies and distributing materials to Beneficiaries as
provided in this Agreement;
(c) voting the Beneficiary Votes in accordance with the provisions of
this Agreement;
(d) receiving the grant of the Exchange Right and the Automatic Exchange
Rights from Parent as Trustee for and on behalf of the Beneficiaries
in accordance with the provisions of this Agreement;
(e) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the
provisions of this Agreement, and in connection therewith receiving
from Beneficiaries Exchangeable Shares and other requisite documents
and distributing to such Beneficiaries (net of any withholding
described in section 5.13) Parent Common Shares and cheques, if any,
to which such Beneficiaries are entitled upon the exercise of the
Exchange Right or pursuant to the Automatic Exchange Rights, as the
case may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the Trust
Estate as provided in this Agreement;
(h) taking action on its own initiative or at the direction of a
Beneficiary or Beneficiaries to enforce the obligations of Parent
and Company under this Agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this Agreement.
In the exercise of such rights, powers, duties and authorities the Trustee
shall have (and is granted) such incidental and additional rights, powers,
duties and authority not in conflict with any of the provisions of this
Agreement as the Trustee, acting in good faith and in the reasonable exercise of
its discretion, may deem necessary, appropriate or desirable to effect the
purpose of the Trust. Any exercise of such discretionary rights, powers, duties
and authorities by the Trustee shall be final, conclusive and binding upon all
Persons.
The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith and with a view to the best
interests of the Beneficiaries and shall exercise the care, diligence and skill
that a reasonably prudent trustee would exercise in comparable circumstances.
The Trustee shall not be bound to give notice or do or take any act,
action or proceeding by virtue of the powers conferred on it hereby unless and
until it shall be specifically required to do so under the terms hereof; nor
shall the Trustee be required to take any notice of, or to do, or to take any
act, action or proceeding as a result of any default or breach of any provision
19
hereunder, unless and until notified in writing of such default or breach, which
notices shall distinctly specify the default or breach desired to be brought to
the attention of the Trustee, and in the absence of such notice the Trustee may
for all purposes of this Agreement conclusively assume that no default or breach
has been made in the observance or performance of any of the representations,
warranties, covenants, agreements or conditions contained herein.
7.2 NO CONFLICT OF INTEREST
The Trustee represents to Parent and Company that at the date of execution
and delivery of this Agreement there exists no material conflict of interest in
the role of the Trustee as a fiduciary hereunder and the role of the Trustee in
any other capacity. The Trustee shall, within 30 days after it becomes aware
that such material conflict of interest exists, either eliminate such material
conflict of interest or resign in the manner and with the effect specified in
Article 10. If, notwithstanding the foregoing provisions of this section 7.2,
the Trustee has such a material conflict of interest, the validity and
enforceability of this Agreement shall not be affected in any manner whatsoever
by reason only of the existence of such material conflict of interest. If the
Trustee contravenes the foregoing provisions of this section 7.2, any interested
party may apply to the Court for an order that the Trustee be replaced as
Trustee hereunder.
7.3 DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC.
Parent and Company irrevocably authorize the Trustee, from time to time,
to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent
registrar or transfer agent, of the Exchangeable Shares and Parent
Common Shares; and
(b) requisition, from time to time, (i) from any such registrar or
transfer agent any information readily available from the records
maintained by it which the Trustee may reasonably require for the
discharge of its duties and responsibilities under this Agreement
and (ii) from the transfer agent of Parent Common Shares, and any
subsequent transfer agent of such shares, the share certificates
issuable upon the exercise from time to time of the Exchange Right
and pursuant to the Automatic Exchange Rights in the manner
specified in Article 5.
Parent and Company irrevocably authorize their respective registrars and
transfer agents to comply with all such requests. Parent covenants that it will
supply its transfer agent with duly executed share certificates for the purpose
of completing the exercise from time to time of the Exchange Right and the
Automatic Exchange Rights, in each case pursuant to Article 5.
7.4 BOOKS AND RECORDS
The Trustee shall keep available for inspection by Parent and Company at
the Trustee's principal offices in Toronto correct and complete books and
records of account relating to the Trust created by this Agreement, including
without limitation, all relevant data relating to mailings and instructions to
and from Beneficiaries and all transactions pursuant to the Exchange Right and
the Automatic Exchange Rights. From time to time, Parent may request in writing
that the Trustee transmit to Parent a brief report, dated as of a given date,
with respect to the details provided below. Within five (5) Business Days of
receiving such written request, the Trustee
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shall transmit such report to Parent. In addition, on or before January 15,
2002, and on or before January 15th in every year thereafter, so long as the
Special Voting Share is registered in the name of the Trustee, the Trustee shall
transmit to Parent and Company a brief report, dated as of the preceding
December 31st, with respect to:
(a) the property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Right, if any, and the
aggregate number of Exchangeable Shares received by the Trustee on
behalf of Beneficiaries in consideration of the delivery by or on
behalf of Parent of Parent Common Shares in connection with the
Exchange Right, during the fiscal year of Parent ended on such
December 31st; and
(c) any action taken by the Trustee in the performance of its duties
under this Agreement which it had not previously reported and which,
in the Trustee's opinion, materially affects the Trust Estate.
7.5 INCOME TAX RETURNS AND REPORTS
The Trustee shall, to the extent necessary, prepare and file on behalf of
the Trust appropriate United States and Canadian income tax returns and any
other returns or reports as may be required by applicable law. In connection
therewith, the Trustee may obtain the advice and assistance of such experts or
advisors as the Trustee considers necessary or advisable (who may be experts or
advisors to Parent or Company). If requested by the Trustee, Parent or Company
shall retain qualified experts or advisors for the purpose of providing such tax
advice or assistance.
7.6 INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE
The Trustee shall exercise any or all of the rights, duties, powers or
authorities vested in it by this Agreement at the request, order or direction of
any Beneficiary upon such Beneficiary furnishing to the Trustee reasonable
funding, security or indemnity against the costs, expenses and liabilities which
may be incurred by the Trustee therein or thereby, provided that no Beneficiary
shall be obligated to furnish to the Trustee any such security or indemnity in
connection with the exercise by the Trustee of any of its rights, duties, powers
and authorities with respect to the Special Voting Share pursuant to Article 4,
subject to section 7.15, and with respect to the Exchange Right pursuant to
Article 5, subject to section 7.15, and with respect to the Automatic Exchange
Rights pursuant to Article 5, subject to section 7.15.
None of the provisions contained in this Agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the exercise of any of its rights, powers, duties, or authorities unless
funded, given security and indemnified as aforesaid.
7.7 ACTION OF BENEFICIARIES
No Beneficiary shall have the right to institute any action, suit or
proceeding or to exercise any other remedy authorized by this Agreement for the
purpose of enforcing any of its rights or for the execution of any trust or
power hereunder unless the Beneficiary has requested the Trustee to take or
institute such action, suit or proceeding and furnished the Trustee with the
21
funding, security or indemnity referred to in section 7.6 and the Trustee shall
have failed to act within a reasonable time thereafter. In such case, but not
otherwise, the Beneficiary shall be entitled to take proceedings in any court of
competent jurisdiction such as the Trustee might have taken; it being understood
and intended that no one or more Beneficiaries shall have any right in any
manner whatsoever to affect, disturb or prejudice the rights hereby created by
any such action, or to enforce any right hereunder or the Voting Rights, the
Exchange Right or the Automatic Exchange Rights, except subject to the
conditions and in the manner herein provided, and that all powers and trusts
hereunder shall be exercised and all proceedings at law shall be instituted, had
and maintained by the Trustee, except only as herein provided, and in any event
for the equal benefit of all Beneficiaries.
7.8 RELIANCE UPON DECLARATIONS
The Trustee shall not be considered to be in contravention of any of its
rights, powers, duties and authorities hereunder if, when required, it acts and
relies in good faith upon statutory declarations, certificates, opinions or
reports furnished pursuant to the provisions hereof or required by the Trustee
to be furnished to it in the exercise of its rights, powers, duties and
authorities hereunder if such statutory declarations, certificates, opinions or
reports comply with the provisions of section 7.9, if applicable, and with any
other applicable provisions of this Agreement.
7.9 EVIDENCE AND AUTHORITY TO TRUSTEE
Parent or Company shall furnish to the Trustee evidence of compliance with
the conditions provided for in this Agreement relating to any action or step
required or permitted to be taken by Parent or Company or the Trustee under this
Agreement or as a result of any obligation imposed under this Agreement,
including, without limitation, in respect of the Voting Rights or the Exchange
Right or the Automatic Exchange Rights and the taking of any other action to be
taken by the Trustee at the request of or on the application of Parent and/or
Company promptly if and when:
(a) such evidence is required by any other section of this Agreement to
be furnished to the Trustee in accordance with the terms of this
section 7.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this Agreement, gives Parent or Company written
notice requiring it to furnish such evidence in relation to any
particular action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of Parent or
Company or a statutory declaration or a certificate made by Persons entitled to
sign an Officer's Certificate stating that any such condition has been complied
with in accordance with the terms of this Agreement.
Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Right or the Automatic Exchange Rights or the taking of any other
action to be taken by the Trustee at the request or on the application of Parent
or Company, and except as otherwise specifically provided herein, such evidence
may consist of a report or opinion of any solicitor, attorney, auditor,
accountant, appraiser, valuer, engineer or other expert or any other Person
whose qualifications give authority to a statement made by him, provided that if
such report or
22
opinion is furnished by a director, officer or employee of Parent or Company it
shall be in the form of an Officer's Certificate or a statutory declaration.
Each statutory declaration, Officer's Certificate, opinion or report
furnished to the Trustee as evidence of compliance with a condition provided for
in this Agreement shall include a statement by the Person giving the evidence:
(a) declaring that he has read and understands the provisions of this
Agreement relating to the condition in question;
(b) describing the nature and scope of the examination or investigation
upon which he based the statutory declaration, certificate,
statement or opinion; and
(c) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give
the opinions contained or expressed therein.
7.10 EXPERTS, ADVISORS AND AGENTS
The Trustee may:
(a) in relation to these presents act and rely on the opinion or advice
of or information obtained from any solicitor, attorney, auditor,
accountant, appraiser, valuer, engineer or other expert, whether
retained by the Trustee or by Parent or Company or otherwise, and
may retain or employ such assistants as may be necessary to the
proper discharge of its powers and duties and determination of its
rights hereunder and may pay proper and reasonable compensation for
all such legal and other advice or assistance as aforesaid;
(b) retain or employ such agents and other assistants as it may
reasonably require for the proper determination and discharge of its
powers and duties hereunder; and
(c) pay reasonable remuneration for all services performed for it (and
shall be entitled to receive reasonable remuneration for all
services performed by it) in the discharge of the trusts hereof and
compensation for all disbursements, costs and expenses made or
incurred by it in the discharge of its duties hereunder and in the
management of the Trust.
7.11 INVESTMENT OF MONEYS HELD BY TRUSTEE
Unless otherwise provided in this Agreement, any moneys held by or on
behalf of the Trustee which under the terms of this Agreement may or ought to be
invested or which may be on deposit with the Trustee or which may be in the
hands of the Trustee may be invested and reinvested in the name or under the
control of the Trustee in securities in which, under the laws of the Province of
Ontario, trustees are authorized to invest trust moneys, provided that such
securities are stated to mature within two years after their purchase by the
Trustee, and the Trustee shall so invest such moneys on the written direction of
Company. Pending the investment of any moneys as hereinbefore provided, such
moneys may be deposited in the name of the Trustee in any chartered bank in
Canada or, with the consent of Company, in the deposit
23
department of the Trustee or any other specified loan or trust company
authorized to accept deposits under the laws of Canada or any province thereof
at the rate of interest then current on similar deposits.
7.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY
The Trustee shall not be required to give any bond or security in respect
of the execution of the trusts, rights, duties, powers and authorities of this
Agreement or otherwise in respect of the premises.
7.13 TRUSTEE NOT BOUND TO ACT ON REQUEST
Except as in this Agreement otherwise specifically provided, the Trustee
shall not be bound to act in accordance with any direction or request of Parent
or Company or of the directors thereof until a duly authenticated copy of the
instrument or resolution containing such direction or request shall have been
delivered to the Trustee, and the Trustee shall be empowered to act upon any
such copy purporting to be authenticated and believed by the Trustee to be
genuine.
7.14 AUTHORITY TO CARRY ON BUSINESS
The Trustee represents to Parent and Company that at the date of execution
and delivery by it of this Agreement it is authorized to carry on the business
of a trust company in each of the provinces of Canada but if, notwithstanding
the provisions of this section 7.14, it ceases to be so authorized to carry on
business, the validity and enforceability of this Agreement and the Voting
Rights, the Exchange Right and the Automatic Exchange Rights shall not be
affected in any manner whatsoever by reason only of such event but the Trustee
shall, within 90 days after ceasing to be authorized to carry on the business of
a trust company in any province of Canada, either become so authorized or resign
in the manner and with the effect specified in Article 10.
7.15 CONFLICTING CLAIMS
If conflicting claims or demands are made or asserted with respect to any
interest of any Beneficiary in any Exchangeable Shares, including any
disagreement between the heirs, representatives, successors or assigns
succeeding to all or any part of the interest of any Beneficiary in any
Exchangeable Shares, resulting in conflicting claims or demands being made in
connection with such interest, then the Trustee shall be entitled, in its sole
discretion, to refuse to recognize or to comply with any such claims or demands.
In so refusing, the Trustee may elect not to exercise any Voting Rights,
Exchange Right or Automatic Exchange Rights subject to such conflicting claims
or demands and, in so doing, the Trustee shall not be or become liable to any
Person on account of such election or its failure or refusal to comply with any
such conflicting claims or demands. The Trustee shall be entitled to continue to
refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands have been adjudicated by a final
judgment of a court of competent jurisdiction and all rights of
appeal have expired; or
24
(b) all differences with respect to the Voting Rights, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or
demands have been conclusively settled by a valid written agreement
binding on all such adverse claimants, and the Trustee shall have
been furnished with an executed copy of such agreement certified to
be in full force and effect.
If the Trustee elects to recognize any claim or comply with any demand
made by any such adverse claimant, it may in its discretion require such
claimant to furnish such surety bond or other security satisfactory to the
Trustee as it shall deem appropriate to fully indemnify it as between all
conflicting claims or demands.
7.16 ACCEPTANCE OF TRUST
The Trustee hereby accepts the Trust created and provided for by and in
this Agreement and agrees to perform the same upon the terms and conditions
herein set forth and to hold all rights, privileges and benefits conferred
hereby and by law in trust for the various Persons who shall from time to time
be Beneficiaries, subject to all the terms and conditions herein set forth.
ARTICLE 8
COMPENSATION
8.1 FEES AND EXPENSES OF THE TRUSTEE
Parent and Company jointly and severally agree to pay the Trustee
reasonable compensation for all of the services rendered by it under this
Agreement and will reimburse the Trustee for all reasonable expenses (including,
but not limited to, taxes other than taxes based on the net income or capital of
the Trustee, fees paid to legal counsel and other experts and advisors and
travel expenses) and disbursements, including the cost and expense of any suit
or litigation of any character and any proceedings before any governmental
agency, reasonably incurred by the Trustee in connection with its duties under
this Agreement; provided that Parent and Company shall have no obligation to
reimburse the Trustee for any expenses or disbursements paid, incurred or
suffered by the Trustee in any suit or litigation in which the Trustee is
determined to have acted in bad faith or with fraud, gross negligence,
recklessness or wilful misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 INDEMNIFICATION OF THE TRUSTEE
Parent and Company jointly and severally agree to indemnify and hold
harmless the Trustee and each of its directors, officers and agents appointed
and acting in accordance with this Agreement (collectively, the "INDEMNIFIED
PARTIES") against all claims, losses, damages, reasonable costs, penalties,
fines and reasonable expenses (including reasonable expenses of the Trustee's
legal counsel) which, without fraud, gross negligence, wilful misconduct or bad
faith on the part of such Indemnified Party, may be paid, incurred or suffered
by the Indemnified Party by reason or as a result of the Trustee's acceptance or
administration of the Trust, its compliance with its duties set forth in this
Agreement, or any written or oral instruction delivered to the Trustee by Parent
or Company pursuant hereto.
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In no case shall Parent or Company be liable under this indemnity for any
claim against any of the Indemnified Parties unless Parent and Company shall be
notified by the Trustee of the written assertion of a claim or of any action
commenced against the Indemnified Parties, promptly after any of the Indemnified
Parties shall have received any such written assertion of a claim or shall have
been served with a summons or other first legal process giving information as to
the nature and basis of the claim. Subject to (ii) below, Parent and Company
shall be entitled to participate at their own expense in the defence and, if
Parent and Company so elect at any time after receipt of such notice, either of
them may assume the defence of any suit brought to enforce any such claim. The
Trustee shall have the right to employ separate counsel in any such suit and
participate in the defence thereof, but the fees and expenses of such counsel
shall be at the expense of the Trustee unless: (i) the employment of such
counsel has been authorized by Parent or Company; or (ii) the named parties to
any such suit include both the Trustee and Parent or Company and the Trustee
shall have been advised by counsel acceptable to Parent or Company that there
may be one or more legal defences available to the Trustee that are different
from or in addition to those available to Parent or Company and that, in the
judgment of such counsel, would present a conflict of interest were a joint
representation to be undertaken (in which case Parent and Company shall not have
the right to assume the defence of such suit on behalf of the Trustee but shall
be liable to pay the reasonable fees and expenses of counsel for the Trustee).
This indemnity shall survive the termination of this Agreement and the
resignation or removal of the Trustee.
9.2 LIMITATION OF LIABILITY
The Trustee shall not be held liable for any loss which may occur by
reason of depreciation of the value of any part of the Trust Estate or any loss
incurred on any investment of funds pursuant to this Agreement, except to the
extent that such loss is attributable to the fraud, gross negligence,
recklessness, wilful misconduct or bad faith on the part of the Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 RESIGNATION
The Trustee, or any trustee hereafter appointed, may at any time resign by
giving written notice of such resignation to Parent and Company specifying the
date on which it desires to resign, provided that such notice shall not be given
less than thirty (30) days before such desired resignation date unless Parent
and Company otherwise agree and provided further that such resignation shall not
take effect until the date of the appointment of a successor trustee and the
acceptance of such appointment by the successor trustee. Upon receiving such
notice of resignation, Parent and Company shall promptly appoint a successor
trustee, which shall be a corporation organized and existing under the laws of
Canada or a province thereof and authorized to carry on the business of a trust
company in all provinces of Canada, by written instrument in duplicate, one copy
of which shall be delivered to the resigning trustee and one copy to the
successor trustee. Failing the appointment and acceptance of a successor
trustee, a successor trustee may be appointed by order of the Court upon
application of one or more of the parties to this Agreement. If the retiring
trustee is the party initiating an application for the appointment of a
successor trustee by order of the Court, Parent and Company shall be jointly and
severally liable to reimburse the retiring trustee for its legal costs and
expenses in connection with same.
26
10.2 REMOVAL
The Trustee, or any trustee hereafter appointed, may (provided a successor
trustee is appointed) be removed at any time on not less than 30 days' prior
notice by written instrument executed by Parent and Company, in duplicate, one
copy of which shall be delivered to the trustee so removed and one copy to the
successor trustee.
10.3 SUCCESSOR TRUSTEE
Any successor trustee appointed as provided under this Agreement shall
execute, acknowledge and deliver to Parent and Company and to its predecessor
trustee an instrument accepting such appointment. Thereupon the resignation or
removal of the predecessor trustee shall become effective and such successor
trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, duties and obligations of its predecessor under this
Agreement, with the like effect as if originally named as trustee in this
Agreement. However, on the written request of Parent and Company or of the
successor trustee, the trustee ceasing to act shall, upon payment of any amounts
then due it pursuant to the provisions of this Agreement, execute and deliver an
instrument transferring to such successor trustee all the rights and powers of
the trustee so ceasing to act. Upon the request of any such successor trustee,
Parent, Company and such predecessor trustee shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming to
such successor trustee all such rights and powers.
10.4 NOTICE OF SUCCESSOR TRUSTEE
Upon acceptance of appointment by a successor trustee as provided herein,
Parent and Company shall cause to be mailed notice of the succession of such
trustee hereunder to each Beneficiary specified in a List. If Parent or Company
shall fail to cause such notice to be mailed within 10 days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of Parent and Company.
ARTICLE 11
PARENT SUCCESSORS
11.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC.
As long as any outstanding Exchangeable Shares are owned by any Person
other than Parent or any of its Affiliates, Parent shall not consummate any
transaction (whether by way of reconstruction, reorganization, consolidation,
arrangement, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other Person or, in the case of a merger, of the continuing
corporation or other entity resulting therefrom unless, but may do so if:
(a) such other Person or continuing corporation or, in the event of any
merger, amalgamation or similar transaction pursuant to which
holders of shares in Parent are entitled to receive shares in the
capital of any corporation or other legal entity other than such
other Person or continuing corporation, then such corporation or
legal entity (in each case, the "PARENT SUCCESSOR") by operation of
law, becomes, without more, bound by the terms and provisions of
this Agreement or, if not so bound, executes, prior to or
contemporaneously with the consummation of such
27
transaction, an agreement supplemental hereto or otherwise agrees to
become bound by the terms and provisions of this Agreement, in
either case together with such other instruments (if any) as are
reasonably necessary or advisable to evidence the assumption by the
Parent Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such Parent Successor to
pay and deliver or cause to be delivered the same and its agreement
to observe and perform all the covenants and obligations of Parent
under this Agreement; and
(b) such transaction shall, to the satisfaction of the Trustee, acting
reasonably, and in the opinion of legal counsel to the Trustee, be
upon such terms and conditions as substantially to preserve and not
to impair in any material respect any of the rights, duties, powers
and authorities of the Trustee or of the Beneficiaries hereunder.
11.2 VESTING OF POWERS IN SUCCESSOR
Whenever the conditions of section 11.1 have been duly observed and
performed, the Trustee, Parent Successor, Company and Parent, as applicable,
shall, if required by section 11.1, execute and deliver the supplemental trust
agreement provided for in Article 12 and thereupon Parent Successor shall
possess and from time to time may exercise each and every right and power of
Parent under this Agreement in the name of Parent or otherwise and any act or
proceeding by any provision of this Agreement required to be done or performed
by the Board of Directors of Parent, or any officers of Parent, may be done and
performed with like force and effect by the directors or officers of such Parent
Successor.
11.3 WHOLLY-OWNED SUBSIDIARIES
Nothing herein shall be construed as preventing the amalgamation or merger
of any wholly-owned direct or indirect subsidiary of Parent with or into Parent
or the winding-up, liquidation or dissolution of any wholly-owned direct or
indirect subsidiary of Parent (if all of the assets of such subsidiary are
transferred to Parent or another wholly-owned direct or indirect subsidiary of
Parent) or any other distribution of the assets of any wholly-owned direct or
indirect subsidiary of Parent among the shareholders of such subsidiary for the
purpose of winding up its affairs, and any such transactions are expressly
permitted by this Article 11.
ARTICLE 12
AMENDMENTS AND SUPPLEMENTAL TRUST AGREEMENTS
12.1 AMENDMENTS, MODIFICATIONS, ETC.
Subject to Sections 12.2, 12.4 and 14.1, this Agreement may not be amended
or modified except by an agreement in writing executed by Parent, Company and
the Trustee and approved by the Beneficiaries in accordance with section 12.3
and section 10.2 of the Share Provisions. No amendment or modification or waiver
of any of the provisions of this Agreement otherwise permitted hereunder shall
be effective unless made in writing and signed by all of the parties hereto.
28
12.2 MINISTERIAL AMENDMENTS
Notwithstanding the provisions of section 12.1, the parties to this
Agreement may in writing, at any time and from time to time, without the
approval of the Beneficiaries, amend or modify this Agreement for the purposes
of:
(a) adding to the covenants of any or all parties hereto for the
protection of the Beneficiaries hereunder provided that the Board of
Directors of each of Parent and Company shall be of the good faith
opinion that such additions will not be prejudicial to the rights or
interests of the Beneficiaries;
(b) making such amendments or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters
or questions which, in the good faith opinion of the Board of
Directors of each of Parent and Company and in the opinion of the
Trustee, having in mind the best interests of the Beneficiaries, it
may be expedient to make, provided that such Boards of Directors and
the Trustee, acting on the advice of counsel, shall be of the
opinion that such amendments and modifications will not be
prejudicial to the interests of the Beneficiaries; or
(c) making such changes or corrections which, on the advice of counsel
to Parent, Company and the Trustee, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error,
provided that the Trustee, acting on the advice of counsel, and the
Board of Directors of each of Parent and Company shall be of the
opinion that such changes or corrections will not be prejudicial to
the rights and interests of the Beneficiaries.
12.3 MEETING TO CONSIDER AMENDMENTS
Company, at the request of Parent, shall call a meeting or meetings of the
Beneficiaries for the purpose of considering any proposed amendment or
modification requiring approval pursuant hereto. Any such meeting or meetings
shall be called and held in accordance with the by-laws of Company, the Share
Provisions and all applicable laws.
12.4 CHANGES IN CAPITAL OF PARENT AND COMPANY
At all times after the occurrence of any event contemplated pursuant to
section 2.7 or 2.8 of the Exchangeable Share Support Agreement or otherwise, as
a result of which either Parent Common Shares or the Exchangeable Shares or both
are in any way changed, this Agreement shall forthwith be amended and modified
as necessary in order that it shall apply with full force and effect, mutatis
mutandis, to all new securities into which Parent Common Shares or the
Exchangeable Shares or both are so changed and the parties hereto shall execute
and deliver a supplemental trust agreement giving effect to and evidencing such
necessary amendments and modifications.
29
12.5 EXECUTION OF SUPPLEMENTAL TRUST AGREEMENTS
From time to time Company (when authorized by a resolution of its Board of
Directors), Parent (when authorized by a resolution of its Board of Directors),
and the Trustee may, subject to the provisions of these presents, and they
shall, when so directed by these presents, execute and deliver by their proper
officers, trust agreements or other instruments supplemental hereto, which
thereafter shall form part hereof, for any one or more of the following
purposes:
(a) evidencing the succession of Parent Successors and the covenants of
and obligations assumed by each such Parent Successor in accordance
with the provisions of Article 11 and the successors of the Trustee
or any successor trustee in accordance with the provisions of
Article 10;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange
Right or the Automatic Exchange Rights which, in the opinion of the
Trustee, will not be prejudicial to the interests of the
Beneficiaries or are, in the opinion of counsel to the Trustee,
necessary or advisable in order to incorporate, reflect or comply
with any legislation the provisions of which apply to Parent,
Company, the Trustee or this Agreement; and
(c) for any other purposes not inconsistent with the provisions of this
Agreement, including without limitation, to make or evidence any
amendment or modification to this Agreement as contemplated hereby,
provided that, in the opinion of the Trustee, the rights of the
Trustee and Beneficiaries will not be prejudiced thereby.
ARTICLE 13
TERMINATION
13.1 TERM
The Trust created by this Agreement shall continue until the earliest to
occur of the following events:
(a) no outstanding Exchangeable Shares are held by a Beneficiary;
(b) each of Parent and Company elects in writing to terminate the Trust
and such termination is approved by the Beneficiaries in accordance
with section 10.2 of the Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants of
His Majesty King George VI of Canada and the United Kingdom of Great
Britain and Northern Ireland living on the date of the creation of
the Trust.
13.2 SURVIVAL OF AGREEMENT
This Agreement shall survive any termination of the Trust and shall
continue until there are no Exchangeable Shares outstanding held by a
Beneficiary; provided, however, that the provisions of Articles 8 and 9 shall
survive any such termination of this Agreement.
30
ARTICLE 14
GENERAL
14.1 SEVERABILITY
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule or law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the fullest extent possible.
14.2 ENUREMENT
This Agreement shall be binding upon and enure to the benefit of the
parties hereto and their respective successors and assigns and, subject to the
terms hereof, to the benefit of the Beneficiaries and is specifically assignable
to any Affiliate of Parent that is a wholly-owned entity disregarded for United
States federal income tax purposes without the consent of the Beneficiaries or
the Trustee.
14.3 NOTICES TO PARTIES
All notices and other communications between the parties hereunder shall
be in writing and shall be deemed to have been given if delivered personally or
by confirmed telecopy to the parties at the following addresses (or at such
other address for such party as shall be specified in like notice):
(a) To Parent or Company at:
1301 N. Elston Avenue
Chicago, IL 60622
USA
Attention: General Counsel
with a copy (which shall not constitute notice) to:
Bell, Boyd & Lloyd LLC
70 West Madison Street
Three First National Plaza
Chicago, IL 60602-4207
USA
Attention: D. Mark McMillan
31
Osler, Hoskin & Harcourt, LLP
1 First Canadian Place
Box 50
Toronto, Ontario M5X 1B8
Attention: Linda Robinson
Goodmans LLP
250 Yonge Street
Suite 2400
Toronto, ON M5B 2M6
Attention: Stephen Halperin
(b) To the Trustee at:
--
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day, in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
14.4 NOTICE TO BENEFICIARIES
Any and all notices to be given and any documents to be sent to any
Beneficiary may be given or sent to the address of such Beneficiary shown on the
register of holders of Exchangeable Shares in any manner permitted by the
by-laws of Company from time to time in force in respect of notices to
shareholders and shall be deemed to be received (if given or sent in such
manner) at the time specified in such by-laws, the provisions of which by-laws
shall apply mutatis mutandis to notices or documents as aforesaid sent to such
Beneficiary.
14.5 RISK OF PAYMENTS BY POST
Whenever payments are to be made or documents are to be sent to any
Beneficiary by the Trustee or by a Beneficiary to the Trustee, the making of
such payment or sending of such document sent through the post shall be at the
risk of Parent and Company, in the case of payments made or documents sent by
the Trustee, and at the risk of the Beneficiary, in the case of payments made or
documents sent by the Beneficiary.
14.6 COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
14.7 JURISDICTION
This Agreement shall be construed and enforced in accordance with the laws
of the Province of Ontario and the laws of Canada applicable therein.
32
14.8 ATTORNMENT
Each of the Trustee, Parent and Company agrees that any action or
proceeding arising out of or relating to this Agreement may be instituted in the
Court, waives any objection which it may have now or hereafter to the venue of
any such action or proceeding, irrevocably submits to the jurisdiction of the
said courts in any such action or proceeding, agrees to be bound by any judgment
of the said courts and not to seek, and hereby waives, any review of the merits
of any such judgment by the courts of any other jurisdiction, and Parent hereby
appoints Company at its registered office in the Province of Ontario as attorney
for service of process.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
divine, Inc.
By:
---------------------------------
Name:
Title:
Delano Technology Corporation
By:
---------------------------------
Name:
Title:
--
By:
---------------------------------
Name:
Title:
ANNEX F
ARRANGEMENT RESOLUTION
----------------------
FORM OF COMPANY RESOLUTION
SPECIAL RESOLUTION OF SHAREHOLDERS OF DELANO TECHNOLOGY CORPORATION
BE IT RESOLVED THAT:
1. The arrangement (the "Arrangement") under Section 182 of the Business
Corporations Act (Ontario) (the "OBCA") involving Delano Technology
Corporation (the "Company"), as more particularly described and set forth
in the Proxy Statement (the "Circular") of the Company accompanying the
notice of this meeting (as the Arrangement may be or may have been
modified or amended) is hereby authorized, approved and adopted.
2. The plan of arrangement (the "Plan of Arrangement") involving the Company,
the full text of which is set out as Annex C to the Circular (as the Plan
of Arrangement may be or may have been modified or amended) is hereby
authorized, approved and adopted.
3. The combination agreement (including the schedules thereto) dated as of
March 12, 2002 (the "Combination Agreement") among the Company and divine,
Inc. and the transactions contemplated thereby, the actions of the board
of directors of the Company in approving the Combination Agreement and the
transactions contemplated thereby, and the actions of the officers of the
Company in executing and delivering the Combination Agreement, are hereby
confirmed, ratified and approved.
4. Notwithstanding that this resolution has been passed (and the
Arrangement adopted) by the shareholders of the Company or that the
Arrangement has been approved by the Ontario Superior Court of Justice,
the directors of the Company are hereby authorized and empowered
without further notice to or approval of the shareholders of the
Company (i) to amend the Combination Agreement or the Plan of
Arrangement to the extent permitted by the Combination Agreement, and
(ii) subject to the terms of the Combination Agreement, not to proceed
with the Arrangement.
5. Any officer or director of the Company is hereby authorized and directed
for and on behalf of the Company to execute, under the seal of the Company
or otherwise, and to deliver articles of arrangement and such other
documents as are necessary or desirable to the Director under the OBCA in
accordance with the Combination Agreement for filing.
6. Any officer or director of the Company is hereby authorized and directed
for and on behalf of the Company to execute or cause to be executed, under
the seal of the Company or otherwise, and to deliver or cause to be
delivered, all such other documents and instruments and to perform or
cause to be performed all such other acts and things as may be necessary
or desirable to give full effect to the foregoing resolution and the
matters authorized hereby.
ANNEX G
OPINION OF BROADVIEW INTERNATIONAL LLC
[BROADVIEW LETTERHEAD]
March 12, 2002
CONFIDENTIAL
Board of Directors
Delano Technology Corporation
302 Town Centre Boulevard
Markham, Ontario L3R 0E8
Canada
Dear Members of the Board:
We understand that Delano Technology Corporation ("Delano" or the "Company") and
divine, inc. ("divine" or "Parent") propose to enter into a Combination
Agreement (the "Agreement") pursuant to which each common share of Delano
("Company Common Shares") will be converted into the right to receive
1.1870 shares (the "Exchange Ratio") of the common stock of Parent ("Parent
Common Shares"), or, in the case of Company Common Shares held by or on behalf
of a Canadian resident who makes a valid election to receive Exchangeable Shares
(as defined in the Agreement), the number of Exchangeable Shares equal to the
Exchange Ratio. The transaction is intended to be treated as a tax-deferred
"rollover" for purposes of Section 85 of the Income Tax Act (Canada) to the
extent that Company Common Shares are exchanged for Exchangeable Shares and as a
reorganization within the meaning of Section 368 of the United States Internal
Revenue Code of 1986, as amended. The terms and conditions of the above
described transaction (referred to herein as the "Arrangement") are more fully
detailed in the Agreement.
You have requested our opinion as to whether the Exchange Ratio is fair, from a
financial point of view, to holders of Company Common shares.
Broadview International LLC ("Broadview") focuses on providing merger and
acquisition advisory services to information technology ("IT"), communications
and media companies. In this capacity, we are continually engaged in valuing
such businesses, and we maintain an extensive database of IT, communications and
media mergers and acquisitions for comparative purposes. We are currently acting
as financial advisor to Delano's Board of Directors and will receive a fee from
Delano upon the successful conclusion of the Arrangement.
In rendering our opinion, we have, among other things:
1) reviewed the terms of the Agreement, the Plan of Arrangement (as defined
in the Agreement) and the Exchangeable Share Provisions (as defined in the
Plan of Arrangement), in the form of the drafts dated March 11, 2002,
respectively, furnished to us by Company counsel on March 11, 2002 (which,
for the purposes of this opinion, we have assumed, with your permission,
to be identical in all material respects to the agreement to be executed
except that we have assumed with your permission that the Exchange Ratio
is as defined above);
2) reviewed Delano's annual report on Form 10-K for the fiscal year ended
March 31, 2001, including the audited financial statements included
therein, Delano's
BROADVIEW
Delano Technology Corporation Board of Directors March 12,2002
Page 2
quarterly report on Form 10-Q for the period ended December 31, 2001,
including the unaudited financial statements included therein;
3) reviewed certain internal financial and operating information, including
quarterly projections through December 31, 2003, relating to Delano,
prepared and furnished to us by Delano management;
4) participated in discussions with Delano's management concerning the
operations, business strategy, current financial performance and
prospects for Delano;
5) discussed with Delano management its view of the strategic rationale for
the Arrangement;
6) reviewed the recent reported closing prices and trading activity for
Company Common Shares;
7) compared certain aspects of the financial performance of Delano with
public companies we deemed comparable;
8) analyzed available information, both public and private, concerning
other mergers and acquisitions we believe to be comparable in whole or
in part to the Arrangement;
9) reviewed recent equity research analyst reports covering Delano;
10) reviewed divine's annual report on Form 10-K for the fiscal year ended
December 31, 2000, including the audited financial statements included
therein, divine's quarterly report on Form 10-Q for the period ended
September 30, 2001, including the unaudited financial statements
included therein, divine's current reports on Form 8-K filed since the
filing of its Form 10-Q for the period ended September 30, 2001, and
divine's press release dated March 7, 2002, for the period ended
December 31, 2001, including the unaudited financial statements included
therein;
11) reviewed certain internal financial and operating information for
divine, including a financial outlook through December 31, 2003,
prepared and furnished to us by divine management;
12) participated in discussions with divine management concerning the
operations, business strategy, financial performance and prospects for
divine;
13) discussed with divine management its view of the strategic rationale for
the Arrangement;
14) reviewed the recent reported closing prices and trading activity for
Parent Common Shares;
BROADVIEW
Delano Technology Corporation Board of Directors March 12, 2002
Page 3
15) compared certain aspects of the financial performance of divine with
public companies we deemed comparable;
16) reviewed recent research analyst reports covering divine;
17) analyzed the anticipated effect of the Arrangement on the future
financial performance of divine;
18) assisted in negotiations and discussions related to the Arrangement
among Delano, divine and their respective financial and legal advisors;
and
19) conducted other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Delano,
divine, or their respective advisors. With respect to the financial
projections examined by us, we have assumed that they were reasonably
prepared and reflected the best available estimates and good faith judgments
of the management of Delano and divine as to the future performance of
Delano and divine, respectively. We have neither made nor obtained an
independent appraisal or valuation of any of Delano's assets.
For purposes of this opinion we have assumed with your permission that Parent
Common Shares and Exchangeable Shares are identical in all material respects
from a financial point of view, and we therefore express no opinion as to the
fairness of any particular form of consideration available to holders of
Company Common Shares.
With your permission, in rendering our opinion, we have not taken into
account the impact that any additional potential transactions being
considered by divine may have on the financial performance or stock price of
divine. For purposes of this opinion, we have assumed that neither Delano nor
divine is currently involved in any material transaction other than the
Arrangement, other publicly announced transactions, and those activities
undertaken in the ordinary course of conducting their respective businesses.
Subject to the foregoing, our opinion is necessarily based upon market,
economic, financial and other conditions as they exist and can be evaluated
as of the date of this opinion, and any change in such conditions would
require a reevaluation of this opinion. We express no opinion as to the price
at which Parent Common Shares will trade at any time or as to the value of
such securities. In that regard, we understand that the Parent is not in
compliance with NASDAQ listing requirements. Our opinion does not take into
account the impact, if any, that a de-listing of Parent Common Shares would
have on the price of Parent Common Shares.
BROADVIEW
Delano Technology Corporation Board of Directors March 12, 2002
Page 4
Based upon and subject to the foregoing and subject to the limitations and
assumptions below, we are of the opinion that the Exchange Ratio is fair,
from a financial point of view, to holders of Company Common Shares.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Delano in
connection with its consideration of the Arrangement and does not constitute
a recommendation to any Delano shareholder as to how such shareholder should
vote with respect to the Arrangement or as to the form of consideration that
Delano shareholders should elect to receive in the Arrangement. This opinion
may not be published or referred to, in whole or part, without our prior
written permission, which shall not be unreasonably withheld. Broadview
hereby consents to references to and the inclusion of this opinion in its
entirety in the Company Circular to be distributed to Delano shareholders in
connection with the Arrangement.
Delano Technology Corporation
Fairness Opinion
Valuation Analysis
Prepared For: Delano Technology Corporation
Board of Directors
Prepared By: Broadview International LLC
March 12, 2002
DELANO TECHNOLOGY CORPORATION FAIRNESS OPINION
Valuation Analysis
Table of Contents
Tab
Transaction Summary A
Transaction Description and Consideration Value
Valuation Analysis B
Offer Analysis
Valuation Summary
Graphical Valuation Summary
Delano Stock Performance Analyses C
Delano Weekly Trading History Since Inception
Delano 1-Year Daily Trading History
Index of Public Company Comparables vs. Delano and
the NASDAQ Composite
Delano Public Comparables Analysis D
Public Company Comparables Summary
Public Company Comparables Descriptions
M&A Transaction Analyses E
Selected M&A Transaction Comparables
Public Seller Premium Analysis
Present Value of Future Potential Share Price Comparison Analysis F
Present Value of Future Potential Share Price for Delano
Discount Rate Calculation
Historical Implied Exchange Ratio Analysis G
Historical Exchange Ratio Summary
BROADVIEW INTERNATIONAL LLC
Relative Contribution Analyses H
Relative Contribution Analysis
Relative Ownership Analysis
divine Stock Performance Analyses and Public Comparables Analysis I
divine 1-Year Daily Trading History
Index of Public Company Comparables vs. divine and the NASDAQ
Composite
divine Public Company Comparables Analysis
divine Public Company Comparables Descriptions
Pro Forma Combination Analysis J
Purchase Analysis
BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
TRANSACTION DESCRIPTION AND CONSIDERATION VALUE
TRANSACTION DESCRIPTION
We understand that Delano Technology Corporation ("Delano" or the "Company")
and divine, inc. ("divine" or "Parent") propose to enter into a Combination
Agreement (the "Agreement") pursuant to which each common share of Delano
("Company Common Shares") will be converted into the right to receive 1.1870
shares (the "Exchange Ratio") of the common stock of Parent ("Parent Common
Shares"), or, in the case of Company Common Shares held by or on behalf of a
Canadian resident who makes a valid election to receive Exchangeable Shares
(as defined in the Agreement), the number of Exchangeable Shares equal to the
Exchange Ratio. The transaction is intended to be treated as a tax-deferred
"rollover" for purposes of Section 85 of the Income Tax Act (Canada) to the
extent that Company Common Shares are exchanged for Exchangeable Shares and
as a reorganization within the meaning of Section 368 of the United States
Internal Revenue Code of 1986, as amended. The terms and conditions of the
above described transaction (referred to herein as the "Arrangement") are
more fully detailed in the Agreement.
CONSIDERATION VALUE
($ Thousands Except Per Share Data)
DELANO TECHNOLOGY CORPORATION COMMON SHARES OUTSTANDING (1) 43,430
DELANO TECHNOLOGY CORPORATION COMMON STOCK EQUIVALENTS (2) 3,182
- -------------------------------------------------------------------------------------
IMPLIED DELANO TECHNOLOGY CORPORATION TOTAL SHARES TO BE ACQUIRED 46,612
OFFER PRICE PER DELANO TECHNOLOGY CORPORATION SHARE $ 0.80
divine, inc. SHARE PRICE AS OF 3/11/2002 $ 0.67
DELANO TECHNOLOGY CORPORATION SHARE PRICE AS OF 3/11/2002 $ 0.75
IMPLIED EXCHANGE RATIO 1.1870 X
SHARES OF divine, inc. COMMON STOCK TO BE RECEIVED FOR COMMON SHARES 51,550
SHARES OF divine, inc. COMMON STOCK TO BE RECEIVED FOR CSES 3,777
TOTAL SHARES OF divine, inc. COMMON STOCK TO BE RECEIVED 55,327
IMPLIED VALUE OF divine, inc. SHARES OFFERED $ 37,069
- -------------------------------------------------------------------------------------
IMPLIED EQUITY VALUE OF DELANO TECHNOLOGY CORPORATION $ 37,069
BALANCE SHEET ADJUSTMENT (3) $ 12,543
IMPLIED ENTITY VALUE OF DELANO TECHNOLOGY CORPORATION $ 24,526
- -------------------------------------------------------------------------------------
- ----------
NOTES:
(1) From Delano Technology Corporation management and includes 4.2MM shares
issued to Vikas Kapoor on 12/10/01 which immediately vest upon a change of
control.
(2) Calculated using the treasury method for option dilution at the implied
offer price of $0.80. Option information provided by Delano Technology
Corporation management.
(3) As of 12/31/01, the Company had $12.6MM in cash and $0.1MM in debt,
yielding a net balance sheet adjustment of $12.5MM.
Page 1
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION VALUATION
Offer Analysis
($Thousands Except Per Share Data)
IMPLIED ENTITY VALUE $24,526
BALANCE SHEET ADJUSTMENT $12,543
IMPLIED EQUITY VALUE $37,069
IMPLIED EQUITY VALUE PER SHARE (1) $ 0.80
APPLICABLE
DELANO MULTIPLE MEDIAN
TECHNOLOGY OR PREMIUM MULTIPLE
CORPORATION BALANCE SHEET IMPLIED RANGE OF OR
METHODOLOGY FIGURE (2) ADJUSTMENT (3) BY OFFER MULTIPLES OR PREMIUMS (4) PREMIUM
----------- ---------- -------------- -------- ------------------------- -------
PUBLIC COMPANY COMPARABLES
Multiple of Trailing Twelve Months Revenue $18,209 $12,543 1.35 x NM - 2.52 x 0.57 x
Multiple of Last Quarter Revenue Annualized $16,640 $12,543 1.47 x NM - 2.84 x 0.53 x
Multiple of Trailing Twelve Months Gross Profit $12,114 $12,543 2.02 x NM - 8.87 x 1.36 x
Multiple of Projected 03/31/02 Revenue $15,556 $12,543 1.58 x NM - 2.68 x 1.27 x
Multiple of Projected 03/31/02 Gross Profit $10,103 $12,543 2.43 x NM - 4.60 x 1.71 x
Multiple of Projected 12/31/02 Revenue $20,500 $12,543 1.20 x NM - 2.32 x 1.15 x
Multiple of Projected 12/31/02 Gross Profit $16,012 $12,543 1.53 x NM - 3.54 x 1.17 x
Multiple of Projected 12/31/02 EPS $ 0.04 $ 0 21.15 x NM - NM NM
TRANSACTION COMPARABLES
Multiple of Revenue for Comparable Public and
Private Companies $18,209 $12,543 1.35 x NM - 15.10 x 0.81 x
Premium to Market Value 1 Day Prior to Announcement $ 0.75 6.0% (7.5%) - 176.9% 41.2%
Premium to Market Value 20 Days Prior to Announcement $ 0.90 (11.6%) (18.9%) - 550.0% 76.1%
- ----------
NOTES:
(1) Per share calculations assume 46.6MM Delano Technology Corporation
common share and share equivalents outstanding, based on $0.80 offer
price and Delano Technology Corporation option table as provided by
management.
(2) Applicable Delano Technology Corporation figures provided by
management.
(3) As of 12/31/01, the Company had $12.6MM in cash and $0.1MM in debt,
yielding a net balance sheet adjustment of $12.5MM.
(4) Not Meaningful (NM) when TMC of company is negative or there are less
than two data points. NM figures are, however, included in the median
calculation as zero.
Page 2
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION VALUATION
Valuation Summary
($Thousands Except Per Share Data)
IMPLIED ENTITY VALUE $24,526
BALANCE SHEET ADJUSTMENT $12,543
IMPLIED EQUITY VALUE $37,069
IMPLIED EQUITY VALUE PER SHARE (1) $ 0.80
APPLICABLE IMPLIED
DELANO EQUITY
MEDIAN TECHNOLOGY VALUE FROM
MULTIPLE CORPORATION BALANCE SHEET APPLICABLE
METHODOLOGY OR PREMIUM FIGURE (2) ADJUSTMENT (3) MEDIAN
- ----------- ---------- ---------- -------------- ------
PUBLIC COMPANY COMPARABLES
Multiple of Trailing Twelve Months Revenue 0.57 x $18,209 $12,543 $22,847
Multiple of Last Quarter Revenue Annualized 0.53 x $16,640 $12,543 $21,417
Multiple of Trailing Twelve Months Gross Profit 1.36 x $12,114 $12,543 $28,977
Multiple of Projected 03/31/02 Revenue 1.27 x $15,556 $12,543 $32,232
Multiple of Projected 03/31/02 Gross Profit 1.71 x $10,103 $12,543 $29,850
Multiple of Projected 12/31/02 Revenue 1.15 x $20,500 $12,543 $36,146
Multiple of Projected 12/31/02 Gross Profit 1.17 x $16,012 $12,543 $31,261
Multiple of Projected 12/31/02 EPS NM $ 0.04 $ 0 NM
TRANSACTION COMPARABLES
Multiple of Revenue for Comparable Public and Private
Companies 0.81 x $18,209 $12,543 $27,291
Premium to Market Value 1 Day Prior to Announcement 41.2% $ 0.75 NA $49,358
Premium to Market Value 20 Days Prior to Announcement 76.1% $ 0.90 NA $73,858
FUTURE POTENTIAL SHARE PRICE ANALYSIS (5)
Present Value of Future Potential Share Price Based On
The Median Public Company Comparable TTM TMC/R
Ratio (6) $19,328
Present Value of Future Potential Share Price Based On
Delano Technology Corporation TTM TMC/R Ratio (7) $30,129
IMPLIED PER SHARE VALUE
IMPLIED PER SHARE VALUE RANGE (1) FROM APPLICABLE MEDIAN
METHODOLOGY (4) (1)
- ----------- -----------------------------------------------------------
PUBLIC COMPANY COMPARABLES
Multiple of Trailing Twelve Months Revenue NM - $1.26 $0.49
Multiple of Last Quarter Revenue Annualized NM - $1.28 $0.46
Multiple of Trailing Twelve Months Gross Profit NM - $2.58 $0.62
Multiple of Projected 03/31/02 Revenue NM - $1.16 $0.69
Multiple of Projected 03/31/02 Gross Profit NM - $1.27 $0.64
Multiple of Projected 12/31/02 Revenue NM - $1.29 $0.78
Multiple of Projected 12/31/02 Gross Profit NM - $1.48 $0.67
Multiple of Projected 12/31/02 EPS NM - NM NM
TRANSACTION COMPARABLES
Multiple of Revenue for Comparable Public and Private
Companies NM - $6.17 $0.59
Premium to Market Value 1 Day Prior to Announcement $0.69 - $2.08 $1.06
Premium to Market Value 20 Days Prior to Announcement $0.73 - $5.85 $1.58
FUTURE POTENTIAL SHARE PRICE ANALYSIS (5)
Present Value of Future Potential Share Price Based On
The Median Public Company Comparable TTM TMC/R Ratio (6) $0.41 - $0.46 $0.44
Present Value of Future Potential Share Price Based On
Delano Technology Corporation TTM TMC/R Ratio (7) $0.63 - $0.71 $0.68
- ----------
NOTES:
(1) Per share calculations assume 46.6MM Delano Technology Corporation
common share and share equivalents outstanding, based on $0.80 offer
price and Delano Technology Corporation option table as provided by
management.
(2) Applicable Delano Technology Corporation figures provided by
management.
(3) As of 12/31/01, the Company had $12.6MM in cash and $0.1MM in debt,
yielding a net balance sheet adjustment of $12.5MM.
(4) Not Meaningful (NM) when TMC of company is negative or there are less
than two data points. NM figures are, however, included in the median
calculation as zero.
(5) Range of implied values calculated using discount rates ranging from
15.0% to 30.0%.
(6) Implied value calculated using a discount rate of 19.10% (calculated
using CAPM and the median capital structure adjusted betas of the
public company comparables).
(7) Implied value calculated using a discount rate of 20.45% (calculated
using CAPM and Delano Technology Corporation's historical beta).
Page 3
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION VALUATION
Summary Analysis
[BAR GRAPH]
25th 75th
Percentile Median Percentile
- ---------------------------------
- ---------------------------------
Range
[BAR GRAPH]
($Thousands Except Per Share Data)
Equity Offer Price Per
Share Of $0.80
PUBLIC COMPANY COMPARABLES
Multiple of Trailing Twelve Months Revenue
Multiple of Last Quarter Revenue Annualized
Multiple of Trailing Twelve Months Gross Profit
Multiple of Projected 03/31/02 Revenue
Multiple of Projected 03/31/02 Gross Profit
Multiple of Projected 12/31/02 Revenue
Multiple of Projected 12/31/02 Gross Profit
Multiple of Projected 12/31/02 EPS (1)
TRANSACTION COMPARABLES
Multiple of Revenue for Comparable Public and Private Companies $6.17
Premium to Market Value 1 Day Prior to Announcement
Premium to Market Value 20 Days Prior to Announcement $5.85
FUTURE POTENTIAL SHARE PRICE ANALYSIS
Present Value of Future Potential Share Price Based On The Median
Public Company Comparable TTM TMC/R Ratio (2)
Present Value of Future Potential Share Price Based On Delano
Technology Corporation TTM TMC/R Ratio (3)
- ----------
NOTES:
(1) Not Meaningful (NM) when there are less than two data points.
(2) Implied value calculated using a discount rate of 19.10% (calculated
using CAPM and the median capital structure adjusted betas of the
public company comparables).
(3) Implied value calculated using a discount rate of 20.45% (calculated
using CAPM and Delano Technology Corporation's historical beta).
Page 4
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION TRADING HISTORY
Historical Weekly Share Price and Volume Performance from 02/11/00 to 03/08/02
[BAR GRAPH]
Page 5
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION TRADING HISTORY
Historical Daily Share Price and Volume Performance from 03/08/01 to 03/11/02
[LINE GRAPH]
Page 6
CONFIDENTIAL
INDEX OF PUBLIC COMPANY COMPARABLES VS. DELANO TECHNOLOGY CORPORATION AND THE
NASDAQ COMPOSITE
Weighted Daily Closing Prices from 03/08/01 to 03/11/02 (1)
[LINE GRAPH]
Page 7
CONFIDENTIAL
PUBLIC COMPANY COMPARABLES ANALYSIS
- --------------------------------------------------------------------------------
North American eCRM Software Solution Providers with TTM Revenue Less Than $75MM
and Less Than 50% TTM Revenue Growth
($Thousands Except Per Share Data)
OPERATING STATISTICS
--------------------------------------------------------------------------------------------
LAST PROJECTED
TTM LAST TTM TTM QUARTER PROJECTED 03/31/02 PROJECTED
REVENUE QUARTER REVENUE GROSS GROSS 03/31/02 GROSS 12/31/02
COMPANY (1) (2) REVENUE GROWTH (2) MARGIN (2) MARGIN REVENUE MARGIN REVENUE
eGain Communications
Corporation [EGAN] $ 45,749 $ 10,167 28.9% 52.5% 62.8% $ 43,104 58.3% $ 49,734
Digital Impact, Inc.
[DIGI] 38,907 10,329 8.9% 53.1% NA 38,755 NA 48,500
ClickSoftware
Technologies, Ltd. [CKSW] 18,204 5,905 15.6% 68.3% 79.3% 19,288 70.8% 25,200
Click Commerce,
Inc. [CKCM] 43,394 7,096 19.3% 69.9% 55.2% 39,025 NA 39,900
Accrue Software,
Inc. [ACRU] 14,632 3,861 (50.9%) 43.9% 61.9% NA NA NA
ServiceWare
Technologies, Inc. [SVCW] 11,933 4,270 (30.4%) 8.3% 61.6% NA NA NA
Primus Knowledge
Solutions, Inc. [PKSI] 27,550 6,225 (42.2%) 70.6% 73.2% NA NA NA
Blue Martini
Software, Inc. [BLUE] 57,494 10,093 (22.6%) 35.5% 46.1% 46,265 36.8% 50,300
Xchange, Inc. [EXAP] 44,711 9,036 (27.4%) 67.0% 79.1% NA NA NA
FirePond, Inc. [FIRE] 46,089 9,113 (25.6%) 33.2% 42.9% NA NA NA
Selectica, Inc. [SLTC] 47,686 10,345 0.6% 39.1% 41.3% 44,178 NA 44,700
Net Perceptions, Inc.
[NETP] 10,163 2,342 (72.2%) 47.9% 61.4% 9,324 58.4% 10,759
----------------------------------------------------------------------------------------------------
High $ 57,494 $ 10,345 28.9% 70.6% 79.3% $ 46,265 70.8% $ 50,300
MEDIAN 41,151 8,066 (24.1%) 50.2% 61.6% 39,025 58.3% 44,700
Low 10,163 2,342 (72.2%) 8.3% 41.3% 9,324 36.8% 10,759
----------------------------------------------------------------------------------------------------
DELANO TECHNOLOGY
CORPORATION (4) $ 18,209 $ 4,160 (33.7%) 66.5% 72.3% $ 15,556 65.0% $ 20,800
DELANO TECHNOLOGY
CORPORATION MANAGEMENT
ESTIMATES (5) $ 18,209 $ 4,160 (33.7%) 66.5% 72.3% $ 15,556 64.9% $ 20,500
OPERATING STATISTICS
----------------------------------------------------------------------------
PROJECTED SHARE TOTAL
12/31/02 PROJECTED PRICE AS EQUITY MARKET
GROSS 12/31/02 OF MARKET NET CASH CAPITALIZATION
COMPANY (1) MARGIN EPS 3/11/02 CAPITALIZATION (CASH-DEBT) (3)
eGain Communications
Corporation [EGAN] 65.7% $ 0.07 $ 1.10 $ 40,280 ($ 75,189) $ 115,469
Digital Impact, Inc.
[DIGI] NA (0.10) 3.30 102,744 24,295 78,449
ClickSoftware
Technologies, Ltd. [CKSW] 77.4% (0.12) 1.50 38,824 9,810 29,014
Click Commerce,
Inc. [CKCM] NA (0.10) 2.09 88,528 39,135 49,393
Accrue Software,
Inc. [ACRU] NA NA 0.51 15,435 4,530 10,905
ServiceWare
Technologies, Inc. [SVCW] NA NA 0.57 13,620 4,790 8,830
Primus Knowledge
Solutions, Inc. [PKSI] NA NA 1.55 29,294 18,499 10,795
Blue Martini
Software, Inc. [BLUE] 51.9% (0.35) 1.77 117,762 95,574 22,188
Xchange, Inc. [EXAP] NA NA 0.22 7,479 (9,629) 17,108
FirePond, Inc. [FIRE] NA NA 1.25 50,097 44,803 5,294
Selectica, Inc. [SLTC] NA (0.38) 3.82 134,557 155,095 (20,538)
Net Perceptions, Inc.
[NETP] 63.9% (0.35) 1.71 46,776 73,605 (26,829)
---------------------------------------------------------------------------------
High 77.4% $ 0.07 $ 134,557 $ 155,095 $ 115,469
MEDIAN 64.8% (0.12) 43,528 21,397 14,007
Low 51.9% (0.38) 7,479 (75,189) (26,829)
---------------------------------------------------------------------------------
DELANO TECHNOLOGY
CORPORATION (4) 77.0% $ 0.00 $ 0.75 $ 33,001 $ 12,543 $ 20,458
DELANO TECHNOLOGY
CORPORATION MANAGEMENT
ESTIMATES (5) 78.1% $ 0.04 $ 0.75 $ 34,500 $ 12,543 $ 21,957
- ----------
NOTES:
(1) Valuation information calculated using the closing price on 03/11/02.
Projected financials calculated from selected analyst reports.
(2) TTM refers to the Trailing Twelve Months ending 12/31/01.
(3) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and
cash equivalents. Equity Market Capitalization is calculated by
multiplying diluted shares outstanding by current share price.
(4) To maintain consistency with public company comparables, Delano
Technology Corporation financials are taken from publicly available
sources. Delano Technology Corporation projections from BMO Nesbitt
Burns Research analyst report dated 01/24/02. Delano Technology
Corporation market capitalization calculated with diluted shares
outstanding of 44.0MM as reported in the 10-Q for the quarter ending
12/31/01.
(5) Projected financials calculated from Delano Technology Corporation
management estimates.
Delano Technology Corporation market capitalization calculated with
diluted shares outstanding of 46.0MM, based on 03/12/02 option table
provided by management and 03/11/02 share price of $0.75.
Page 8
CONFIDENTIAL
PUBLIC COMPANY COMPARABLES ANALYSIS
North American eCRM Software Solution Providers with TTM Revenue Less Than $75MM
and Less Than 50% TTM Revenue Growth
($Thousands Except Per Share Data)
VALUATION STATISTICS
-------------------------------------------------------------------------------------
PROJECTED PROJECTED
TTM PROJECTED 03/31/02 PROJECTED 12/31/02
TTM TMC/LQA TMC/GROSS 03/31/02 TMC/GROSS 12/31/02 TMC/GROSS PROJECTED
TMC/R(2) REVENUE PROFIT TMC/R PROFIT TMC/R PROFIT 12/31/02
COMPANY (1) (3)(4) (3)(4) (2)(3)(4) (3)(4) (3)(4) (3)(4) (3)(4) P/E(4)(5)
- ----------- ------ ------ --------- ------ ------ ------ ------ ---------
eGain Communications
Corporation [EGAN] 2.52 x 2.84 x 4.81 x 2.68 x 4.60 x 2.32 x 3.54 x 15.58 x
Digital Impact, Inc.
[DIGI] 2.02 1.90 3.80 2.02 NA 1.62 NA NOM
ClickSoftware
Technologies, Ltd.
[CKSW] 1.59 1.23 2.33 1.50 2.12 1.15 1.49 NOM
Click Commerce, Inc.
[CKCM] 1.14 1.74 1.63 1.27 NA 1.24 NA NOM
Accrue Software, Inc.
[ACRU] 0.75 0.71 1.70 NA NA NA NA NA
ServiceWare
Technologies, Inc.
[SVCW] 0.74 0.52 8.87 NA NA NA NA NA
Primus Knowledge
Solutions, Inc. [PKSI] 0.39 0.43 0.56 NA NA NA NA NA
Blue Martini Software,
Inc. [BLUE] 0.39 0.55 1.09 0.48 1.30 0.44 0.85 NOM
Xchange, Inc. [EXAP] 0.38 0.47 0.57 NA NA NA NA NA
FirePond, Inc. [FIRE] 0.11 0.15 0.35 NA NA NA NA NA
Selectica, Inc. [SLTC] NM NM NM NM NA NM NA NOM
Net Perceptions, Inc.
[NETP] NM NM NM NM NM NM NM NOM
------------------------------------------------------------------------------------------
High 2.52 x 2.84 x 8.87 x 2.68 x 4.60 x 2.32 x 3.54 x NM
MEDIAN 0.57 0.53 1.36 1.27 1.71 1.15 1.17 NM
Low NM NM NM NM NM NM NM NM
------------------------------------------------------------------------------------------
DELANO TECHNOLOGY 1.12 X 1.23 X 1.69 X 1.32 X 2.02 X 0.98 X 1.28 X NM
CORPORATION (6)
DELANO TECHNOLOGY
CORPORATION MANAGEMENT
ESTIMATES (7) 1.21 X 1.32 X 1.81 X 1.41 X 2.17 X 1.07 X 1.37 X 19.94 X
- ----------
NOTES:
(1) Valuation information calculated using the closing price on
03/11/02. Projected financials calculated from selected analyst
reports.
(2) TTM refers to the Trailing Twelve Months ending 12/31/01.
(3) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and
cash equivalents. Equity Market Capitalization is calculated by
multiplying diluted shares outstanding by current share price.
(4) Not Meaningful (NM) when TMC of company is negative or there are less
than two data points. NM figures are, however, included in the median
calculation as zero.
(5) Negative Operating Metric (NOM) when relevant operating metric is less
than zero. NOM figures are not included in the median calculation.
(6) To maintain consistency with public company comparables, Delano
Technology Corporation financials are taken from publicly available
sources. Delano Technology Corporation projections from BMO Nesbitt
Burns Research analyst report dated 01/24/02. Delano Technology
Corporation market capitalization calculated with diluted shares
outstanding of 44.0MM as reported in the 10-Q for the quarter ending
12/31/01.
(7) Projected financials calculated from Delano Technology Corporation
management estimates.
Delano Technology Corporation market capitalization calculated with
diluted shares outstanding of 46.0MM, based on 03/12/02 option table
provided by management and 03/11/02 share price of $0.75.
Page 9
CONFIDENTIAL
DESCRIPTIONS OF PUBLIC COMPANY COMPARABLES
North American eCRM Software Solution Providers with TTM Revenue Less Than $75MM
and Less Than 50% TTM Revenue Growth
COMPANY DESCRIPTION
- ------- -----------
Accrue Software, Accrue Software, Inc. provides enterprise-level eBusiness
Inc. analysis solutions that enable companies to understand,
predict and respond to online customer behavior. The
Company's products allow businesses to address marketing and
merchandising initiatives concerning the effectiveness of
their websites.
Blue Martini Blue Martini Software provides software and services that
Software, Inc. enable businesses to understand, target and interact with
customers on the Web, through call centers, via e-mail and
over wireless devices. The company offers software suite that
allows companies to interact with customers and channel
partners across multiple touch points.
Click Commerce, Click Commerce, Inc., provides business-to-business channel
Inc. management software products and integration services that
use the Internet to connect global companies with their
distribution channel partners. The Company develops,
implements and supports private e-marketplace extranets,
which are secure systems that use the Internet to connect
companies with participants in the chain of distribution.
ClickSoftware ClickSoftware Technologies Ltd. provides software for
Technologies, optimizing service operations by improving customer
Ltd. responsiveness and the utilization of service resources. The
Company's products enable businesses to respond to customer
demands for service while maximizing utilization of service
personnel and minimizing operational costs.
Digital Impact, Digital Impact, Inc. offers Internet direct marketing
Inc. services to businesses that wish to communicate with their
customers online through email. The Company's solutions
facilitate many aspects of online direct marketing including
data management, marketing analytics, campaign management and
message delivery.
eGain eGain Communications provides large companies with enterprise
Communications interaction management software for the Internet. The
Corporation Company's solution includes self-service, live online
assistance and e-mail-based communications.
COMPANY DESCRIPTION
- ------- -----------
FirePond, Inc. FirePond, Inc. provides integrated eBusiness sales and
marketing solutions for companies wishing to offer complex
products and services through the Internet. The Company's
products leverage intelligence engines and automation
technology to shorten sales cycles, improve revenue per
channel and maximize price optimization.
Net Perceptions, Net Perceptions, Inc. provides software that integrates and
Inc. analyzes information about customers, products and
promotional activities, enabling companies to improve their
marketing, merchandising and advertising effectiveness. The
Company's solutions include data mining, reporting and
campaign management capabilities.
Primus Knowledge Primus Knowledge Solutions provides customer relationship
Solutions, Inc. management software that enables companies to leverage
customer interactions across multiple communication channels
and business processes. The Company's software is designed to
give customers access information and to enable businesses to
share customer and product knowledge across the enterprise.
Selectica, Inc. Selectica, Inc. provides Internet selling system software and
services that enable companies to sell products and services
over intranets, extranets, and the public Internet.
Businesses use the Company's software to guide their
customers, partners and employees through the selection,
configuration, pricing, quotation and fulfillment processes.
ServiceWare ServiceWare Technologies, Inc. provides software solutions
Technologies, that provide an Internet-based eService platform for
Inc. customers, partners, suppliers and employees. The Company's
eService Suite includes licensed and subscription-based
software and content products that enable businesses to
capture enterprise knowledge and share that information
through the Internet.
Xchange, Inc. Xchange, Inc. provides software that delivers personalized
online and offline customer communications, performs
customer-analytics and synchronizes cross-channel
communications. The software allows for real-time
interactions between a company and its customers.
Page 10
CONFIDENTIAL
SELECTED M&A TRANSACTION COMPARABLES
North American eCRM Software Solution Provider Transactions Announced Since
January 1, 2001
($ Millions)
ADJUSTED ADJUSTED
ANNOUNCE PRICE SELLER PRICE/
DATE BUYER SELLER SELLER DESCRIPTION (1) REVENUE REVENUE (2)
- ---- ----- ------ ------------------ --- ------- -----------
01/17/01 NetIQ Corporation WebTrends Corporation Provides enterprise solutions for $925.16 $61.27 15.10 x
visitor relationship management,
eBusiness intelligence and systems
management.
08/15/01 J.D. Edwards & YOUcenric, Inc. Provides Java-based customer 71.49 17.45 4.10
Company relationship management software,
including applications for sales
force automation, campaign
management, contact center management
and partner relationship management.
03/28/01 Sage Group Plc Interact Commerce Provides software that enables 271.82 107.65 2.52
Corporation mid-market businesses to automate
sales, marketing and customer support
interactions.
06/01/01 DoubleClick, Inc. MessageMedia, Inc. Provides marketers with a variety of 29.37 35.37 0.83
email marketing solutions and
services, including its M3 platform,
a full service e-messaging solution,
and Unitymail 4.0, an award- winning
licensed software.
08/16/01 divine, inc. Open Market, Inc. Provides content-driven eBusiness 51.43 63.50 0.81
solutions that enable enterprises to
manage interactions with their site
visitors, customers, employees and
channel partners.
07/09/01 divine, inc. eshare Provides customer interaction 57.12 79.92 0.71
communications, Inc. management solutions that help both
Internet-based and traditional
businesses establish and maintain
relationships with their customers.
10/29/01 SPSS, Inc. NetGenesis Corporation Provides eCustomer intelligence 13.63 19.54 0.70
solutions. The company's net.analysis
product combines information about
Website visitor behavior with a
company's other online and offline
customer data.
01/08/01 Chordiant Prime Response, Inc. Provides relationship marketing suite 9.19 28.86 0.32
Software, Inc. of software applications providing
and easy-to- use interface empowering
marketing capabilities.
04/09/01 Kana Software, Broadbase Software, Provides customer-focused, analytic (54.39) 54.99 NM
Inc. Inc. marketing automation and eService
software applications that analyze
customer data from multiple touch
points and use that information to
execute marketing campaigns, improve
online merchandizing and content,
increase site stickiness and
personalize all customer
interactions.
Mean 2.79 x
High 15.10
- --------------------------------
MEDIAN 0.81
- --------------------------------
Low NM
- --------------------------------
- -----------
NOTES:
(1) Prices paid have been adjusted for cash and debt on the seller's
balance sheet at the time of acquisition if known.
(2) Not meaningful (NM) when adjusted price is negative. NM figures are
included in the median calculation as zero.
Page 11
CONFIDENTIAL
SOFTWARE COMPANY PREMIUMS - 1 TRADING DAY PRIOR TO ANNOUNCEMENT
PREMIUM OVER SELLER'S SHARE PRICE 1 TRADING DAY PRIOR TO ANNOUNCEMENT
FOR PUBLIC SOFTWARE COMPANIES WITH TOTAL CONSIDERATION BETWEEN $10MM
AND $100MM, SINCE JANUARY 1, 2000
[BAR GRAPH]
NOTES:
(1) Calculated based on 03/11/02 Delano Technology Corporation closing price of
$0.75.
Page 12
CONFIDENTIAL
SOFTWARE COMPANY PREMIUMS - 20 TRADING DAYS PRIOR TO ANNOUNCEMENT
PREMIUM OVER SELLER'S SHARE PRICE 20 TRADING DAYS PRIOR TO ANNOUNCEMENT FOR
PUBLIC SOFTWARE COMPANIES WITH TOTAL CONSIDERATION BETWEEN $10MM AND
$100MM, SINCE JANUARY 1, 2000
[BAR GRAPH]
(1) Calculated based on 02/11/02 Delano Technology Corporation closing price of
$0.90.
Page 13
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
EQUITY PREMIUM PREMIUM PAID
CONSIDERATION PAID 1 20 TRADING
ANNOUNCE AT DAY BEFORE DAYS BEFORE
DATE BUYER SELLER DESCRIPTION ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
---- ----- ------ ----------- ------------ ------------ ------------
1/31/2001 Plato Learning, Wasatch Interactive Provides interactive, $11.49 9.2% 550.0%
Inc. Learning Corporation curriculum-based educational
software.
1/30/2001 The First Credit Management Provides software solutions for 81.29 110.1% 530.3%
American Solutions, Inc. automating credit analysis.
Corporation
5/7/2001 Verso Telemate.Net Provides software for Internet usage 30.00 121.8% 173.6%
Technologies, Software, Inc. management, call accounting and Web
Inc. analytics.
7/9/2001 divine, inc. eshare Provides customer interaction 71.10 164.6% 166.7%
communications, management solutions that help both
Inc. Internet-based and traditional
businesses establish and maintain
relationships with their customers.
1/7/2002 COGNICASE, Inc. Applied Terravision Provides enterprise solutions 40.52 72.9% 162.9%
Systems, Inc. focusing on the application service
provider and business function
outsourcing delivery models for the
oil & gas and trust management
verticals.
11/14/2001 Information Liquent, Inc. Provides software and services for 43.58 138.2% 150.5%
Holdings, Inc. content assembly and publishing for
the life sciences industry.
Page 14
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
EQUITY PREMIUM PREMIUM PAID
CONSIDERATION PAID 1 20 TRADING
ANNOUNCE AT DAY BEFORE DAYS BEFORE
DATE BUYER SELLER DESCRIPTION ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
---- ----- ------ ----------- ------------ ------------ ------------
9/18/2001 divine, inc. Eprise Corporation Provides content management $44.38 176.9% 139.3%
solutions.
10/29/2001 SPSS, Inc. NetGenesis Provides e-customer intelligence 45.30 50.2% 139.0%
Corporation solutions. The company's
net.analysis product combines
information about web site visitor
behavior with a company's other
online and offline customer data.
6/12/2001 Adir NetSpeak Corporation Provides a suite of software for 47.28 59.7% 138.3%
Technologies, real-time concurrent interactive
Inc. voice, video and data transmission
over data networks.
11/20/2000 Onvia.com, Inc. DemandStar.com, Inc. Provides Internet-based 14.45 41.4% 132.9%
procurement systems for
governmental agencies.
1/30/2001 Orchestream Crosskeys Systems Provides telecommunications 35.94 40.3% 129.2%
Holdings plc Corp. management software products and
services for telecommunications
service providers.
5/15/2000 Cerner Citation Computer Provides clinical information 17.15 45.1% 124.4%
Corporation Systems, Inc. systems for hospitals, clinics,
physicians' groups and emerging
integrated delivery networks.
4/3/2001 Harris Exigent Provides tracking and control 22.97 83.2% 118.5%
Corporation International, Inc. software for satellite networks.
Page 15
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
EQUITY PREMIUM PREMIUM PAID
CONSIDERATION PAID 1 20 TRADING
ANNOUNCE AT DAY BEFORE DAYS BEFORE
DATE BUYER SELLER DESCRIPTION ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
---- ----- ------ ----------- ------------ ------------ ------------
2/26/2001 AremisSoft Fourth Shift Provides eBusiness software $40.05 41.0% 111.4%
Corporation Corporation and services for
manufacturing, distribution,
customer relationship and
financial management.
10/25/2001 Investor Group Ecometry Provides integrated software 33.67 80.0% 92.0%
(SG Merger Corporation (1) solutions for multi-channel
Corporation) commerce.
7/16/2001 Corel Micrografx, Inc. Provides enterprise process 27.09 17.4% 91.0%
Corporation and graphics software,
solutions and services
allowing executives to
identify and value
performance improvement
initiatives.
10/25/2000 Telelogic AB Continuus Software Provides asset and project 41.54 28.7% 90.9%
Corporation management software designed
to support the collaborative
development, management,
approval and deployment of
software, Internet
applications and Web content.
2/18/2000 Nemetschek diehl graphsoft, Provides interactive graphics 29.23 33.3% 90.0%
Aktiengesell- inc. and Computer Aided Design
schaft (CAD) software for
architectural and engineering
projects.
- ----------
NOTES:
(1) Acquisition pending
Page 16
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
PREMIUM PREMIUM
EQUITY PAID 1 PAID 20
ANNOUNCE CONSIDERATION DAY BEFORE TRADING DAYS
DATE BUYER SELLER DESCRIPTION AT ANNOUNCEMENT ANNOUNCEMENT BEFORE ANNOUNCEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
8/7/2001 COGNICASE, Inc. Ezenet Corporation Provides customer-centric $34.30 85.9% 80.6%
software for aggregating and
managing customer account
information, personal financial
planning and transaction
processing capabilities for
financial institutions.
3/10/2000 The Thomson Wave Technologies Provides training solutions for 41.59 32.2% 77.3%
Corporation International, technical certification,
Inc. including computer programming,
networking and operating
systems certifications.
6/29/2000 Tumbleweed Interface Systems, Provides legacy-to-Internet 70.39 40.3% 74.8%
Communications Inc. software and services enabling
Corporation organizations to re-deploy
information stored on legacy
systems to their e-Commerce or
Internet-based applications.
5/23/2000 BMC Software, .OptiSystems Provides enterprise application 70.00 19.4% 66.7%
Inc. Solutions, Ltd. management software for the SAP
and IBM markets that manages
application performance and
availability in real-time.
3/16/2000 eGain Inference Provides customer relationship 88.27 (6.3%) 63.5%
Communications Corporation management (CRM) software for
Corporation customer self-service and
agent-assisted customer contact
centers.
7/2/2001 ValueClick, Inc. Mediaplex, Inc. Provides relational database 53.77 44.6% 62.5%
management technology and
component architecture that
integrates online and offline
campaign management.
Page 17 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
PREMIUM PREMIUM
EQUITY PAID 1 PAID 20
ANNOUNCE CONSIDERATION DAY BEFORE TRADING DAYS
DATE BUYER SELLER DESCRIPTION AT ANNOUNCEMENT ANNOUNCEMENT BEFORE ANNOUNCEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
12/1/2000 CGI Group, Inc. Star Data Systems, Provides online, real-time $62.08 44.8% 61.6%
Inc. financial information and
transaction processing services
to the Canadian investment
community.
10/19/2000 Perot Systems Health Systems Provides health benefits 13.52 33.3% 60.0%
Corporation Design information systems software to
Corporation organizations that administer
health benefits.
7/17/2000 John H. Concentrex, Inc. Provides software solutions to 37.01 75.0% 60.0%
Harland deliverfinancial services,
Company including real-time information
management, branch automation,
loan origination and new
accounts management solutions.
8/7/2001 Corel SoftQuad Software, Develops XML enabling 37.53 40.0% 50.7%
Corporation Ltd. (1) technologies and commerce
solutions for eBusiness.
2/1/2002 Adobe Systems, Accelio Provides web-enabled solutions 70.49 47.4% 50.5%
Inc. Corporation that help customers manage
business processes driven by
electronic forms.
5/18/2001 America Online, InfoInterActive, Provides telecommunications 28.20 35.6% 42.0%
Inc. Inc. applications combining
telephone, Internet and
wireless networking
technologies.
NOTES:
(1) Acquisition pending
Page 18 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
PREMIUM PREMIUM
EQUITY PAID 1 PAID 20
ANNOUNCE CONSIDERATION DAY BEFORE TRADING DAYS
DATE BUYER SELLER DESCRIPTION AT ANNOUNCEMENT ANNOUNCEMENT BEFORE ANNOUNCEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
6/1/2001 DoubleClick, MessageMedia, Inc. Provides permission-based, $39.26 30.0% 40.0%
Inc. email marketing and
messaging solutions.
11/7/2000 SPSS, Inc. ShowCase Provides integrated business 94.60 49.8% 33.3%
Corporation intelligence solutions for IBM
AS/400 customers.
7/2/2001 Radisys Microware Systems Provides embedded software 13.03 41.7% 23.6%
Corporation Corporation solutions for advanced
communications infrastructure,
Internet appliances and
multimedia devices.
3/20/2001 Pitney Bowes, Alysis Provides component-based 22.39 85.3% 23.6%
Inc. Technologies, Inc. eBilling software for billing,
payment, processing, dispute
management, workflow and data
analysis.
12/4/2001 Roxio, Inc. MGI Software Provides consumer digital photo 32.78 12.4% (4.0%)
Corporation and video editing software.
1/8/2001 Chordiant Prime Response, Develops relationship marketing 36.25 (2.2%) (5.7%)
Software Inc. Inc. suite of software applications
providing and easy-to-use
interface empowering marketing
capabilities.
1/25/2002 PeopleSoft, Momentum Business Provides eBusiness, analytics 90.00 (3.3%) (5.7%)
Inc. Applications, and business process
Inc. (1) applications software
solutions.
NOTES:
(1) Acquisition pending
Page 19 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
PUBLIC SELLER PREMIUM ANALYSIS
Software Transactions with North American Sellers and Equity Consideration
between US $10 Million and US $100 Million at Announcement Since January 1, 2000
($ Millions)
PREMIUM PREMIUM
EQUITY PAID 1 PAID 20
ANNOUNCE CONSIDERATION DAY BEFORE TRADING DAYS
DATE BUYER SELLER DESCRIPTION AT ANNOUNCEMENT ANNOUNCEMENT BEFORE ANNOUNCEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
8/16/2001 divine, inc. Open Market, Inc. Provides content-driven $45.46 (7.5%) (11.5%)
eBusiness solutions that
enable enterprises to manage
interactions with their site
visitors, customers, employees
and channel partners.
9/6/2001 Cerner Dynamic Healthcare Provides clinical and 17.45 (0.9%) (17.4%)
Corporation Technologies, Inc. diagnostic workflow software
and Internet services for
pathology, laboratory, and
radiology, enabling
collaboration among physicians
and clinicians in hospital and
clinical care settings.
3/22/2001 First Virtual CUseeMe Networks, Develops and hosts technology 18.23 27.1% (18.9%)
Communications, Inc. for interactive voice and
Inc. visual communications over the
Internet.
------------------------------------------------------------------------------
High 176.9% 550.0%
------------------------------------------------------------------------------
MEDIAN 41.2% 76.1%
------------------------------------------------------------------------------
Low (7.5%) (18.9%)
------------------------------------------------------------------------------
Page 20 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
PRESENT VALUE OF PROJECTED DELANO TECHNOLOGY CORPORATION SHARE PRICE
52 Week High $2.56
Current Share Price as of 3/11/02 $0.75
52 Week Low $0.11
Revenue For TTM Period Ending 12/31/2001(1) $18,209
Projected Revenue for Fiscal Year Ending 12/31/2002(2) $20,500
Delano Technology Corporation TTM TMC/R(1)(3) 1.21 x
Median TTM TMC/R of Public Company Comparables(1)(3) 0.57 x
CALCULATION OF IMPLIED SHARE PRICE BASED ON MEDIAN TMC/R OF COMPARABLES
MEDIAN TTM DELANO TECHNOLOGY IMPLIED FUTURE
TMC/R OF CORPORATION PROJECTED IMPLIED FUTURE TOTAL SHARE
COMPARABLES(1)(3) REVENUE (12/31/02)(2) MARKET CAPITALIZATION PRICE(5)
- ---------------------------------------------------------------------------------------------
0.57 x $20,500 $11,601 $0.52
PRESENT VALUE OF SHARE PRICE BASED ON REVENUE
FOR TWELVE MONTHS ENDED 12/31/2002 AT VARIOUS DISCOUNT RATES(4)
- -------------------------------------------------------------------------
15.00% 19.10%(6) 20.00% 20.45%(7) 25.00% 30.00%
$ 0.46 $ 0.44 $ 0.44 $ 0.44 $ 0.43 $ 0.41
CURRENT STANDALONE
DELANO TECHNOLOGY
CORPORATION TTM
TMC/R(1)(3)
- ------------------
1.21 x $20,500 $24,719 $0.80 $0.71 $0.68 $0.68 $0.68 $0.66 $0.63
SENSITIVITY ANALYSIS
PRESENT VALUE OF SHARE PRICE BASED ON REVENUE
FOR TWELVE MONTHS ENDED 12/31/2002 AT VARIOUS DISCOUNT RATES(4)
---------------------------------------------------------------
IMPLIED FUTURE
TMC/R(3) SHARE PRICE(5) 15.00% 19.10%(6) 20.00% 20.45%(7) 25.00% 30.00%
------------------------------------------------------------------------------------------
0.25 x $0.38 $0.33 $0.32 $0.32 $0.32 $0.31 $0.30
0.50 x $0.49 $0.43 $0.42 $0.42 $0.41 $0.40 $0.39
Implied Share Price Based 0.57 x $0.52 $0.46 $0.44 $0.44 $0.44 $0.43 $0.41
on Median Public Company 0.75 x $0.60 $0.53 $0.51 $0.51 $0.51 $0.49 $0.47
Comparables TTM TMC/R 1.00 x $0.71 $0.63 $0.61 $0.60 $0.60 $0.58 $0.56
1.21 x $0.80 $0.71 $0.68 $0.68 $0.68 $0.66 $0.63
1.25 x $0.82 $0.72 $0.70 $0.70 $0.69 $0.67 $0.65
Implied Share Price Based on 1.50 x $0.93 $0.82 $0.80 $0.79 $0.79 $0.76 $0.74
Current Delano Technology 1.75 x $1.04 $0.92 $0.89 $0.88 $0.88 $0.85 $0.82
Corporation TTM TMC/R 2.00 x $1.15 $1.01 $0.98 $0.98 $0.97 $0.94 $0.91
2.25 x $1.26 $1.11 $1.08 $1.07 $1.07 $1.03 $1.00
2.50 x $1.37 $1.21 $1.17 $1.16 $1.16 $1.12 $1.08
2.75 x $1.48 $1.31 $1.27 $1.26 $1.25 $1.21 $1.17
3.00 x $1.59 $1.40 $1.36 $1.35 $1.35 $1.30 $1.26
3.25 x $1.70 $1.50 $1.45 $1.45 $1.44 $1.39 $1.35
3.50 x $1.81 $1.60 $1.55 $1.54 $1.53 $1.48 $1.43
NOTES:
(1) TTM refers to the Trailing Twelve Months ending 12/31/01.
(2) Delano Technology Corporation projected revenue provided by management.
(3) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and cash
equivalents.
(4) Assumes that results are reported thirty days after end of period.
(5) Implied Future Share Price calculated by taking Implied Future Total Market
Capitalization (TMC), adjusting for net cash of $12.5MM, and dividing by
46.6MM diluted shares outstanding. Diluted shares outstanding calculated
using the treasury method for option dilution at the offer price of $0.80
per share. Option information provided by Delano Technology Corporation
management as of 03/12/02.
(6) Based on CAPM and median beta (adjusted for capital structure) of the
public company comparables.
(7) Based on CAPM and Delano Technology Corporation's historical beta.
Page 21 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
DISCOUNT RATE CALCULATION
($Thousands Except Per Share Data)
LEVERED EQUITY MARKET TOTAL CORPORATE UNLEVERED
PUBLIC COMPANY COMPARABLES BETA(1) CAPITALIZATION(2) DEBT TAX RATE(3) BETA(4)
- -------------------------- ------- ----------------- ---- ----------- -------
Blue Martini Software, Inc. 3.130 $117,762 $ 110 38.0% 3.128
ServiceWare Technologies, Inc. 2.560 13,620 0 38.0% 2.560
Xchange, Inc. 2.430 7,479 16,703 38.0% 1.019
eGain Communications Corporation 2.150 40,280 96,855 38.0% 0.863
Click Commerce, Inc. 1.950 88,528 1,542 38.0% 1.929
Accrue Software, Inc. 1.550 15,435 0 38.0% 1.550
FirePond, Inc. 1.860 50,097 0 38.0% 1.860
ClickSoftware Technologies, Ltd. 1.490 38,824 161 38.0% 1.486
Primus Knowledge Solutions, Inc. 1.250 29,294 0 38.0% 1.250
Selectica, Inc. 0.720 134,557 0 38.0% 0.720
Net Perceptions, Inc. 0.420 46,776 0 38.0% 0.420
Digital Impact, Inc. 0.080 102,744 3,956 38.0% 0.078
MEDIAN OF COMPARABLES 1.705 1.368
DELANO TECHNOLOGY CORPORATION 1.550
CALCULATION OF DELANO TECHNOLOGY CORPORATION LEVERED BETA BASED ON MEDIAN BETA
OF COMPARABLES
DELANO TECHNOLOGY CORPORATION UNLEVERED EQUITY MARKET TOTAL CORPORATE IMPLIED LEVERED
BETA(4) CAPITALIZATION(2) DEBT TAX RATE(3) BETA
------- ----------------- ---- ----------- ----
Delano Technology Corporation 1.368 $34,959 $89 38.0% 1.370
CALCULATION OF DELANO TECHNOLOGY CORPORATION COST OF EQUITY
Market Risk Premium(5): 7.50%
Risk Free Rate(6): 5.32%
Size Premium(7): 3.50%
CAPM: (Risk Free Rate + (Levered Beta * Market Risk Premium) + Small Cap Premium
COST OF EQUITY BASED ON 19.10%
BETA OF COMPARABLES (8) COST OF EQUITY BASED ON DELANO TECHNOLOGY CORPORATION HISTORICAL BETA 20.45%
NOTES:
(1) Levered betas derived from Bloomberg for weekly periods from 01/12/01 to
03/08/02.
(2) Equity Market Capitalization (EMC) calculated using current share price as
of 03/11/02 and 46.6MM diluted shares outstanding for Delano Technology
Corporation.
(3) All corporated tax rates assumed to be 38%.
(4) Unlevered Beta = Levered Beta * (Equity Market Capitalization / (Debt * (1
- Corporate Tax Rate) + Equity Market Capitalization)).
(5) Source : Ibbotson Associates, Inc.,Stocks, Bonds, Bills, and Inflation 2001
Yearbook , Ibbotson and Associates, Chicago, 2001.
(6) 10 Year U.S. Treasury Bond Rate as of 03/11/02.
(7) The Small Capitalization Premium reflects the difference between the market
capitalization of the companies used to calculate the Market Risk Premium
and the value implied by the current share price. Companies with market
capitalization below $197MM are expected, on average, to outperform large
company stocks by 3.5%, as per Ibbotson Associates, Inc.
(8) Calculated using the levered beta derived from the median unlevered beta of
the public company comparables and Delano Technology Corporation's capital
structure.
Page 22 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
EXCHANGE RATIO ANALYSIS (1)
Ratio of Delano Technology Corporation / divine, inc. Daily Share Price From
03/08/01 to 03/11/02
Premium Implied
Exchange Ratio by Offer (2)
---------------------------------
Spot Price as of 03/11/02: 1.1194 6.0%
20 Day Average: 1.2461 (4.7%)
3 Month Average: 1.1833 0.3%
1 Year Average : 0.6700 77.2%
1 Year High: 1.6585 (28.4%)
1 year Low: 0.1374 763.9%
[LINE GRAPH]
Notes:
- ------
(1) Represents Delano Technology Corporation historical share price divided by
divine, Inc. share price.
(2) Implied premium calculated using offered exchange ratio of 1.1870.
Page 23 BROADVIEW INTERNATIONAL LLC
CONFIDENTIAL
DIVINE, INC. ACQUIRES DELANO TECHNOLOGY CORPORATION
Relative Contribution Analysis (1)
($Thousands)
ACTUAL CONTRIBUTIONS RELATIVE CONTRIBUTIONS
---------------------------------------- ---------------------------------
DELANO TECHNOLOGY DELANO TECHNOLOGY
TTM ENDING DECEMBER 31, 2001 (2) DIVINE, INC. CORPORATION DIVINE, INC. CORPORATION
- --------------------------------- ----------- ----------------- ----------- -----------------
Revenue $199,598 $18,209 91.6% 8.4%
Gross Profit 19,745 12,114 62.0% 38.0%
LAST QUARTER ANNUALIZED
Revenue $321,920 $16,640 95.1% 4.9%
PROJECTED CALENDAR YEAR 2002
Revenue $767,400 $20,500 97.4% 2.6%
Gross Profit 296,523 16,012 94.9% 5.1%
HIGH 97.4% 38.0%
LOW 62.0% 2.6%
RELATIVE EQUITY OWNERSHIP
IMPLIED FROM CURRENT OFFER (3) 89.3% 10.7%
NOTES:
(1) divine, inc. and Delano Technology Corporation projected figures from
management estimates.
(2) TTM indicates trailing twelve months ending 12/31/01.
(3) Relative equity ownership calculated based on total shares outstanding of
the combined entity (fully diluted divine, inc. shares outstanding of
461.0MM plus total shares issued in the transaction at the current $0.80
per share offer price).
Page 24
CONFIDENTIAL
RELATIVE CONTRIBUTION OF DIVINE, INC. AND DELANO TECHNOLOGY CORPORATION TO
COMBINED ENTITY
[BAR CHART]
NOTES
(1) TTM indicates trailing twelve months ending 12/31/01.
Page 25
DIVINE, INC. ACQUIRES DELANO TECHNOLOGY CORPORATION
Relative Ownership Analysis (1)
($Thousands Except Per Share Data)
DELANO
TECHNOLOGY
DIVINE, INC. CORPORATION
----------- -----------
Share Price as of 03/11/02 $ 0.67 $ 0.75
Diluted Shares Outstanding (2) (3) 461,048 46,612
Net Cash (4) $ 30,332 $ 12,543
Equity Market Capitalization $308,902 $ 34,959
Total Market Capitalization $278,569 $ 22,416
RELATIVE ENTITY VALUE RELATIVE EQUITY
NET OF CASH OWNERSHIP
---------------------------- -----------------------------
Delano Delano
Technology Technology
divine, inc. Corporation divine, inc. Corporation
------------ ----------- ------------ -----------
99.0% 1.0% 95.3% 4.7%
97.8% 2.2% 94.3% 5.7%
96.6% 3.4% 93.3% 6.7%
95.4% 4.6% 92.3% 7.7%
94.3% 5.7% 91.3% 8.7%
93.1% 6.9% 90.3% 9.7%
91.9% 8.1% 89.3% 10.7%
90.7% 9.3% 88.3% 11.7%
Relative Ownership Implied
89.6% 10.4% 87.3% 12.7%
From Current Offer
88.4% 11.6% 86.3% 13.7%
87.2% 12.8% 85.3% 14.7%
86.1% 13.9% 84.3% 15.7%
84.9% 15.1% 83.3% 16.7%
83.8% 16.2% 82.3% 17.7%
82.6% 17.4% 81.3% 18.7%
81.5% 18.5% 80.3% 19.7%
80.3% 19.7% 79.3% 20.7%
79.2% 20.8% 78.3% 21.7%
78.1% 21.9% 77.3% 22.7%
76.9% 23.1% 76.3% 23.7%
Implied Premium
to Delano
Implied Shares Technology
Issued for Delano Implied Corporation Share
Technology Implied Equity Stock Price Price as of
Corporation Value Of Stock Per Share 03/11/02
----------- -------------- --------- --------
22,813 15,284 0.33 (56.3%)
27,944 18,723 0.40 (46.4%)
33,186 22,235 0.48 (36.4%)
38,542 25,823 0.55 (26.1%)
44,015 29,490 0.63 (15.6%)
49,609 33,238 0.71 (4.9%)
55,328 37,070 0.80 6.0%
61,177 40,989 0.88 17.2%
Relative Ownership Implied
67,160 44,997 0.97 28.7%
From Current Offer
73,282 49,099 1.05 40.4%
79,547 53,296 1.14 52.5%
85,961 57,594 1.24 64.7%
92,529 61,994 1.33 77.3%
99,256 66,502 1.43 90.2%
106,149 71,120 1.53 103.4%
113,214 75,853 1.63 117.0%
120,457 80,706 1.73 130.9%
127,885 85,683 1.84 145.1%
135,505 90,788 1.95 159.7%
143,325 96,028 2.06 174.7%
NOTES:
(1) Assumes shareholders elect to receive all consideration in stock for
purposes of the analysis.
(2) divine, inc. diluted shares outstanding obtained from divine, inc.
management as of 02/28/02.
(3) Delano Technology Corporation diluted shares outstanding calculated using
the treasury method based on summary option table provided by management
as of 03/12/02.
(4) divine, inc. net cash from management as of 12/31/01.
Page 26
CONFIDENTIAL
DIVINE, INC. TRADING HISTORY
Historical Daily Share Price and Volume Performance from 03/08/01 to 03/11/02
[LINE CHART]
Page 27
CONFIDENTIAL
INDEX OF PUBLIC COMPANY COMPARABLES VS. DIVINE, INC. AND THE NASDAQ COMPOSITE
Weighted Daily Closing Prices from 03/08/01 to 03/11/02 (1)
[LINE CHART]
NOTES:
(1) Index companies are equally weighted.
Page 28
CONFIDENTIAL
DIVINE, INC. PUBLIC COMPANY COMPARABLES ANALYSIS
($ Thousands Except Per Share Data)
OPERATING STATISTICS
----------------------------------------------------------------------------
TTM REVENUE LAST QUARTER TTM REVENUE TTM GROSS LAST QUARTER
COMPANY (1) (2) REVENUE GROWTH (2) MARGIN (2) GROSS MARGIN
- ----------- ----------- ------------ ----------- ---------- -------------
TECHNOLOGY-FOCUSED INTERNET SERVICE
COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM
Digitas, Inc. [DTAS] $235,514 $46,953 (18.3%) 33.0% 38.8%
Sapient Corporation [SAPE] 329,698 63,291 (34.5%) 28.5% 26.9%
Answerthink, Inc. [ANSR] 247,461 50,154 (20.5%) 37.3% 35.9%
- -----------------------------------------------------------------------------------------------------------------------------------
High $329,698 $63,291 (18.3%) 37.3% 38.8%
MEDIAN 247,461 50,154 (20.5%) 33.0% 35.9%
Low 235,514 46,953 (34.5%) 28.5% 26.9%
- -----------------------------------------------------------------------------------------------------------------------------------
eCRM, WEB CONTENT MANAGEMENT & CALL CENTER
SOFTWARE COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM AND
PROJECTED 12/31/02 REVENUE GROWTH LESS THAN 25%
Documentum, Inc. [DCTM] $185,712 $50,018 (6.0%) 69.8% 70.0%
Open Text Corporation [OTEX] 154,311 39,173 19.9% 74.1% 73.3%
Interwoven, Inc. [IWOV] 202,721 44,025 53.4% 70.0% 70.5%
E.piphany, Inc. [EPNY] 125,688 28,007 (1.3%) 56.1% 68.6%
Kana Software, Inc. [KANA] 113,347 24,830 (29.7%) 44.3% 76.7%
Vignette Corporation [VIGN] 296,750 52,504 (19.1%) 69.9% 69.6%
BroadVision, Inc. [BVSN] 247,773 47,979 (40.1%) 58.2% 68.8%
Art Technology Group, Inc. [ARTG] 138,869 30,916 (15.0%) 63.6% 68.8%
- -----------------------------------------------------------------------------------------------------------------------------------
High $296,750 $52,504 53.4% 74.1% 76.7%
MEDIAN 170,012 41,599 (10.5%) 66.7% 69.8%
Low 113,347 24,830 (40.1%) 44.3% 68.6%
- -----------------------------------------------------------------------------------------------------------------------------------
DIVINE, INC. (4) $199,598 $80,480 352.8% 9.9% 22.4%
DIVINE, INC. MANAGEMENT ESTIMATES (5) $199,598 $80,480 352.8% 9.9% 22.4%
OPERATING STATISTICS
-----------------------------------------------------------------------------
PROJECTED
PROJECTED 12/31/02 PROJECTED PROJECTED
12/31/02 REVENUE 12/31/02 12/31/03 PROJECTED
COMPANY (1) REVENUE GROWTH GROSS MARGIN REVENUE 12/31/03 EPS
- ----------- --------- --------- ------------ ----------- ------------
TECHNOLOGY-FOCUSED INTERNET SERVICE
COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM
Digitas, Inc. [DTAS] $199,300 (15.4%) NA $231,300 $0.28
Sapient Corporation [SAPE] 233,600 (29.1%) NA 259,900 (0.12)
Answerthink, Inc. [ANSR] 212,400 (14.2%) NA 261,600 0.50
- ------------------------------------------------------------------------------------------------------------------------------------
High $233,600 (14.2%) NA $261,600 $0.50
MEDIAN 212,400 (15.4%) NA 259,900 0.28
Low 199,300 (29.1%) NA 231,300 (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
eCRM, WEB CONTENT MANAGEMENT & CALL CENTER
SOFTWARE COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM AND
PROJECTED 12/31/02 REVENUE GROWTH LESS THAN 25%
Documentum, Inc. [DCTM] $217,900 17.3% 73.0% $265,300 $0.18
Open Text Corporation [OTEX] 179,830 16.5% 72.8% NA NA
Interwoven, Inc. [IWOV] 212,300 4.7% 71.2% 260,900 0.17
E.piphany, Inc. [EPNY] 132,707 5.6% 72.9% 154,610 0.03
Kana Software, Inc. [KANA] 110,000 (3.0%) 77.6% 133,750 0.34
Vignette Corporation [VIGN] 218,364 (26.4%) 67.1% 271,196 (0.10)
BroadVision, Inc. [BVSN] 170,000 (31.4%) 63.6% NA NA
Art Technology Group, Inc. [ARTG] 130,006 (6.4%) 69.5% NA NA
- ------------------------------------------------------------------------------------------------------------------------------------
High $218,364 17.3% 77.6% $271,196 $0.34
MEDIAN 174,915 0.9% 72.0% 260,900 0.17
Low 110,000 (31.4%) 63.6% 133,750 (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVINE, INC. (4) NA NA NA NA NA
DIVINE, INC. MANAGEMENT ESTIMATES (5) $767,400 284.5% 38.6% $999,272 $0.06
OPERATING STATISTICS
-----------------------------------------------------------------------
TOTAL MARKET
SHARE PRICE AS EQUITY MARKET NET CASH CAPITALIZATION
COMPANY (1) OF 3/11/02 CAPITALIZATION (CASH-DEBT) (3)
- ----------- -------------- -------------- ----------- --------------
TECHNOLOGY-FOCUSED INTERNET SERVICE
COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM
Digitas, Inc. [DTAS] $5.90 $380,432 $44,484 $335,948
Sapient Corporation [SAPE] 4.62 588,669 244,093 344,576
Answerthink, Inc. [ANSR] 6.68 308,917 59,888 249,029
- ------------------------------------------------------------------------------------------------------------------------------
High $588,669 $244,093 $344,576
MEDIAN 380,432 59,888 335,948
Low 308,917 44,484 249,029
- ------------------------------------------------------------------------------------------------------------------------------
eCRM, WEB CONTENT MANAGEMENT & CALL CENTER
SOFTWARE COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM AND
PROJECTED 12/31/02 REVENUE GROWTH LESS THAN 25%
Documentum, Inc. [DCTM] $25.09 $1,032,980 $94,174 $938,806
Open Text Corporation [OTEX] 26.07 555,343 91,187 464,156
Interwoven, Inc. [IWOV] 8.14 824,069 220,573 603,496
E.piphany, Inc. [EPNY] 9.06 653,460 323,575 329,885
Kana Software, Inc. [KANA] 18.20 341,596 49,677 291,919
Vignette Corporation [VIGN] 3.90 1,000,584 413,296 587,288
BroadVision, Inc. [BVSN] 2.18 639,914 195,231 444,683
Art Technology Group, Inc. [ARTG] 2.49 176,471 78,306 98,165
- ------------------------------------------------------------------------------------------------------------------------------
High $1,032,980 $413,296 $938,806
MEDIAN 646,687 144,703 454,420
Low 176,471 49,677 98,165
- ------------------------------------------------------------------------------------------------------------------------------
DIVINE, INC. (4) $0.67 $308,200 $83,232 $224,968
DIVINE, INC. MANAGEMENT ESTIMATES (5) $0.67 $308,902 $30,332 $278,569
NOTES:
(1) Valuation information calculated using the closing price on 03/11/02.
Projected financials calculated from selected analyst reports.
(2) TTM refers to the Trailing Twelve Months ending 12/31/01.
(3) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and
cash equivalents.
(4) To maintain consistency with public company comparables, divine, inc.
financials are taken from publicly available sources. TTM figures from
Trailing Twelve Months ending 12/31/01. divine, inc. market
capitalization calculated with common shares outstanding of 460.0MM as
reported in the earnings announcement on 03/07/02 for the year ending
12/31/01.
(5) divine, inc. management estimates represent Trailing Twelve Months ending
12/31/01. divine, inc. market capitalization calculated with diluted
shares outstanding of 461.0MM as provided by divine, inc. management as
of 02/28/02.
Page 29
CONFIDENTIAL
DIVINE, INC. PUBLIC COMPANY COMPARABLES ANALYSIS
($ Thousands Except Per Share Data)
OPERATING STATISTICS
----------------------------------------------------------------------------------
TTM REVENUE LAST QUARTER TTM REVENUE TTM GROSS LAST QUARTER
COMPANY (1) (2) REVENUE GROWTH (2) MARGIN (2) GROSS MARGIN
- ----------------------------------------------- ------------- ------------ ------------ ----------- ------------
BUSINESS INFORMATION SOFTWARE AND SERVICES
COMPANIES WITH TRAILING TWELVE MONTHS REVENUE
BETWEEN $10MM AND $100MM AND PROJECTED 12/31/02
REVENUE GROWTH LESS THAN 25%
EDGAR Online Inc. [EDGR] $17,053 $4,358 75.0% 73.9% 79.1%
TheStreet.com, Inc. [TSCM] 15,258 3,842 (34.5%) 42.5% 55.8%
OneSource Information Services, Inc.[ONES] 59,017 14,864 13.7% 68.7% 69.5%
Hoover's, Inc. [HOOV] 31,286 7,887 5.6% 63.1% 68.2%
Multex.com, Inc. [MLTX] 96,615 22,275 12.4% 70.9% 68.9%
Track Data Corporation [TRAC] (5) 62,217 13,974 5.9% NA NA
MarketWatch.com, Inc.[MKTW] 45,856 11,647 (14.9%) 59.4% 61.3%
COMTEX News Network, Inc. [CMTX.OB] 14,774 3,198 (6.6%) 70.0% 68.8%
---------------------------------------------------------------------------------------------------------------------------
High $96,615 $22,275 75.0% 73.9% 79.1%
MEDIAN 38,571 9,767 5.7% 68.7% 68.8%
Low 14,774 3,198 (34.5%) 42.5% 55.8%
---------------------------------------------------------------------------------------------------------------------------
MANAGED WEB HOSTING COMPANIES WITH
TRAILING TWELVE MONTHS REVENUE
BETWEEN $50MM AND $250MM
Equinix, Inc. [EQIX] $63,414 $17,466 387.2% (49.6%) (16.2%)
Digex, Inc. [DIGX] 214,353 55,186 27.5% 44.0% 49.1%
NaviSite, Inc. [NAVI] 95,950 19,279 37.2% (23.4%) (10.9%)
AppliedTheory Corporation [ATHY] 81,132 20,507 21.7% 34.0% 37.8%
---------------------------------------------------------------------------------------------------------------------------
High $214,353 $55,186 387.2% 44.0% 49.1%
MEDIAN 88,541 19,893 32.3% 5.3% 13.4%
Low 63,414 17,466 21.7% (49.6%) (16.2%)
---------------------------------------------------------------------------------------------------------------------------
DIVINE, INC. (6) $199,598 $80,480 352.8% 9.9% 22.4%
DIVINE, INC. MANAGEMENT ESTIMATES (7) $199,598 $80,480 352.8% 9.9% 22.4%
---------------------------------------------------------------------------------
PROJECTED PROJECTED
PROJECTED 12/31/02 12/31/02 PROJECTED PROJECTED
12/31/02 REVENUE GROSS MARGIN 12/31/03 12/31/03 EPS
COMPANY (1) REVENUE GROWTH (3) REVENUE (3) (3)
- ----------------------------------------------- ---------- ----------- ------------ ---------- ------------
BUSINESS INFORMATION SOFTWARE AND SERVICES
COMPANIES WITH TRAILING TWELVE MONTHS REVENUE
BETWEEN $10MM AND $100MM AND PROJECTED 12/31/02
REVENUE GROWTH LESS THAN 25%
EDGAR Online Inc. [EDGR] $20,450 19.9% 78.3% NA NA
TheStreet.com, Inc. [TSCM] NA NA NA NA NA
OneSource Information Services, Inc.[ONES] 65,500 11.0% NA NA NA
Hoover's, Inc. [HOOV] NA NA NA NA NA
Multex.com, Inc. [MLTX] 94,700 (2.0%) NA 104,200 0.07
Track Data Corporation [TRAC] (5) NA NA NA NA NA
MarketWatch.com, Inc.[MKTW] 46,600 1.6% NA NA NA
COMTEX News Network, Inc. [CMTX.OB] NA NA NA NA NA
--------------------------------------------------------------------------------------------------------------------------
High $94,700 19.9% NM NM NM
MEDIAN 56,050 6.3% NM NM NM
Low 20,450 (2.0%) NM NM NM
--------------------------------------------------------------------------------------------------------------------------
MANAGED WEB HOSTING COMPANIES WITH
TRAILING TWELVE MONTHS REVENUE
BETWEEN $50MM AND $250MM
Equinix, Inc. [EQIX] $95,000 49.8% 5.5% NA NA
Digex, Inc. [DIGX] 214,000 (0.2%) NA 288,700 (3.53)
NaviSite, Inc. [NAVI] NA NA NA NA NA
AppliedTheory Corporation [ATHY] NA NA NA NA NA
--------------------------------------------------------------------------------------------------------------------------
High $214,000 49.8% NM NM NM
MEDIAN 154,500 24.8% NM NM NM
Low 95,000 (0.2%) NM NM NM
--------------------------------------------------------------------------------------------------------------------------
DIVINE, INC. (6) NA NA NA NA NA
DIVINE, INC. MANAGEMENT ESTIMATES (7) $767,400 284.5% 38.6% $999,272 $0.06
-------------------------------------------------------------------
SHARE TOTAL MARKET
PRICE AS EQUITY MARKET NET CASH CAPITALIZATION
COMPANY (1) OF 3/11/02 CAPITALIZATION (CASH-DEBT) (4)
- ----------------------------------------------- ---------- ---------------- ---------- ----------------
BUSINESS INFORMATION SOFTWARE AND SERVICES
COMPANIES WITH TRAILING TWELVE MONTHS REVENUE
BETWEEN $10MM AND $100MM AND PROJECTED 12/31/02
REVENUE GROWTH LESS THAN 25%
EDGAR Online Inc. [EDGR] $2.85 $43,551 ($2,909) $46,460
TheStreet.com, Inc. [TSCM] 2.40 56,701 33,265 23,436
OneSource Information Services, Inc.[ONES] 7.61 99,782 18,162 81,620
Hoover's, Inc. [HOOV] 4.60 72,286 31,165 41,121
Multex.com, Inc. [MLTX] 4.45 148,082 41,798 106,284
Track Data Corporation [TRAC] (5) 1.80 98,460 32,681 65,779
MarketWatch.com, Inc.[MKTW] 3.85 64,636 37,637 26,999
COMTEX News Network, Inc. [CMTX.OB] 0.56 7,238 (153) 7,390
------------------------------------------------------------------------------------------------------
High $148,082 $41,798 $106,284
MEDIAN 68,461 31,923 43,791
Low 7,238 (2,909) 7,390
------------------------------------------------------------------------------------------------------
MANAGED WEB HOSTING COMPANIES WITH
TRAILING TWELVE MONTHS REVENUE
BETWEEN $50MM AND $250MM
Equinix, Inc. [EQIX] $1.30 $105,369 ($190,667) $296,036
Digex, Inc. [DIGX] 1.65 105,828 (194,626) 300,454
NaviSite, Inc. [NAVI] 0.31 26,967 (106,390) 133,357
AppliedTheory Corporation [ATHY] 0.10 2,899 (46,705) 49,604
------------------------------------------------------------------------------------------------------
High $105,828 ($46,705) $300,454
MEDIAN 66,168 (148,529) 214,696
Low 2,899 (194,626) 49,604
------------------------------------------------------------------------------------------------------
DIVINE, INC. (6) $0.67 $308,200 $83,232 $224,968
DIVINE, INC. MANAGEMENT ESTIMATES (7) $0.67 $308,902 $30,332 $278,569
NOTES:
(1) Valuation information calculated using the closing price on 03/11/02.
Projected financials calculated from selected analyst reports.
(2) TTM refers to the Trailing Twelve Months ending 12/31/01, except for
ATHY, which refers to the Trailing Twelve Months period ending 9/30/01,
and NAVI, which refers to the Trailing Twelve Months period ending
10/31/01. NAVI earnings for the Trailing Twelve Months ending 01/31/02
were excluded from this analysis because they were announced after market
close on 03/11/02, too late to be reflected in the stock price and
valuation metrics shown above.
(3) Not Meaningful (NM) when there are less than two data points.
(4) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and
cash equivalents.
(5) Diluted shares outstanding for TRAC estimated to be 54.7MM, derived from
net income and diluted earnings per share for the 3 months ended
12/31/01. Balance sheet information as of 9/30/01.
(6) To maintain consistency with public company comparables, divine, inc.
financials are taken from publicly available sources. TTM figures from
Trailing Twelve Months ending 12/31/01. divine, inc. market
capitalization calculated with common shares outstanding of 460.0MM as
reported in the earnings announcement on 03/07/02 for the year ending
12/31/01.
(7) divine, inc. management estimates represent Trailing Twelve Months ending
12/31/01. divine, inc. market capitalization calculated with diluted
shares outstanding of 461.0MM as provided by divine, inc. management as
of 02/28/02.
Page 30
CONFIDENTIAL
dIVINE, INC. PUBLIC COMPANY COMPARABLES ANALYSIS
($ Thousands Except Per Share Data)
VALUATION STATISTICS
---------------------------------------------------------------
PROJECTED
TTM TMC/R (2) TMC/LQA TTM TMC/GROSS 12/31/02 TMC/R
COMPANY (1) (3) REVENUE (3)(4) PROFIT (2)(3) (3)
- ---------------------------------------- ------------- -------------- ------------- --------------
TECHNOLOGY-FOCUSED INTERNET SERVICE COMPANIES WITH PROJECTED 2002 REVENUES BETWEEN $100MM AND $300MM
Digitas, Inc. [DTAS] 1.43 x 1.79 x 4.32 x 1.69 x
Sapient Corporation [SAPE] 1.05 1.36 3.67 1.48
Answerthink, Inc. [ANSR] 1.01 1.24 2.70 1.17
-------------------------------------------------------------------------------------------------------
High 1.43 x 1.79 x 4.32 x 1.69 x
Median 1.05 1.36 3.67 1.48
Low 1.01 1.24 2.70 1.17
-------------------------------------------------------------------------------------------------------
eCRM, WEB CONTENT MANAGEMENT & CALL CENTER SOFTWARE COMPANIES WITH PROJECTED
2002 REVENUES BETWEEN $100MM AND $300MM AND PROJECTED 12/31/02 REVENUE GROWTH LESS THAN 25%
Documentum, Inc. [DCTM] 5.06 x 4.69 x 7.24 x 4.31 x
Open Text Corporation [OTEX] 3.01 2.96 4.06 2.58
Interwoven, Inc.[IWOV] 2.98 3.43 4.26 2.84
E.piphany, Inc.[EPNY] 2.62 2.94 4.68 2.49
Kana Software, Inc. [KANA] 2.58 2.94 5.82 2.65
Vignette Corporation [VIGN] 1.98 2.80 2.83 2.69
BroadVision, Inc.[BVSN] 1.79 2.32 3.08 2.62
Art Technology Group, Inc.[ARTG] 0.71 0.79 1.11 0.76
-------------------------------------------------------------------------------------------------------
High 5.06 x 4.69 x 7.24 x 4.31 x
Median 2.60 2.94 4.16 2.63
Low 0.71 0.79 1.11 0.76
-------------------------------------------------------------------------------------------------------
DIVINE, INC. (7) 1.13 X 0.70 X 11.39 X NA
DIVINE, INC. MANAGEMENT ESTIMATES (8) 1.40 X 0.87 X 14.11 X 0.36 X
VALUATION STATISTICS
---------------------------------------------
PROJECTED
12/31/02 PROJECTED PROJECTED
TMC/GROSS 12/31/03 TMC/R 12/31/03 P/E
COMPANY (1) PROFIT (3) (3) (5) (6)
- ---------------------------------------- ---------- --------------- -------------
TECHNOLOGY-FOCUSED INTERNET SERVICE COMPANIES WITH PROJECTED 2002 REVENUES BETWEEN $100MM AND $300MM
Digitas, Inc. [DTAS] NA 1.45 x 21.07 x
Sapient Corporation [SAPE] NA 1.33 NOM
Answerthink, Inc. [ANSR] NA 0.95 13.36
------------------------------------------------------------------------------------
High NA 1.45 x 21.07 x
Median NA 1.33 17.22
Low NA 0.95 13.36
------------------------------------------------------------------------------------
ECRM, WEB CONTENT MANAGEMENT & CALL CENTER SOFTWARE COMPANIES WITH PROJECTED 2002
REVENUES BETWEEN $100MM AND $300MM AND PROJECTED 12/31/02 REVENUE GROWTH LESS THAN 25%
Documentum, Inc. [DCTM] 5.90 x 3.54 x 139.39 x
Open Text Corporation [OTEX] 3.54 NA NA
Interwoven, Inc.[IWOV] 3.99 2.31 47.88
E.piphany, Inc.[EPNY] 3.41 2.13 NM
Kana Software, Inc. [KANA] 3.42 2.18 53.53
Vignette Corporation [VIGN] 4.01 2.17 NOM
BroadVision, Inc.[BVSN] 4.11 NA NA
Art Technology Group, Inc.[ARTG] 1.09 NA NA
------------------------------------------------------------------------------------
High 5.90 x 3.54 x 139.39 x
Median 3.77 2.18 50.71
Low 1.09 2.13 NM
------------------------------------------------------------------------------------
DIVINE, INC. (7) NA NA NA
DIVINE, INC. MANAGEMENT ESTIMATES (8) 0.94 x 0.28 x 11.37 x
NOTES:
(1) Valuation information calculated using the closing price on 03/11/02.
Projected financials calculated from selected analyst reports.
(2) TTM refers to the Trailing Twelve Months ending 12/31/01.
(3) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and
cash equivalents.
(4) LQA refers to Last Quarter Annualized.
(5) Negative Operating Metric (NOM) when relavent operating metric is less
than zero. NOM figures are not included in the median calculation.
(6) Not Meaningful (NM) when net margin is less than 2%.
(7) To maintain consistency with public company comparables, divine, inc.
financials are taken from publicly available sources. TTM figures from
Trailing Twelve Months ending 12/31/01. divine, inc. market
capitalization calculated with common shares outstanding of 460.0MM as
reported in the earnings announcement on 03/07/02 for the year ending
12/31/01.
(8) divine, inc. management estimates represent Trailing Twelve Months ending
12/31/01.
divine, inc. market capitalization calculated with diluted
shares outstanding of 461.0MM as provided by divine, inc. management as
of 02/28/02.
Page 31
CONFIDENTIAL
DIVINE, INC. PUBLIC COMPANY COMPARABLES ANALYSIS
($ Thousands Except Per Share Data)
VALUATION STATISTICS
-------------------------------------------------------------------
PROJECTED
TTM TMC/R (2) TMC/LQA TTM TMC/GROSS 12/31/02 TMC/R
COMPANY (1) (3) REVENUE (3)(4) PROFIT (2)(3)(6) (3)
- ------------------------------------------ ------------- --------------- --------------- --------------
BUSINESS INFORMATION SOFTWARE AND
SERVICES COMPANIES WITH TRAILING
TWELVE MONTHS REVENUE BETWEEN $10MM
AND $100MM AND PROJECTED 12/31/02
REVENUE GROWTH LESS THAN 25%
EDGAR Online Inc. [EDGR] 2.72 x 2.67 x 3.69 x 2.27 x
TheStreet.com, Inc. [TSCM] 1.54 1.52 3.62 NA
OneSource Information Services, Inc. [ONES] 1.38 1.37 2.01 1.25
Hoover's, Inc. [HOOV] 1.31 1.30 2.08 NA
Multex.com, Inc. [MLTX] 1.10 1.19 1.55 1.12
Track Data Corporation [TRAC] (7) 1.06 1.18 NA NA
MarketWatch.com, Inc. [MKTW] 0.59 0.58 0.99 0.58
COMTEX News Network, Inc. [CMTX.OB] 0.50 0.58 0.72 NA
---------------------------------------------------------------------------------------------------------------
High 2.72 x 2.67 x 3.69 x 2.27 x
MEDIAN 1.21 1.25 2.01 1.18
Low 0.50 0.58 0.72 0.58
---------------------------------------------------------------------------------------------------------------
MANAGED WEB HOSTING COMPANIES WITH
TRAILING TWELVE MONTHS REVENUE
BETWEEN $50MM AND $250MM
Equinix, Inc. [EQIX] 4.67 x 4.24 x NOM 3.12 x
Digex, Inc. [DIGX] 1.40 1.36 3.19 x 1.40
NaviSite, Inc. [NAVI] 1.39 1.73 NOM NA
AppliedTheory Corporation [ATHY] 0.61 0.60 1.80 NA
---------------------------------------------------------------------------------------------------------------
High 4.67 x 4.24 x 3.19 x 3.12 x
MEDIAN 1.40 1.55 2.49 2.26
Low 0.61 0.60 1.80 1.40
---------------------------------------------------------------------------------------------------------------
DIVINE, INC. (8) 1.13 X 0.70 X 11.39 X NA
DIVINE, INC. MANAGEMENT ESTIMATES (9) 1.40 X 0.87 X 14.11 X 0.36 X
-------------------------------------------------------
PROJECTED
12/31/02 PROJECTED
TMC/GROSS 12/31/03 TMC/R PROJECTED
COMPANY (1) PROFIT (3) (5) (3) (5) 12/31/03 P/E (6)
- ------------------------------------------ -------------- -------------- ----------------
BUSINESS INFORMATION SOFTWARE AND
SERVICES COMPANIES WITH TRAILING
TWELVE MONTHS REVENUE BETWEEN $10MM
AND $100MM AND PROJECTED 12/31/02
REVENUE GROWTH LESS THAN 25%
EDGAR Online Inc. [EDGR] 2.90 x NA NA
TheStreet.com, Inc. [TSCM] NA NA NA
OneSource Information Services, Inc. [ONES] NA NA NA
Hoover's, Inc. [HOOV] NA NA NA
Multex.com, Inc. [MLTX] NA 1.02 x 63.57 x
Track Data Corporation [TRAC] (7) NA NA NA
MarketWatch.com, Inc. [MKTW] NA NA NA
COMTEX News Network, Inc. [CMTX.OB] NA NA NA
------------------------------------------------------------------------------------------
High NM NM NM
MEDIAN NM NM NM
Low NM NM NM
------------------------------------------------------------------------------------------
MANAGED WEB HOSTING COMPANIES WITH
TRAILING TWELVE MONTHS REVENUE
BETWEEN $50MM AND $250MM
Equinix, Inc. [EQIX] 56.93 x NA NA
Digex, Inc. [DIGX] NA 1.04 x NOM
NaviSite, Inc. [NAVI] NA NA NA
AppliedTheory Corporation [ATHY] NA NA NA
------------------------------------------------------------------------------------------
High NM NM NA
MEDIAN NM NM NA
Low NM NM NA
------------------------------------------------------------------------------------------
DIVINE, INC. (8) NA NA NA
DIVINE, INC. MANAGEMENT ESTIMATES (9) 0.94 X 0.28 X 11.37 X
NOTES:
(1) Valuation information calculated using the closing price on 03/11/02.
Projected financials calculated from selected analyst reports.
(2) TTM refers to the Trailing Twelve Months ending 12/31/01, except for
ATHY, which refers to the Trailing Twelve Months period ending 9/30/01,
and NAVI, which refers to the Trailing Twelve Months period ending
10/31/01. NAVI earnings for the Trailing Twelve Months ending 01/31/02
were excluded from this analysis because they were announced after market
close on 03/11/02, too late to be reflected in the stock price and
valuation metrics shown above.
(3) Total Market Capitalization (TMC) is defined as Equity Market
Capitalization (EMC) plus total debt and preferred stock less cash and
cash equivalents.
(4) LQA refers to Last Quarter Annualized.
(5) Not Meaningful (NM) when there are less than two data points.
(6) Negative Operating Metric (NOM) when relevant operating metric is less
than zero. NOM figures are not included in the median calculation.
(7) Diluted shares outstanding for TRAC estimated to be 54.7MM, derived from
net income and diluted earnings per share for the 3 months ended
12/31/01. Balance sheet information as of 9/30/01.
(8) To maintain consistency with public company comparables, divine, inc.
financials are taken from publicly available sources. TTM figures from
Trailing Twelve Months ending 12/31/01. divine, inc. market
capitalization calculated with common shares outstanding of 460.0MM as
reported in the earnings announcement on 03/07/02 for the year ending
12/31/01.
(9) divine, inc. management estimates represent Trailing Twelve Months ending
12/31/01. divine, inc. market capitalization calculated with diluted
shares outstanding of 461.0MM as provided by divine, inc. management as
of 02/28/02.
Page 32
CONFIDENTIAL
DESCRIPTIONS OF PUBLIC COMPANY COMPARABLES
Technology-Focused Internet Service Companies with Projected 2002 Revenues
between $100MM and $300MM
COMPANY DESCRIPTION
Answerthink, Inc. Answerthink, Inc. provides consulting and
technology solutions focused on the Internet and
eCommerce. Core function areas include benchmarking
and research, interactive marketing, business
applications and technology integration.
Digitas, Inc. Digitas, Inc. provides strategy, technology,
marketing, and performance measurement solutions
designed to leverage a client's brand position. The
Company builds Websites, databases and linkages and
provides marketing services.
Sapient Corporation Sapient Corporation provides business and
technology consulting services to large
organizations. The Company delivers its solutions
through seven industry units: financial services,
technology and industrial services, media,
entertainment and communications, travel, retail
and consumer products, public services and energy
services.
Page 33
CONFIDENTIAL
DESCRIPTIONS OF PUBLIC COMPANY COMPARABLES
eCRM, Web Content Management & Call Center Software Companies with Projected
2002 Revenues between $100MM and $300MM and Projected 12/31/02 Revenue Growth
Less Than 25%
COMPANY DESCRIPTION
Art Technology Group, Inc. Art Technology Group, Inc. offers an integrated
suite of Internet customer relationship management
and eCommerce software applications, as well as
related application development, integration and
support services.
BroadVision, Inc. BroadVision, Inc. offers an integrated suite of
packaged applications for conducting eBusiness
interactions, transactions and services. The
Company's eBusiness application suite enables a
corporation to manage relationships with customers,
suppliers, partners, distributors and employees.
Documentum, Inc. Documentum, Inc. offers a Web-based content
management platform that enables companies to
create, deliver, publish and personalize content in
various formats across eBusiness applications.
E.piphany, Inc. E.piphany, Inc. offers a suite of customer
relationship management (CRM) software solutions.
These CRM solutions provide capabilities for the
analysis of customer data, the creation of inbound
and outbound marketing campaigns and the execution
of sales and service customer interactions.
Interwoven, Inc. Interwoven, Inc. provides XML-based enterprise
content management software. Its content
infrastructure product suite includes content
aggregation, content collaboration, content
management, content intelligence and content
distribution.
Kana Software, Inc. Kana Software, Inc. develops, markets and supports
customer communication software products and
services for eBusiness. The Company's software
enables corporations to manage high volumes of
inbound and outbound e-mail and Web-based
communications.
Open Text Corporation Open Text Corporation provides collaborative
knowledge management application software for use
on intranets, extranets and the Internet. This
software enables users to find electronically
stored information and work together in creative
processes.
Vignette Corporation Vignette Corporation provides content management
applications enabling companies to interact online
with their customers, employees and partners. The
Company's software combines content management with
integration and analysis applications.
Page 34
CONFIDENTIAL
DESCRIPTIONS OF PUBLIC COMPANY COMPARABLES
Business Information Software and Services Companies with Trailing Twelve Months
Revenue between $10MM and $100MM and Projected 12/31/02 Revenue Growth Less Than
25%
COMPANY DESCRIPTION
COMTEX News Network, Inc. COMTEX News Network, Inc. provides real-time news
content to business information retailers serving
the financial services, individual and
institutional investor, wireless and corporate
information markets. The Company's network of
distributors includes Websites and corporate
information applications.
EDGAR Online Inc. EDGAR Online, Inc. provides business, financial and
competitive information about public companies over
the Internet. The Company derives the information
from the SEC's filing system and provides it to
corporations, Websites and individuals on a
real-time basis.
Hoover's, Inc. Hoover's, Inc. publishes information about
companies, industries and executives. The company
maintains numerous websites and publishes CD-ROMS
and reference books.
MarketWatch.com, Inc. MarketWatch.com, Inc. provides real-time business
news, financial programming and analytic tools
through its Websites, CBS.MartketWatch.com and
BigCharts.com.
Multex.com, Inc. Multex.com, Inc. provides investment information
and technology solutions to the financial services
industry. The Company's solutions allow clients to
disseminate information to internal and external
audiences based on client-defined access and
authentication rules in a secure environment.
OneSource Information OneSource Information Services, Inc. provides
Services, Inc. companies with Web-based access to business and
financial information. The Company's Business
Browser product line integrates corporate and
market data numerous information providers and
sources of content.
TheStreet.com, Inc. TheStreet.com, Inc. is a Web-based provider of
financial news and commentary. The Company's
content is available across diverse product
offerings, including the Internet, print media,
books and conferences.
Track Data Corporation Track Data Corporation provides real-time financial
market data, fundamental research, charting and
analytical services to institutional and individual
investors through telecommunication lines and the
Internet.
Page 35
CONFIDENTIAL
DESCRIPTIONS OF PUBLIC COMPANY COMPARABLES
Managed Web Hosting Companies with Trailing Twelve Months Revenue Between $50MM
and $250MM
COMPANY DESCRIPTION
Applied Theory AppliedTheory Corporation offers a suite of managed
Corporation hosting, Internet solutions, connectivity and
security services to large enterprises.
Digex, Inc. Digex, Inc. provides managed web hosting services
and related value-added services, such as firewall
management, stress testing and consulting services,
including capacity and migration planning and
database optimization.
Equinix, Inc. Equinix, Inc. designs, builds and operates neutral
Internet business exchange centers where
enterprises and Internet businesses place their
equipment and network facilities in order to
interconnect with a competitive choice of bandwidth
providers, Internet service providers (ISPs), site
management companies and content distribution
companies.
NaviSite, Inc. NaviSite, Inc. provides managed website and
application hosting services. The Company's managed
application hosting services allow businesses to
outsource the deployment, configuration, hosting,
management and support of their Websites and
Internet applications.
Page 36
CONFIDENTIAL
PURCHASE ANALYSIS: DIVINE, INC. ACQUIRES DELANO TECHNOLOGY CORPORATION
Transaction Parameters
($ Thousands, except per share data)
DEAL STRUCTURE
Purchase Price (Equity): $ 37,070
Premium Paid to Market Over Spot Price as of 3/11/02: 6.04%
Purchase Price Per Share Based Upon divine, inc. 3/11/02 Closing Price: $ 0.80
Exchange Ratio: 1.1870 x
Acquisition Expenses (1): $ 2,500
Total Acquisition Cost: $ 39,570
Cash Used in Acquisition: $ 2,500
Debt Used in Acquisition: $ 0
Stock Used in Acquisition: $ 37,070
Projected Closing Date: 6/30/02
divine, inc. PROFILE
Closing Price as of 3/11/02: $ 0.67
20-Day Weighted Avg. Share Price as of 3/11/02: $ 0.63
Diluted Shares Outstanding (2): 461,048
Foregone Interest Rate on Cash (3): 5.3%
Forward FY2002 PE: NM
Forward FY2003 PE: 11.37 x
SYNERGY ASSUMPTIONS
Net Synergies in Quarter Ending 9/30/2002: 0.0%
Net Synergies in Quarter Ending 12/31/2002: 0.0%
Net Synergies in FY2003: 0.0%
ACCOUNTING PARAMETERS
Premium Paid to Book Value: $ 25,273
Premium Allocated to Purchased R&D: 20.0%
Transaction Taxable to Seller on Corporate Level? (4) no
DELANO TECHNOLOGY CORPORATION PROFILE
Closing Price as of 3/11/02: $ 0.75
20-Day Weighted Avg. Share Price as of 3/11/02: $ 0.75
Common Shares Outstanding (2): 43,430
Common Share Equivalents Based on Offer Price Per Share (5): 3,182
Shares to be Acquired: 46,612
Book Value: $ 14,297
Forward FY2002 PE: NM
Forward FY2003 PE: 13.53 x
PRO FORMA ENTITY PROFILE
Shares Issued for Delano Technology Corporation Common Shares Outstanding: 51,550
Common Share Equivalents Issued for Delano Technology Corporation Options: (5) 3,777
Total Incremental Shares Issued: 55,327
Pro Forma Shares Outstanding: 516,375
Buyer Percent Ownership: 89.3%
Seller Percent Ownership: 10.7%
NOTES:
(1) Acquisition expenses include the following: investment banking and legal
fees for Delano Technology Corporation, $1.25MM and $0.5MM, respectively;
and for divine, inc., $0.0MM and $0.75MM, respectively (Broadview
estimates).
(2) divine, inc. diluted shares outstanding from management as of 02/28/02.
Delano Technology Corporation common shares outstanding from management
as of 03/12/02.
(3) 10-Year Treasury Bond rate as of 03/11/02.
(4) Purchases of stock are not taxable to the seller at the corporate level,
purchases of assets are taxable to the seller.
(5) Calculated using the treasury method based on summary option table
provided by management as of 03/12/02 using an offer price of $0.80.
Page 37
CONFIDENTIAL
PURCHASE ANALYSIS: DIVINE, INC. ACQUIRES DELANO TECHNOLOGY CORPORATION
Pro Forma Combined Quarterly Operating Statements
($ Thousands, except per share data)
QUARTER ENDING FYE
------------------------------------------------------------------------- ----------------
3/31/2002 6/30/2002 9/30/2002 12/31/2002 12/31/2002
BUYER STANDALONE (1)
Revenue $154,550 $ 172,950 $ 203,450 $ 236,450 $ 767,400
EBITDA (53,400) (26,100) (7,100) 13,300 (73,300)
Net Income (2) (64,200) (38,000) (19,800) (200) (122,200)
Diluted EPS (14.01(cent)) (7.94(cent)) (3.85(cent)) (0.04(cent)) (24.73(CENT))
Diluted Shares Outstanding (3) 458,100 478,400 514,000 526,100 494,150
SELLER STANDALONE (4)
Revenue $ 3,200 $ 1,600 $ 2,100 $ 3,100 $ 10,000
EBITDA (1,100) (1,800) (1,600) (1,000) (5,500)
Net Income (2) (1,800) (2,400) (2,200) (1,700) (8,100)
Diluted EPS (4.53(cent)) (5.61(cent)) (5.13(cent)) (3.95(cent)) (19.25(CENT))
Diluted Shares Outstanding (3) 39,700 42,800 42,850 43,000 42,088
ACQUISITION EFFECTS
Net Synergies $ 0 $ 0 $ 0 $ 0
Foregone Interest On Cash 0 (33) (33) (66)
Premium Allocated to Purchased R&D (5,055) NA NA (5,055)
----------- ----------- ----------- ---------
Total (5,055) (33) (33) (5,121)
PRO FORMA COMBINED ENTITY
Revenue $ 172,950 $ 205,550 $ 239,550 $ 772,600
EBITDA (31,155) (8,700) 12,300 (80,955)
Net Income (2) (43,055) (22,033) (1,933) (131,221)
Diluted EPS (9.00(cent)) (3.90(cent)) (0.33(cent)) (25.24(CENT))
Diluted EPS Excluding Purchased
R&D Write-off (7.94(cent))
Diluted Shares Outstanding (5) 478,400 565,550 577,650 519,925
INCREASE (DECREASE) IN EPS (5) (1.06(cent)) (0.04(cent)) (0.30(cent)) (0.51(CENT))
ACCRETION (DILUTION) (6) NM NM NM NM
INCREASE (DECREASE) IN EPS EXCLUDING
PURCHASED R&D WRITE-OFF (5) 0.00(cent) 0.46(cent)
ACCRETION (DILUTION) EXCLUDING
PURCHASED R&D WRITE-OFF (6) NM NM
QUARTER ENDING FYE
------------------------------------------------------------------ ------------
3/31/2003 6/30/2003 9/30/2003 12/31/2003 12/31/2003
BUYER STANDALONE (1)
Revenue $ 240,025 $ 246,867 $ 251,980 $ 260,400 $ 999,272
EBITDA 15,378 19,973 22,817 28,946 87,115
Net Income (2) 1,793 6,388 9,232 15,361 32,774
Diluted EPS 0.33(cent) 1.16(cent) 1.64(cent) 2.67(cent) 5.89(CENT)
Diluted Shares Outstanding (3) 538,000 548,500 563,000 575,400 556,225
SELLER STANDALONE (4)
Revenue $ 4,600 $ 4,900 $ 5,900 $ 6,200 $ 21,600
EBITDA 700 600 1,540 1,540 4,380
Net Income (2) 200 100 1,140 1,140 2,580
Diluted EPS 0.43(cent) 0.22(cent) 2.44(cent) 2.44(cent) 5.54(CENT)
Diluted Shares Outstanding (3) 46,333 46,484 46,635 46,787 46,560
ACQUISITION EFFECTS
Net Synergies $ 0 $ 0 $ 0 $ 0 $ 0
Foregone Interest On Cash (33) (34) (35) (35) (137)
Premium Allocated to Purchased R&D NA NA NA NA NA
--------- --------- --------- ----------- ----------
Total (33) (34) (35) (35) (137)
PRO FORMA COMBINED ENTITY
Revenue $ 244,625 $ 251,767 $ 257,880 $ 266,600 $1,020,872
EBITDA 16,078 20,573 24,357 30,486 91,495
Net Income (2) 1,960 6,454 10,338 16,466 35,218
Diluted EPS 0.33(cent) 1.07(cent) 1.67(cent) 2.61(cent) 5.76(CENT)
Diluted EPS Excluding Purchased R&D
Write-off
Diluted Shares Outstanding (5) 593,327 603,827 618,327 630,727 611,552
INCREASE (DECREASE) IN EPS (5) (0.00(cent)) (0.10(cent)) 0.03(cent) (0.06(cent)) (0.13(CENT))
ACCRETION (DILUTION) (6) (0.9%) (8.2%) 2.0% (2.2%) (2.3%)
INCREASE (DECREASE) IN EPS EXCLUDING
PURCHASED R&D WRITE-OFF (5)
ACCRETION (DILUTION) EXCLUDING
PURCHASED R&D WRITE-OFF (6)
NOTES:
(1) divine, inc. projected financials from management estimates.
(2) Net income assumes no taxes paid due to usage of NOLs. Combined net
income is unaffected by Delano Technology Corporation NOLs in FY2003
because of the magnitude of divine, inc.'s NOLs.
(3) divine, inc. diluted shares outstanding calculated using the treasury
method as provided by management. Delano Technology Corporation shares
outstanding represent basic outstanding when net income is negative.
(4) Delano Technology Corporation projected financials based on management's
view of the business on a subscription-based revenue model.
(5) Combined entity basic and diluted shares outstanding calculated by adding
shares issued to projected buyer basic and diluted shares outstanding.
(6) Accretion (dilution) in EPS not meaningful if proforma combined EPS
is negative and shares are issued in the transaction.
Page 38
CONFIDENTIAL
PURCHASE ANALYSIS: divine, inc. ACQUIRES DELANO TECHNOLOGY CORPORATION
Sensitivity Analysis - Accretion (Dilution) Excluding Purchased R&D Write-Off
Based on Net Synergies vs. Offer Price Per Share (1)
($ Thousands, except per share data)
QUARTER ENDING 9/30/2002
NET SYNERGIES (2) (3)
0.0% 5.0% 10.0% 15.0%
Aggregate Offer Price Shares Issued ---- ---- ----- -----
Consideration Per Share for Common $0 $185 $370 $555
------------- ----------- -------------- ---- ---- ----- -----
$ 31,676 67.96(CENT) 44,050 NM NM NM NM
$ 32,755 70.27(CENT) 45,550 NM NM NM NM
$ 33,833 72.59(CENT) 47,050 NM NM NM NM
$ 34,912 74.90(CENT) 48,550 NM NM NM NM
$ 35,990 77.21(CENT) 50,050 NM NM NM NM
Current divine, inc. Offer $ 37,069 79.53(CENT) 51,550 NM NM NM NM
$ 38,148 81.84(CENT) 53,050 NM NM NM NM
$ 39,226 84.16(CENT) 54,550 NM NM NM NM
$ 40,305 86.47(CENT) 56,050 NM NM NM NM
$ 41,384 88.78(CENT) 57,550 NM NM NM NM
$ 42,462 91.10(CENT) 59,050 NM NM NM NM
$ 43,541 93.41(CENT) 60,550 NM NM NM NM
QUARTER ENDING 9/30/2002
NET SYNERGIES (2) (3)
20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
$740 $925 $1,110 $1,295 $1,480 $1,665
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
Current divine, inc. Offer NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
QUARTER ENDING 12/31/2002
NET SYNERGIES (2) (3)
0.0% 5.0% 10.0% 15.0%
Aggregate Offer Price Shares Issued
Consideration Per Share for Common $0 $205 $410 $615
$ 31,676 67.96(CENT) 44,050 NM NM NM NM
$ 32,755 70.27(CENT) 45,550 NM NM NM NM
$ 33,833 72.59(CENT) 47,050 NM NM NM NM
$ 34,912 74.90(CENT) 48,550 NM NM NM NM
$ 35,990 77.21(CENT) 50,050 NM NM NM NM
Current divine, inc. Offer $ 37,069 79.53(CENT) 51,550 NM NM NM NM
$ 38,148 81.84(CENT) 53,050 NM NM NM NM
$ 39,226 84.16(CENT) 54,550 NM NM NM NM
$ 40,305 86.47(CENT) 56,050 NM NM NM NM
$ 41,384 88.78(CENT) 57,550 NM NM NM NM
$ 42,462 91.10(CENT) 59,050 NM NM NM NM
$ 43,541 93.41(CENT) 60,550 NM NM NM NM
QUARTER ENDING 12/31/2002
NET SYNERGIES (2) (3)
20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
$820 $1,025 $1,230 $1,435 $1,640 $1,845
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
Current divine, inc. Offer NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NM NM NM NM NM NM
NOTES:
(1) Increase (decrease) in EPS not meaningful if proforma combined EPS is
negative and shares are issued in the transaction.
(2) Net synergies calculated as a percent of Delano Technology Corporation's
direct and operating costs and are net of any expenses generated by cost
savings measures.
(3) Accretion/dilution reflects effective acquisition date of 6/30/02.
Page 39
CONFIDENTIAL
PURCHASE ANALYSIS: divine, inc. ACQUIRES DELANO TECHNOLOGY CORPORATION
Sensitivity Analysis - Accretion (Dilution) Based on Net Synergies vs. Offer
Price Per Share
(Thousands, except per share data)
FY 2003
NET SYNERGIES (1) (2)
0.0% 5.0% 10.0% 15.0%
Aggregate Offer Price Shares Issued
Consideration Per Share for Common $0 $861 $1,722 $2,583
$ 31,676 67.96(CENT) 44,050 (0.06(cent) 0.08(cent) 0.22(cent) 0.37(cent)
$ 32,755 70.27(CENT) 45,550 (0.08(cent) 0.07(cent) 0.21(cent) 0.35(cent)
$ 33,833 72.59(CENT) 47,050 (0.09(cent) 0.05(cent) 0.19(cent) 0.33(cent)
$ 34,912 74.90(CENT) 48,550 (0.11(cent) 0.04(cent) 0.18(cent) 0.32(cent)
Current divine, $ 35,990 77.21(CENT) 50,050 (0.12(cent) 0.02(cent) 0.16(cent) 0.30(cent)
inc. Offer .............. $ 37,069 79.53(CENT) 51,550 (0.13(cent) 0.01(cent) 0.15(cent) 0.29(cent)
$ 38,148 81.84(CENT) 53,050 (0.15(cent) 0.01(cent) 0.13(cent) 0.27(cent)
$ 39,226 84.16(CENT) 54,550 (0.16(cent) (0.02(cent) 0.12(cent) 0.26(cent)
$ 40,305 86.47(CENT) 56,050 (0.18(cent) (0.04(cent) 0.10(cent) 0.24(cent)
$ 41,384 88.78(CENT) 57,550 (0.19(cent) (0.05(cent) 0.09(cent) 0.23(cent)
$ 42,462 91.10(CENT) 59,050 (0.20(cent) (0.06(cent) 0.07(cent) 0.21(cent)
$ 43,541 93.41(CENT) 60,550 (0.22(cent) (0.08(cent) 0.06(cent) 0.20(cent)
FY 2003
NET SYNERGIES (1) (2)
20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
$3,444 $4,305 $5,166 $6,027 $6,888 $7,749
0.51(cent) 0.65(cent) 0.79(cent) 0.94(cent) 1.08(cent) 1.22(CENT)
0.49(cent) 0.63(cent) 0.78(cent) 0.92(cent) 1.06(cent) 1.20(CENT)
0.48(cent) 0.62(cent) 0.76(cent) 0.90(cent) 1.04(cent) 1.19(CENT)
0.46(cent) 0.60(cent) 0.74(cent) 0.89(cent) 1.03(cent) 1.17(CENT)
Current divine, 0.45(cent) 0.59(cent) 0.73(cent) 0.87(cent) 1.01(cent) 1.15(CENT)
inc. Offer ............. 0.43(cent) 0.57(cent) 0.71(cent) 0.85(cent) 0.99(cent) 1.13(CENT)
0.41(cent) 0.55(cent) 0.70(cent) 0.84(cent) 0.98(cent) 1.12(CENT)
0.40(cent) 0.54(cent) 0.68(cent) 0.82(cent) 0.96(cent) 1.10(CENT)
0.38(cent) 0.52(cent) 0.66(cent) 0.80(cent) 0.94(cent) 1.08(CENT)
0.37(cent) 0.51(cent) 0.65(cent) 0.79(cent) 0.93(cent) 1.07(CENT)
0.35(cent) 0.49(cent) 0.63(cent) 0.77(cent) 0.91(cent) 1.05(CENT)
0.34(cent) 0.48(cent) 0.62(cent) 0.75(cent) 0.89(cent) 1.03(CENT)
NOTES:
(1) Net synergies calculated as a percent of Delano Technology Corporation's
direct and operating costs and are net of any expenses generated by cost
savings measures.
(2) Accretion/dilution reflects effective acquisition date of 6/30/02.
Page 40
DELANO TECHNOLOGY CORPORATION
FAIRNESS OPINION DOCUMENTATION
MARCH 12, 2002
BROADVIEW INTERNATIONAL LLC
Silicon Valley New York Boston London
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION
FAIRNESS OPINION DOCUMENTATION
Table of Contents
TAB
Fairness Opinion Letter 1
Valuation Considerations 2
Summary Explanation of Valuation Methodology 3
Valuation Analysis 4
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION FAIRNESS OPINION
VALUATION CONSIDERATIONS
In reviewing the business of Delano Technology Corporation. ("Delano" or the
"Company"), along with the current activity within the information technology
("IT"), communications and media industries, we have identified the following
factors, which, among others, may have a material impact on valuation.
FACTORS POSITIVELY AFFECTING THE VALUE OF DELANO
LARGE AND GROWING WEB-BASED CRM ("ECRM") MARKET OPPORTUNITY - According to
International Data Corporation ("IDC"), the overall eCRM applications market
exhibits strong long-term growth, scaling to over $14 billion dollars by 2005,
representing a Compounded Annual Growth Rate ("CAGR") of 17.7% since 2000 (IDC,
December 2001). This growth is driven by customer demand for front-office
technologies that integrate sales, marketing and customer service. Delano
products primarily address the Marketing and Customer Support software segments
of the eCRM market, which have shown strong growth in prior years. IDC reports
that the Marketing Applications segment grew 110% to $1.3 billion in 2000 as
compared to 1999, while the Customer Support and Contact Center Software segment
grew 72% to $2.3 billion in 2000. Given its eCRM product focus, Delano's
technologically innovative solutions position the Company to capitalize on
long-term market opportunities and provide the Company with potential to
increase revenue both as a result of market growth and through increased market
share.
DIFFERENTIATED TECHNOLOGY PLATFORM - Delano provides a suite of packaged e-
marketing, e-service and advanced analytics applications built on its robust,
proprietary rapid application development platform. This platform allows users
to create and modify business processes through rules-based software that
diminishes the need for hard-coded custom applications written by professional
programmers. As a result, management believes its eCRM suite enables enterprises
to build highly customized eBusiness applications that automate business
processes with shorter time to market and lower cost of ownership relative to
other software providers.
HIGH QUALITY CUSTOMER BASE - Since its inception in 1998, Delano has established
a blue chip customer base of Fortune 500 and Global 2000 enterprises across
various industries. The Company has developed entrenched relationships with over
100 enterprises including Ericsson, Charles Schwab, Amdocs, i2 Technologies,
Warner Music Group, Compaq, Mackenzie Financial, United Way, YMCA, and
DaimlerChrysler. These enterprise customers depend on the Company to deliver
scalable, technologically
1
CONFIDENTIAL
innovative solutions to support large-scale eCRM deployments. Delano expects
that its existing customer base will provide an ongoing source of revenue in
fiscal years 2002 and 2003. According to management, approximately 50% of
revenue was derived from existing accounts for the three months ending December
31, 2001.
SUCCESSFUL CORPORATE RESTRUCTURING - Delano has completed three major
restructurings over the past 12 months to bring its expense base in line with
its rapidly declining quarterly revenues and to preserve cash. As part of its
expense reduction efforts, the Company reduced headcount from 490 to 124 people,
rationalized its R&D efforts and designed its sales and marketing efforts to
focus its resources on selected vertical markets. As a result, Delano achieved
profitability in the quarter ended December 31, 2001. With a net cash balance of
$12.5 million as of December 31, 2001 and continued refinement to the expense
structure, management believes the Company has established an operating model
and cash reserves sufficient to maintain viable operations in the current
economic downturn.
2
CONFIDENTIAL
FACTORS NEGATIVELY AFFECTING THE VALUE OF DELANO
STRONG COMPETITION AND NEED FOR GREATER CRITICAL MASS - The eCRM market is
highly competitive and is experiencing consolidation. Many of the leading
vendors, such as Siebel, Oracle, SAP and PeopleSoft, have greater product
penetration, higher revenues and significantly greater equity market
capitalization than Delano. In addition, potential customers increasingly face
the dilemma of purchasing software licenses from relatively focused product
lines such as Delano's or from larger vendors with greater breadth of product
offerings, larger research and development budgets and more extensive customer
support organizations. As a result, the Company is likely to experience a
greater need for critical mass and capital resources to compete effectively in
this rapidly changing market.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS - To date, a significant portion of
Delano's total revenues has been derived from sales to a small number of
clients. In the three months ended December 31, 2001, two customers accounted
for 44% of the Company's total revenues. Management expects that the Company
will continue to be dependent upon a limited number of clients for a significant
portion of revenue in future periods. As a result, a reduction, delay or
cancellation in orders from clients, including reductions or delays due to
market, economic or competitive conditions, could adversely affect Delano's
business.
POOR RECENT FINANCIAL PERFORMANCE - In the last four quarters, the Company had
an operating loss of more than $34 million, excluding extraordinary charges, and
since inception has generated $80 million in cumulative losses, excluding
extraordinary charges. The Company's losses resulted primarily from building a
cost structure in anticipation of revenue that never materialized, as well as
from competitive pressures and the overall economic downturn's impact on demand
for eCRM software solutions. Revenue has declined dramatically during this same
period. In particular, trailing 12 months revenue as of December 31, 2001 was
down 33.7% to $18.2 million from $27.5 million in the previous period.
Additionally, Delano has experienced a drop in license revenues as a percent of
total revenues, with license revenues accounting for 60.5% of total trailing 12
months revenues, versus 88.0% for the previous period. This decrease in license
sales as a component of total revenue caused a decrease in gross margins to
66.5%, 17 percentage points less than the previous period. Delano's poor
financial performance led to several restructuring efforts over the past 12
months. While Delano's restructuring efforts have helped it to reach
profitability, the Company will still require a significant improvement in
revenue growth and continued improvements in operating efficiency in order to
scale the business in a manner necessary to maintain profitability. There is no
guarantee that Delano will succeed in achieving these objectives.
SHORT-TERM ECRM MARKET GROWTH SLOWED - Although long-term growth in the eCRM
market is expected to be strong, in the short term the eCRM market is expected
to grow at a much slower pace than historical rates. According to Gartner,
overall eCRM market revenue growth declined 8% in 2001, will remain flat in 2002
and will increase slightly in 2003 (Gartner, January 2002). These lower
short-term growth rates reflect a maturing
3
CONFIDENTIAL
eCRM market and an economic environment that limits demand for new software
applications. This decrease in short-term growth may impact Delano's ability to
execute upon its strategic and financial plans.
ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL - Due to the recent restructuring of
the Company, Delano has undergone a significant business transition, including
massive headcount reduction and additional voluntary employee turnover, during
the past 12 months. This transition placed a significant strain on the Company's
resources and created instability among key management, development, marketing
and sales positions. The future success of Delano will depend upon the continued
service of key officers, particularly Vikas Kapoor, Chief Executive Officer, and
the ability to hire and retain talent as the Company returns to growth mode.
Going forward, the inability to attract and retain key personnel could
significantly hamper Delano's ability to meet its strategic and financial
objectives.
POTENTIAL NASDAQ COMPLIANCE ISSUES - Delano is currently in compliance with all
NASDAQ listing requirements. However, given its recent historical trading levels
of at or below $1.00, the Company is at risk of non-compliance with the minimum
$1.00 per share requirement. Should the Company's stock close below $1.00 for 30
consecutive trading days, the Company may be de-listed from the NASDAQ and
forced to seek listing on the NASDAQ SmallCap Market. This NASDAQ de-listing
would result in decreased liquidity for Delano's shareholders and could
significantly impair the Company's public market value.
4
CONFIDENTIAL
DELANO TECHNOLOGY CORPORATION FAIRNESS OPINION
SUMMARY EXPLANATION OF
VALUATION METHODOLOGY
The following is a summary explanation of the various sources of information and
valuation methodologies employed by Broadview International LLC ("Broadview") in
valuing Delano Technology Corporation ("Delano" or the "Company") in conjunction
with rendering its Fairness Opinion regarding the transaction with divine, inc.
("divine"). Broadview employed analyses based on: (1) historical stock price
performance; (2) public company comparables; (3) transaction comparables; (4)
transaction premiums paid; (5) present value of future potential share prices;
(6) exchange ratio; (7) relative contribution; (8) evaluation of divine public
company comparables and stock trading history; and (9) pro forma combination to
determine the fairness of the Agreement.
DELANO STOCK PERFORMANCE ANALYSIS - For comparative purposes, Broadview examined
the following:
1) Delano common stock weekly historical volume and trading purposes
from February 11, 2000 through March 8, 2002;
2) Delano common stock daily historical volume and trading prices
from March 8, 2001 through March 11, 2002; and
3) Relative daily closing prices for an index of public companies
deemed comparable to Delano vs. Delano and the NASDAQ Composite
from March 8, 2001 through March 11, 2002.
PUBLIC COMPANY COMPARABLES ANALYSIS - Ratios of a company's common stock share
price and Equity Market Capitalization ("EMC"), adjusted for cash and debt when
appropriate, to selected historical and projected operating metrics indicate the
value public equity markets place on companies in a particular market segment. A
select group of companies are comparable to Delano based on market focus,
business model and size. Broadview reviewed twelve public company comparables in
the North American eCRM Software Solution industry with Trailing Twelve Month
("TTM") revenue less than $75 million and TTM Revenue Growth less than 50% from
a financial point of view, including each company's TTM Revenue; Last Quarter
Revenue; TTM Revenue Growth; TTM Gross Margin; Last Quarter Gross Margin;
Projected 03/31/02 Revenue; Projected 03/31/02 Gross Margin; Projected 12/31/02
Revenue; Projected 12/31/02 Gross Margin; Projected 12/31/02 Earnings Per Share
("EPS"); Share Price as of 03/11/02; EMC; Net Cash (defined as cash minus debt);
Total Market Capitalization ("TMC"
5
CONFIDENTIAL
defined as EMC minus Net Cash); TMC/TTM Revenue ratio ("TTM TMC/R"); TMC/Last
Quarter Annualized Revenue ratio ("TMC/LQA Revenue"); TMC/TTM Gross Profit ratio
("TTM TMC/Gross Profit"); TMC/Projected 03/31/02 Revenue ratio ("Projected
03/31/02 TMC/R"); TMC/Projected 03/31/02 Gross Profit ratio ("Projected 03/31/02
TMC/Gross Profit"); TMC/Projected 12/31/02 Revenue ratio ("Projected 12/31/02
TMC/R"); TMC/Projected 12/31/02 Gross Profit ratio ("Projected 12/31/02
TMC/Gross Profit"); and Share Price/Projected 12/31/02 EPS ratio ("Projected
12/31/02 P/E"). The public company comparables were selected from the Broadview
Barometer, a proprietary database of publicly-traded information technology
("IT"), communications and media companies maintained by Broadview and broken
down by industry segment.
In order of descending TTM TMC/R, the public company comparables consist of:
1) eGain Communications Corporation;
2) Digital Impact, Inc.;
3) ClickSoftware Technologies, Ltd.;
4) Click Commerce, Inc.;
5) Accrue Software, Inc.;
6) ServiceWare Technologies, Inc.;
7) Primus Knowledge Solutions, Inc.;
8) Blue Martini Software, Inc.;
9) Xchange, Inc.;
10) FirePond, Inc.;
11) Selectica, Inc.; and
12) Net Perceptions, Inc.
These comparables exhibit the following medians and ranges for the applicable
multiples:
Median
Multiple Range of Multiples
TTM TMC/R 0.57 x NM - 2.52 x
TMC/LQA Revenue 0.53 x NM - 2.84 x
TTM TMC/Gross Profit 1.36 x NM - 8.87 x
Projected 03/31/02 TMC/R 1.27 x NM - 2.68 x
Projected 03/31/02 TMC/Gross Profit 1.71 x NM - 4.60 x
Projected 12/31/02 TMC/R 1.15 x NM - 2.32 x
Projected 12/31/02 TMC/Gross Profit 1.17 x NM - 3.54 x
Projected 12/31/02 P/E NM NM - NM
Note: NM refers to not meaningful.
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CONFIDENTIAL
These comparables imply the following medians and ranges for per share value:
Median
Implied Value Range of Implied Values
TTM TMC/R $0.49 NM -- $1.26
TMC/LQA Revenue $0.46 NM -- $1.28
TTM TMC/Gross Profit $0.62 NM -- $2.58
Projected 03/31/02 TMC/R $0.69 NM -- $1.16
Projected 03/31/02 TMC/Gross Profit $0.64 NM -- $1.27
Projected 12/31/02 TMC/R $0.78 NM -- $1.29
Projected 12/31/02 TMC/Gross Profit $0.67 NM -- $1.48
Projected 12/31/02 P/E NM NM -- NM
Note: NM refers to not meaningful.
TRANSACTION COMPARABLES ANALYSIS - Ratios of Equity Price, adjusted for the
seller's cash and debt when appropriate, to selected historical operating
metrics indicate the value strategic and financial acquirers have been willing
to pay for companies in a particular market segment. A handful of companies
involved in recent transactions are comparable to Delano based on market focus,
business model and size. Broadview reviewed nine comparable merger and
acquisition ("M&A") transactions announced from January 1, 2001 through March
11, 2002 involving North American sellers in the eCRM Software Solution Provider
industry, from a financial point of view, including each transaction's: Adjusted
Price (Equity Price plus debt minus cash); Seller TTM Revenue; and Adjusted
Price/TTM Revenue ("P/R") ratio. Transactions were selected from Broadview's
proprietary database of published and confidential M&A transactions in the IT,
communications and media industries. In order of descending P/R multiple, the
transactions used are the acquisition of:
1) WebTrends Corporation by NetIQ Corporation;
2) YOUcentric, Inc. by J.D. Edwards & Company;
3) Interact Commerce Corporation by Sage Group Plc;
4) MessageMedia, Inc. by DoubleClick, Inc.;
5) Open Market, Inc. by divine, inc.;
6) eshare communications, Inc. by divine, inc.;
7) NetGenesis Corporation by SPSS, Inc.;
8) Prime Response, Inc. by Chordiant Software, Inc.; and
9) Broadbase Software, Inc. by Kana Software, Inc.
These comparables exhibit the following median and range for the applicable
multiple:
Median Multiple Range of Multiples
--------------- ------------------
P/R 0.81 x NM - 15.10 x
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CONFIDENTIAL
These comparables imply the following median and range for per share value:
Median Implied
Value Range of Implied Values
----- -----------------------
P/R $0.59 NM - $6.17
TRANSACTION PREMIUMS PAID ANALYSIS - Premiums paid above the seller's stock
price indicate the additional value, when compared to public shareholders,
strategic and financial acquirers are willing to pay for companies in a
particular market segment. In this analysis, the value of consideration paid in
transactions involving stock is computed using the buyer's last reported closing
price (on the appropriate exchange) prior to announcement. The seller's stock
price one trading day prior to announcement is calculated using the seller's
last reported closing price (on the appropriate exchange) prior to announcement.
The seller's stock price twenty trading days prior to announcement is calculated
using the seller's closing price (on the appropriate exchange) on the first day
of that period which: (1) consists of twenty consecutive days during which the
appropriate exchange conducts trading activity; and (2) ends on the day of the
last reported closing price prior to announcement. Broadview reviewed forty
comparable M&A transactions involving North American software vendors from
January 1, 2000 to March 11, 2002 with equity consideration between $10 million
and $100 million. Transactions were selected from Broadview's proprietary
database of published and confidential M&A transactions in the IT,
communications and media industries. In order of descending premium paid to
seller's stock price twenty trading days prior to the date of announcement, the
North American software transactions used are the acquisition of:
1) Wasatch Interactive Learning Corporation by Plato Learning, Inc.;
2) Credit Management Solutions, Inc. by The First American
Corporation;
3) Telemate.Net Software, Inc. by Verso Technologies, Inc.;
4) eshare communications, Inc. by divine, inc.;
5) Applied Terravision Systems, Inc.; by COGNICASE, Inc.;
6) Liquent, Inc. by Information Holdings, Inc.;
7) Eprise Corporation by divine, inc.;
8) NetGenesis Corporation by SPSS, Inc.;
9) NetSpeak Corporation by Adir Technologies, Inc.;
10) DemandStar.com, Inc. by Onvia.com, Inc.;
11) Crosskeys Systems Corporation by Orchestream Holdings plc;
12) Citation Computer Systems, Inc. by Cerner Corporation;
13) Exigent International, Inc. by Harris Corporation;
14) Fourth Shift Corporation by AremiSoft Corporation;
15) Ecometry Corporation by Investor Group (SG Merger Corporation);
16) Micrografx, Inc. by Corel Corporation;
17) Continuous Software Corporation by Telelogic AB;
18) diehl graphsoft, inc. by Nemetschek Aktiengesellshaft;
19) Ezenet Corporation by COGNICASE Inc.;
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CONFIDENTIAL
20) Wave Technologies International, Inc. by The Thomson Corporation;
21) Interface Systems, Inc. by Tumbleweed Communications Corporation;
22) OptiSystems Solutions, Ltd. by BMC Software, Inc.;
23) Inference Corporation by eGain Communications Corporation;
24) Mediaplex, Inc. by ValueClick, Inc.;
25) Star Data Systems, Inc. by CGI Group, Inc.;
26) Health Systems Design Corporation by Perot Systems Corporation;
27) Concentrex, Inc. by John H. Harland Company;
28) SoftQuad Software, Ltd. by Corel Corporation;
29) Accelio Corporation by Adobe Systems, Inc.;
30) InfoInterActive, Inc. by America Online, Inc.;
31) MessageMedia, Inc. by DoubleClick Inc.;
32) ShowCase Corporation by SPSS Inc.;
33) Microware Systems Corporation by Radisys Corporation;
34) Alysis Technologies, Inc. by Pitney Bowes, Inc.;
35) MGI Software Corporation by Roxio, Inc.;
36) Prime Response, Inc. by Chordiant Software, Inc.;
37) Momentum Business Applications, Inc. by PeopleSoft, Inc.;
38) Open Market, Inc. by divine, inc.;
39) Dymanic Healthcare Technologies, Inc. by Cerner Corporation; and
40) CUseeMe Networks, Inc. by First Virtual Communications, Inc.
These comparables exhibit the following medians and ranges for the applicable
premiums (discounts):
Median Premium Range of Premiums
-------------- -----------------
Premium Paid to Seller's 41.2% (7.5%) -- 176.9%
Stock Price 1 Trading Day
Prior to Announcement
Premium Paid to Seller's 76.1% (18.9%) -- 550.0%
Stock Price 20 Trading Days
Prior to Announcement
These comparables imply the following medians and ranges for per share value:
Median Implied
Value Range of Implied Values
----- -----------------------
Premium Paid to Seller's $1.06 $0.69 -- $2.08
Stock Price 1 Trading Day
Prior to Announcement
Premium Paid to Seller's $1.58 $0.73 -- $5.85
Stock Price 20 Trading Days
Prior to Announcement
9
CONFIDENTIAL
PRESENT VALUE OF FUTURE POTENTIAL SHARE PRICE ANALYSIS - Broadview calculated
the present value of the future potential share price of shares of Delano common
stock on a standalone basis using management revenue estimates for the twelve
months ending December 31, 2002. The implied share price calculated using the
median TTM TMC/R for Delano public company comparables applied to management
estimates and discounted based on the Capital Asset Pricing Model ("CAPM") using
the median capital-structure adjusted beta for the public company comparables is
$0.44. The implied share price calculated using Delano's TTM TMC/R applied to
management estimates and discounted based on the CAPM using the
capital-structure adjusted beta for Delano is $0.68.
EXCHANGE RATIO ANALYSIS - Broadview considered the relative value public equity
markets have placed on Delano and divine common stock from March 8, 2001 through
March 11, 2002. For comparative purposes, the implied historical exchange ratio
was examined in contrast with the Exchange Ratio defined in the Agreement. Based
on this analysis, the historical exchange ratio has ranged from 0.137 to 1.659
with an average of 0.670.
RELATIVE CONTRIBUTION ANALYSIS - A relative contribution analysis measures each
of the merging companies' contribution to selected historical and projected
operating metrics on a percentage basis. In this analysis, all projected figures
for Delano and divine are derived from management estimates. Broadview performed
the relative contribution analysis for TTM Revenue; TTM Gross Profit; LQA
Revenue; Projected Twelve Months Ending ("TME") 12/31/02 Revenue ("Projected
Calendar Year 2002 Revenue"); and Projected TME 12/31/02 Gross Profit
("Projected Calendar Year 2002 Gross Profit"). Delano's relative contributions
for these operating metrics ranged from 2.6% to 38.0%.
RELATIVE OWNERSHIP ANALYSIS - A relative ownership analysis measures each of the
merging companies' relative equity ownership and relative entity values (net of
cash). According to the Exchange Ratio as stated in the Agreement, the implied
equity ownership is 89.3% for divine and 10.7% for Delano, and the corresponding
implied entity ownership (EMC plus debt, minus cash) is 91.9% for divine, and
8.1% for Delano.
divine STOCK PERFORMANCE ANALYSIS - For comparative purposes, Broadview examined
the following:
1) divine common stock daily historical volume and trading prices
March 8, 2001 through March 11, 2002; and
2) Relative daily closing prices for an index of public companies
deemed comparable to divine vs. divine and the NASDAQ Composite
from March 8, 2001 through March 11, 2002.
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CONFIDENTIAL
EVALUATION OF DIVINE PUBLIC COMPANY COMPARABLES - Broadview compared selected
operating and valuation metrics for public companies deemed comparable to divine
based on market focus, business model and TTM revenue with the ratios implied by
divine's share price of $0.67 as of March 11, 2002, and its current and
projected performance. Broadview reviewed three public companies in the
Technology-Focused Internet Services industry with Projected 12/31/02 revenue
between $100 million and $300 million from a financial point of view. In order
of descending TTM TMC/R, the public company comparables consist of:
1) Digitas Inc.;
2) Sapient Corporation; and
3) Answerthink, Inc.
Broadview also reviewed eight public companies in the eCRM, Web Content
Management, and Call Center Software industries with Projected 12/31/02 between
$100 million and $300 million and Projected 12/31/02 revenue growth less than
25%, from a financial point of view. In order of descending TTM TMC/R, the
public company comparables consist of:
1) Documentum, Inc.;
2) Open Text Corporation;
3) Interwoven, Inc.;
4) E.piphany, Inc.;
5) Kana Software, Inc.;
6) Vignette Corporation;
7) BroadVision, Inc.; and
8) Art Technology Group, Inc.
Broadview also reviewed eight public companies in the Business Information
Software and Services industry with TTM revenue between $10 million and $100
million and Projected 12/31/02 revenue growth less than 25%, from a financial
point of view. In order of descending TTM TMC/R, the public company comparables
consist of:
1) EDGAR Online, Inc.;
2) TheStreet.com, Inc.;
3) OneSource Information Services, Inc.;
4) Hoover's, Inc.;
5) Multex.com, Inc.;
6) Track Data Corporation;
7) MarketWatch.com, Inc.; and
8) COMTEX News Network, Inc.
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CONFIDENTIAL
Broadview also reviewed four public companies in the Managed Web Hosting
industry with TTM revenue between $50 million and $250 million from a financial
point of view. In order of descending TTM TMC/R, the public company comparables
consist of:
1) Equinix, Inc.;
2) Digex, Inc.;
3) NaviSite, Inc.; and
4) AppliedTheory Corporation
PRO FORMA COMBINATION ANALYSES - Broadview calculated the EPS accretion or
dilution of the pro forma combined entity taking into consideration various
financial effects which will result from a consummation of the Agreement. This
analysis relies upon certain financial and operating assumptions provided by
publicly available data about Delano and divine as well as information provided
by divine and Delano management. The Delano financials are based on a
subscription-based revenue model in order to be consistent with divine's change
in revenue recognition policy. Broadview examined a purchase scenario under the
assumption that no opportunities for net synergies exist. Based on this
scenario, the pro forma purchase model indicates that EPS decreases $0.0004 for
the quarter ending September 30 2002, decreases $0.0030 for the quarter ending
December 31, 2002 and decreases $0.0013 for the fiscal year ending December 31,
2003.
CONSIDERATION OF THE DISCOUNTED CASH FLOW VALUATION METHODOLOGY - While
discounted cash flow is a commonly used valuation methodology, Broadview did not
employ such an analysis for the purposes of this opinion. Discounted cash flow
analysis is most appropriate for companies which exhibit relatively steady or
somewhat predictable streams of future cash flow. Given the uncertainty in
estimating both the future cash flows and a sustainable long-term growth rate
for the Company, Broadview considered a discounted cash flow analysis
inappropriate for valuing Delano.
SUMMARY OF VALUATION ANALYSES - Taken together, the information and analyses
employed by Broadview lead to Broadview's overall opinion that the Exchange
Ratio in the Agreement by holders of Company Common Shares is fair, from a
financial point of view, to such holders.
12
ANNEX H
SECTION 182 OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
------------------------------------------------------
S.181.1 ONTARIO BUSINESS CORPORATIONS ACT
- --------------------------------------------------------------------------------
(7) ACT CEASES TO APPLY.--This Act ceases to apply to the corporation on
the date upon which the corporation is continued under the Co-operative
Corporations Act. 1994, c.17, s.30.
182. (1) ARRANGEMENT.--In this section, "arrangement", with respect to a
corporation, includes,
(a) a reorganization of the shares of any class or series of the
corporation or of the stated capital of any such class or series;
(b) the addition to or removal from the articles of the corporation of
any provision that is permitted by this Act to be, or that is, set
out in the articles or the change of any such provision;
(c) an amalgamation of the corporation with another corporation;
(d) an amalgamation of a body corporate with a corporation that results
in an amalgamated corporation subject to this Act;
(e) a transfer of all or substantially all the property of the
corporation to another body corporate in exchange for securities,
money or other property of the body corporate;
(f) an exchange of securities of the corporation held by security holders
for other securities, money or other property of the corporation or
securities, money or other property of another body corporate that is
not a take-over bid as defined in Part XX of the Securities Act;
(g) a liquidation or dissolution of the corporation;
(h) any other reorganization or scheme involving the business or affairs
of the corporation or of any or all of the holders of its securities
or of any options or rights to acquire any of its securities that is,
at law, an arrangement; and
(i) any combination of the foregoing.
(2) SCHEME OF ARRANGEMENT.--A corporation proposing an arrangement shall
prepare, for the approval of the shareholders, a statement thereof setting out
in detail what is proposed to be done and the manner in which it is proposed to
be done.
(3) ADOPTION OF ARRANGEMENT.--Subject to any order of the court made under
subsection (5), where an arrangement has been approved by shareholders of a
corporation and by holders of shares of each class or series entitled to vote
separately thereon, in each case by special resolution, the arrangement shall
have been adopted by the shareholders of the corporation and the corporation
may apply to the court for an order approving the arrangement.
(4) SEPARATE VOTES.--The holders of shares of a class or series of shares
of a corporation are not entitled to vote separately as a class or series in
respect of an arrangement unless the statement of the arrangement referred to
in subsection (2) contains a provision that, if contained in a proposed
amendment to the articles, would entitle such holders to vote separately as a
class or series under section 170 and, if the statement of the arrangement
contains such a provision, such holders are entitled to vote separately on the
arrangement whether or not such shares otherwise carry the right to vote.
(5) APPLICATION TO COURT.--The corporation may, at any time, apply to the
court for advice and directions in connection with an arrangement or proposed
arrangement and the court may make such order as it considers appropriate,
including, without limiting the generality of the foregoing,
420
PART XIV -- FUNDAMENTAL CHANGES S. 184
- --------------------------------------------------------------------------------
(a) an order determining the notice to be given to any interested
person or dispensing with notice to any person;
(b) an order requiring a corporation to call, hold and conduct an
additional meeting of, or to hold a separate vote of, all or any
particular group of holders of any securities or warrants of the
corporation in such manner as the court directs;
(c) an order permitting a shareholder to dissent under section 185 if
the arrangement is adopted;
(d) an order appointing counsel, at the expense of the corporation,
to represent the interests of shareholders;
(e) an order that the arrangement or proposed arrangement shall be
deemed not to have been adopted by the shareholders of the
corporation unless it has been approved by a specified majority
that is greater than two-thirds of the votes cast at a meeting of
the holders, or any particular group of holders, of securities or
warrants of the corporation; and
(f) an order approving the arrangement as proposed by the corporation
or as amended in any manner the court may direct, subject to
compliance with such terms and conditions, if any, as the court
thinks fit,
and to the extent that any such order is inconsistent with this section such
order shall prevail.
(6) PROCEDURE.--Where a reorganization or scheme is proposed as an
arrangement and involves an amendment of the articles of a corporation or the
taking of any other steps that could be made or taken under any other provision
of this Act, the procedure provided for in this section, and not the procedure
provided for in such other provision, applies to such reorganization or scheme.
1982, c.4,s. 181(1-6).
(7) [Repealed 1994, c.27,s.71(23).]
183. (1) ARTICLES OF ARRANGEMENT SENT TO DIRECTOR.--After an order
referred to in clause 182(5)(f) has been made, articles of arrangement in
prescribed form shall be sent to the Director.
(2) CERTIFICATE OF ARRANGEMENT.--Upon receipt of articles of arrangement
the Director shall endorse thereon in accordance with section 273 a certificate
which shall constitute the certificate of arrangement. 1982, c.4,s.182.
184. (1) BORROWING POWERS.--Unless the articles or by-laws of or a
unanimous shareholder agreement otherwise provide, the articles of a
corporation shall be deemed to state that the directors of a corporation may,
without authorization of the shareholders,
(a) borrow money upon the credit of the corporation;
(b) issue, reissue, sell or pledge debt obligations of the
corporation;
(c) subject to section 20, give a guarantee on behalf of the
corporation to secure performance of an obligation of any
person; and
(d) mortgage, hypothecate, pledge or otherwise create a security
interest in all or any property of the corporation, owned or
subsequently acquired, to secure any obligation of the
corporation.
(2) DELEGATION OF POWERS.--Unless the articles or by-laws of or a
unanimous shareholder agreement relating to a corporation otherwise provide,
the directors may by resolution delegate any or all of the powers referred to
in subsection (1) to a director, a committee of directors or an officer.
ONT.BUSINESS
CORPORATIONS
421
ANNEX I
DIVINE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 (U.S. GAAP)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-30043
DIVINE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4301991
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1301 NORTH ELSTON AVENUE, 60622
CHICAGO, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 394-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Class A Common Stock, par value $.001 per Nasdaq National Market
share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$183,189,352 AT MARCH 27, 2002 (BASED ON THE CLOSING SALE PRICE ON THE NASDAQ
NATIONAL MARKET, INC. ("NASDAQ") ON MARCH 27, 2002). AT MARCH 27, 2002 THE
REGISTRANT HAD ISSUED AND OUTSTANDING AN AGGREGATE OF 457,145,645 SHARES OF
CLASS A COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 21, 2002, DESCRIBED IN PART III
HEREOF, ARE INCORPORATED BY REFERENCE IN THIS REPORT.
TABLE OF CONTENTS
ITEM NO. PAGE
Special Note on Forward-Looking Statements ................................ 2
Part I
1. Business .................................................................. 3
2. Properties ................................................................ 25
3. Legal Proceedings ......................................................... 26
4. Submission of Matters to a Vote of Security Holders ....................... 28
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 29
6. Selected Financial Data ................................................... 30
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................ 31
7A.Quantitative and Qualitative Disclosures About Market Risk ................ 52
8. Financial Statements and Supplementary Data ............................... 53
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 103
Part III
10. Directors and Executive Officers of the Registrant ........................ 104
11. Executive Compensation .................................................... 105
12. Security Ownership of Certain Beneficial Owners and Management ............ 105
13. Certain Relationships and Related Transactions ............................ 105
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 106
1
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that reflect our current
expectations and projections about our future results, performance, prospects,
and opportunities. We have tried to identify these forward-looking statements by
using words such as "may," "will," "expect," "anticipate," "believe," "intend,"
"plan," "estimate," and similar expressions. These forward-looking statements
are based on information currently available to us and are subject to a number
of risks, uncertainties, and other factors that could cause our actual results,
performance, prospects, or opportunities to differ materially from those
expressed in, or implied by, these forward-looking statements. These risks,
uncertainties, and other factors include:
- our ability to become cash flow positive before we deplete our
unrestricted cash reserves or become insolvent;
- our ability to maintain our Nasdaq National Market listing;
- our ability to execute our integrated Web-based software services,
professional services, and managed services strategy;
- our ability to successfully implement our acquisition strategy,
including our ability to integrate the operations, personnel,
products, and technologies of, and address the risks associated
with, acquired companies;
- our ability to develop enterprise Web software and services;
- the uncertainty of customer demand for enterprise Web software and
services;
- our ability to expand our customer base and achieve and maintain
profitability;
- our ability to retain key personnel;
- our ability to predict revenues from project-based engagements;
- our ability to keep pace with technological developments and
industry requirements;
- our ability to efficiently manage our growing operations;
- changes in the market for Internet services and the economy in
general, including as a result of any additional terrorist attacks
or responses to terrorist attacks;
- increasing competition from other providers of software solutions,
professional services, and managed applications;
- the extent to which customers want to purchase software applications
under hosted subscription based models; and
- our ability to address the risks associated with international
operations.
See "Item 1. Business -- Risk Factors" for a description of these factors.
Other matters, including unanticipated events and conditions, also may cause our
actual future results to differ materially from these forward-looking
statements. We cannot assure you that our expectations will prove to be correct.
In addition, all subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements mentioned above. You should not
place undue reliance on these forward-looking statements. All of these
forward-looking statements are based on our expectations as of the date of this
report. Except as required by federal securities laws, we do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
2
PART I
ITEM 1. BUSINESS
divine OVERVIEW
divine, inc. is a service and software company focused on solutions for
the extended enterprise. We help our clients maximize profits through better
collaboration, interaction, and knowledge sharing throughout their entire value
chain, including suppliers, partners, employees, and customers. We facilitate
our customers' integration of advanced enterprise Web solutions with their
business strategies and existing infrastructures by providing a combination of
professional services, Web-based technology, and managed applications
capabilities. We focus our offerings on Global 5000 and high-growth middle
market firms and service over 20,000 customers through three principal business
groups:
divine Professional Services combines our knowledge of how to design and
deploy software solutions with our expertise in technology,
infrastructure, and marketing services and offers services for legacy
systems integration, brand extension, call center automation, business
process optimization, operational strategy consulting, SAP installation,
supply chain and customer management, and technology infrastructure
consulting.
divine Software Services deploys software solutions that focus on
collaboration, workflow, and relationship and content management such as
voice-based customer contact tools, auto-response applications, telephony
webinars (Web-based seminars), secured messaging, team interaction,
content acquisition, organization and management, content delivery, and
training programs.
divine Managed Services builds, hosts, manages, monitors, and secures
clients' critical applications by offering design and engineering of
managed hosting solutions; installation, configuration, and testing of
hardware and software systems; ongoing maintenance, back-ups, and
upgrades; performance and security monitoring; and technical support.
We have forged strategic partnerships and alliances with a number of
leading organizations to strengthen the delivery of open and extensible
e-business solutions to our customers. Our technology integrates with leading
server platforms such as BEA WebLogic, IBM WebSphere, Microsoft Windows NT, and
Sun Solaris. Additionally, we have joined the alliance programs of key vendors
such as BEA, Hewlett-Packard, IBM, Microsoft, Computer Associates, Netscape,
Oracle, and Sun/iPlanet to extend support to our mutual customers and introduce
our solutions into new arenas. While these alliances add value to all of our
constituencies, they also provide us and our partners with additional technical,
marketing, and sales resources to expedite the development and delivery of
complete e-business solutions.
Our principal offices are located at 1301 N. Elston Avenue, Chicago,
Illinois 60622, telephone number (773) 394-6600. We also have satellite offices
located throughout North America, Europe, Asia, and Australia. Our homepage is
located on the Web at http://www.divine.com , where you can find additional
information about us; however, that information generally is not targeted at
investors and is not part of this Report. All references to "we," "us," "our,"
and "divine" refer to divine, inc. and its consolidated subsidiaries.
divine HISTORY
We were incorporated as divine interVentures, inc. on May 7, 1999 and
commenced operations on June 30, 1999. We began by engaging in
business-to-business e-commerce through a community of associated companies in
which we invested. From September 30, 1999 to December 31, 2000, we acquired
interests in 40 associated companies, established a total of 13 associated
companies whose opportunities were consistent with our former business strategy,
while further developing our operational procedures and capabilities.
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In February 2001, we announced our strategy to focus primarily on
enterprise Web solutions, and changed our name to divine, inc. Since then,
interests in our associated companies that provide Web-based technology,
software, professional services, and managed applications are no longer
reflected separately but have become integrated into our core business strategy
and operating model as a fully integrated set of products and services. Our
other associated companies, offering software and services focused on e-commerce
and vertical markets, were included in our divine interVentures portfolio. As of
December 31, 2001, we have completely written off our investments in the
associated companies in our divine interVentures portfolio, other than amounts
included in available-for-sale securities.
We have executed a disciplined acquisition strategy enabling us to
acquire market-leading technology, significant intellectual property, and
world-class talent that round out our extended enterprise solutions. We have
acquired companies providing professional services, Web-based technology, and
managed services, positioning us to provide comprehensive solutions and a single
point of accountability to our customers.
divine STRATEGY
Our goal is to become the recognized leader in advanced enterprise Web
solutions that offer global businesses the ability to improve collaboration,
workflow, and business relationships through delivery of a powerful combination
of technology, software, services and managed applications. As the flow of
information becomes more liberated and complex, we believe that a new breed of
provider must unite the skills and emerging technologies required to create the
advanced enterprise Web solutions that allow companies to go beyond transaction
processing. In order to reach this goal, we have adopted these key strategic
objectives:
- Position divine as a technology owner and solutions integrator.
We plan to differentiate ourselves by positioning divine as a
technology owner and solutions integrator.
- Develop, acquire, and integrate offerings and solutions. We will
continue to focus on developing, acquiring, and integrating
additional innovative technologies and solutions that can be
combined to offer a powerful and comprehensive set of integrated
services, technologies, and hosting capabilities that advance and
extend our customers' businesses to include external and internal
business communities.
- Target a specific customer base. We plan to target customers who
can benefit from greater collaboration, interaction, more
efficient workflow, and better management of business
relationships between their customers, employees, partners,
suppliers, prospects, and sources of information. We believe these
customers are primarily in the financial services, insurance,
energy, pharmaceutical, biotechnology, and telecommunications
industries.
- Expand our relationships with existing customers. We currently
offer solutions from one or more of our business groups to
approximately 20,000 customers. By expanding our relationships
with our current customers, we can increase our offerings to them
and capitalize on cross-selling opportunities with their
customers, suppliers, partners, and distributors.
- Support and complement our solutions through alliances with
business partners . We will continue to establish strategic
alliances that supply additional channels for our products, help
us to build industry- specific solutions for our customers, and
enable us to attract and retain customers who prefer to deal with
large, stable solutions providers.
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divine BUSINESS GROUPS
divine PROFESSIONAL SERVICES
Our Professional Services group offers clients a single source for a
comprehensive range of services required to successfully design, develop, and
implement integrated solutions. This group applies its expertise in technology,
infrastructure, and marketing services across a broad spectrum of leading
technologies. From legacy systems integration to brand extension, we deploy
solutions designed to improve clients' productivity and competitive position,
enable them to more fully engage business communities, optimize enterprise
knowledge, and improve core value-chain processes.
Our Professional Services employees have demonstrated expertise in the
following areas:
Outreach Solutions: call center optimization and automation, e-commerce
strategy, advanced Web technologies, advanced branding, and customer
interaction management.
Knowledge Solutions: optimization of intellectual capital -- workforce,
data and processes, knowledge management strategy, content and document
management, e-learning, business intelligence, and enterprise portals.
Value Chain Solutions: business process optimization, operational
strategy, SAP, Oracle, JD Edwards, customer relationship management, and
sourcing and supply chain management.
Technology Infrastructure Services: for hardware, software, maintenance
agreements, financing, and network consulting.
divine SOFTWARE SERVICES
Our Software Services group provides the technologies and applications
that organizations need to optimize the outer reaches of their value chain --
their customers and other constituencies. Over the last decade, companies have
invested billions of dollars in technology infrastructure systems, and now face
the challenge of extending them into customer, partner, and supplier
communities. To help our customers meet this challenge, divine Software Services
provides industry-leading software services in the following areas:
- Collaboration Technologies -- improve internal and external
interactions with customers, partners, and employees through
secured messaging, team interaction, group feedback, and telephony
webinars.
- Content Management Technologies -- enable customers to quickly and
easily create, disseminate, and manage effective and captivating
Web content.
- Customer Interaction Management -- provides solutions that allow
clients to effectively manage both new and existing customers
across multiple communication channels, including voice mail,
e-mail, interactive Web chat, and voice-over-Internet protocol.
- Information Services -- help organizations find, acquire, use, and
manage knowledge resources in a cost-effective manner.
- divine Search and Content Integration -- provides an integrated
search capability across all internal and external corporate
information sources, as well as instant access to the full-text
articles of more than 7,000 business publications, trade journals,
market research and investment analysis reports, local, national
and international newswires and other premium sources.
divine MANAGED SERVICES
divine's Managed Services group provides solutions, including managed
hosting and applications platforms, for complex, mission-critical applications.
We build and engineer managed hosting solutions
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from the ground up to support the highest levels of application availability.
The applications platform provides the technical infrastructures that
organizations need to implement and manage their systems cost-effectively,
reliably, and without over-burdening resources. Our managed services include
providing, configuring, operating, and maintaining the hardware, software, and
network technologies necessary to implement and support complex applications. We
also offer additional service options, such as scalability and architecture
testing, storage solutions, and security services, including firewalls. divine
Managed Services supplies solutions that deliver:
- Maximum availability -- guaranteed application availability up to
99.95 percent.
- Highly automated operational support -- infrastructure facilities
operationally controlled by highly automated service management
centers.
- Secure operations -- environmental controls, physical security
measures, and proactive monitoring and troubleshooting ensure
system security.
- Highly skilled technical resources -- experienced talent pool that
brings best-in-class skill sets to each managed services solution.
- Single-point of accountability -- our customer support program
provides a single point of accountability for each managed
services solution.
divine PRODUCTS AND SERVICES
COLLABORATION TECHNOLOGIES
divine MindAlign(TM) enables entire organizations to communicate in real
time and work together on solutions, regardless of the location of the
participants. Secure and centrally managed, divine MindAlign offers a wealth of
advanced features such as presence awareness, rich content and data sharing,
content filtering, instant message history, back-chat search tools, real-time
partner access, security and authentication, structured content and delivery,
co-branding, and auditorium mode.
divine OpinionWare(TM) provides a platform for deploying and structuring
dialogue. It allows knowledge workers and management across an organization's
infrastructure to create, publish, and distribute Web content and analyze
feedback and discussion touch-points, resulting in higher-quality interactions,
better decision-making, and increased loyalty. OpinionWare is designed to help
clients increase web site time and traffic by facilitating customization of
their sites for their customers. Clients using OpinionWare can use their
existing tools to collect data and conduct surveys that reflect and maintain
their existing brand presence on the Web. Other advanced features include web
site integration and external data integration, which eliminates the need to
repeatedly redevelop questions for multiple surveys.
divine ShowCase(TM) provides solutions designed to increase
business-to-business collaboration and selling. It enables the creation,
publication, and distribution of live and on-demand multimedia to large
audiences through Web-based environments. divine ShowCase also virtually
eliminates dependency on third parties for webcasts. By fully integrating video,
audio, and data, it provides a complete medium for remote learning. It also
offers an ideal solution for internal and external training and communication,
and stores presentations for future use. ShowCase is scalable and customizable
and offers the security and advanced features necessary to meet business
mandates for reducing travel costs, shortening new product launch times, and
quickly updating international teams on corporate strategy.
divine Athena(TM) captures and stores documents and knowledge from across
an enterprise and makes them available from a single point of access. Athena can
operate as a stand-alone application or as part of an enterprise portal and is
designed to promote knowledge sharing through easy access to vital information.
Users can search and retrieve documents in Lotus Notes or Word, topical e-mails
from experts within an organization, or information from other data
repositories. By allowing users to
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pull information on request, and pushing relevant content to the right business
owners, Athena enables better informed business decisions.
divine fuse(TM) is a centralized, Web-based project team collaboration
tool that streamlines and simplifies project management processes. By
integrating project management tools, document management capabilities, and
real-time communication tools, divine fuse provides a complete solution for
bringing together widely dispersed teams and global organizations. Accessible
from any web browser, it allows users to monitor multiple projects from a single
interface and generate customized reports to better manage and collaborate
around projects. divine fuse promotes effective communications in real time,
keeping internal staff, partners, and customers up-to-speed.
CONTENT MANAGEMENT TECHNOLOGIES
divine Content Server(TM) is a modular set of content-driven applications
for e-business projects such as enterprise portals, department sites,
customer/partner Web sites, and commerce implementations. It is engineered to
enable users to manage information, customize interactions, and integrate
back-office data. divine Content Server mixes robust content functionality with
a high-performance technology base and provides an open, extensible framework
for growth. It is an ideal solution for large organizations requiring a single,
cost-effective platform that can deploy information-rich applications and
initiatives such as portals, marketing campaigns, business-to-business catalogs,
and publications. Licensed by more than 300 customers in 43 countries, divine
Content Server has been recognized as an industry leader by Forrester Research's
Tech Rankings and awarded the Market Engineering Award from Frost and Sullivan.
divine Participant Server(TM) as the platform of choice for divisions or
departments lacking large technical teams, that need to rapidly deploy a
feature-rich, user-focused Web site that is connected to enterprise
applications. This solution supports efficient management of Web content through
features that encourage consistent site design and branding. Participant Server
also automates content workflow from authors to reviewers to viewers. By
providing a streamlined interface, Participant Server enables business users to
easily update their sites without having to learn new tools. divine Participant
Server is currently used by more than 150 customers, including American Express
Travel Services, Sharp Electronics, and Eastman Chemical.
divine Enterprise Content Center(TM) works within intranets, extranets,
and portals to extend business benefits. Providing a channel for the delivery of
business content, aggregated content purchasing, controlled costs and
personalization at the desktop, this solution helps businesses streamline
practices, increase productivity, and lower costs of ownership. It is also a
gateway to one of the largest Extensible Markup Language (XML) repositories of
business information in the world, enabling users to search across multiple
information sources. One key feature is Real-Time News , which delivers news
feeds from premium sources selected and customized by customers. Streaming Media
allows users to create, distribute, and manage video over the Web, creating an
ideal outlet for broadcasting presentations, e-learning materials and meetings.
Content e-Procurement lets individuals search and order information services
from over 200,000 premium content sources, while Tracker provides a clear
understanding of which content and tools are used by and add actual value to an
organization.
CUSTOMER INTERACTION MANAGEMENT -- TELEPHONY
divine Conversations(TM) is a powerful collection of voice-based customer
contact tools that allows call centers to contact more customers, use fewer
agents, and track all information through its monitoring and reporting features.
This solution combines predictive dialing with campaign management capabilities,
enabling companies to significantly reduce abandonment and nuisance rates, while
improving overall call center efficiency and productivity.
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divine XChange(TM) is an award-winning customer contact solution
specifically designed for call centers where campaigns, data, interface, and
scripting rules constantly change. XChange is designed to operate on existing
networks, using existing fileservers and data tools, and works with phone
systems, e-mail, fax, and voice-over-Internet protocal. It offers increased
productivity for the telemarketing, fundraising, market research, and polling
industries and gives call centers an extensive array of affordable options
without sacrificing daily ease-of-use.
CUSTOMER INTERACTION MANAGEMENT -- INTERNET
divine Synchrony(TM) Suite combines integrated communication channels
with other legacy data, allowing agents an instant and complete view of the
customer, including all historical contact channels and interactions. divine
Synchrony features Agent Anywhere, which connects contact centers across the
globe with the same data and application servers and also allows employees the
flexibility of working from home. Shared Agent supplies access to multiple
campaigns from a single screen or view, so that agents can handle interactions
for different groups or divisions within the organization.
divine NetAgent(TM) Suite organizes multiple communication channels into
a standardized interface, permitting customers to interact via e-mail, Computer
Telephony Integration (CTI)-based voice, voice-over-Internet protocal, or live
Web chat. NetAgent EMAIL supports increases in the quantity and accuracy of
e-mail processing. NetAgent ANSWER is an intelligent, auto-response application
that filters incoming e-mails and provides timely responses. NetAgent CHAT
routes requests to appropriate agents and allows multiple simultaneous online
sessions. NetAgent TELEPHONY enables call centers to integrate inbound Public
Branch Exchange/Automated Call Distribution (PBX/ACD) calls and desktop phones
with NetAgent CHAT. NetAgent WIRELESS provides wireless monitoring of call
center performance, while NetAgent INTERNATIONAL permits communication around
the globe in over a dozen languages.
INFORMATION SERVICES
divine Global Library Services delivers high-quality personal service,
comprehensive management reporting, and industry-leading Web-based solutions to
manage and access print and electronic journals.
- divine Information Quest(TM) (IQ) simplifies the selection,
access, and management of online resources and provides
researchers with a sophisticated, easy-to-use front end to
electronically research materials in a variety of fields. IQ
functions as a gateway through which resources are delivered and
e-journals are readily accessible throughout an entire
organization.
- divine kLibrary(TM) provides clients with a wealth of significant
bibliographic and supplemental title information at the desktop
level and is designed to enable libraries to simplify all their
major serials tasks.
Acquisition and Procurement Services provides Web-based solutions that
manage the challenges presented by the acquisition, organization, and management
of information resources in corporations worldwide.
- divine kStore(TM) is a Web-based solution that provides a
convenient way for employees to search for and order information
resources from the desktop and enables the employer to centrally
manage and track the process.
- divine kCentral(TM) provides access to timely and relevant
information resources integrating with e-procurement systems such
as Ariba and Commerce One and enables streamlined acquisition and
management of information resources.
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Electronic Content Services provides simple solutions for accessing,
licensing, evaluating, and delivering e-content to the desktop.
- divine MedInfoNOW(TM) is a unique, Web-based information and
updating service that offers anytime-anywhere access to Doody's
Review Service; Online Literature Review with automatic updates on
the latest medical literature; and a Weekly eBulletin that alerts
users to new books and articles.
- divine E-content Licensing(TM) provides various levels of support
for content development, including links to valuable e-journal
licensing and registration terms and conditions, and comprehensive
strategies that help libraries, information centers and other
organizations manage their entire e-journal process.
divine SEARCH AND CONTENT INTEGRATION (DSCI)
divine Content Packages(TM) facilitate global desktop to authoritative,
industry-specific research materials. For a flat fee, users can efficiently
search content and the Internet at the same time. Clients also have the option
to license content from several sources to create custom packages. The Special
Collection (TM) is an online business library including 70 million pages of
full-text content from over 7,000 sources such as trade journals and business,
medical, and scientific publications. Additional Premium Content includes
resources such as Reuters Online, Investext, Corptech, and real-time newswires.
All content is available on a platform-neutral web interface and users can
access it through alternative search methods. divine Content Packages bring
about increased employee productivity, enhanced competitor intelligence, and
improved decision-making, typically accompanied by rapid return on investment.
divine Search Toolkit(TM) is a hosted search solution that can be
installed on a client's Web, extranet, or intranet site. It can perform
full-text searches of the client's site, internal content, vertical, or
custom-defined sections or divine's libraries. A turn-key solution, Search
Toolkit enables the client to control its "look and feel" and see results
displayed in the client interface; yet it requires no investment in hardware,
software, or human capital. Extremely secure and simple to implement, Search
Toolkit can search virtually any type of database or file format.
divine RivalEye(TM), a Web-based custom microsite, features information
on a company's industry, competitors, customers, supply chain, or other
designated topics. Easy-to-use monitoring of the external business environment
enables quick and effective decision-making that can lead to new opportunities
and increased revenues. Clients use RivalEye as a competitive intelligence or
business planning tool, anticipating change and adjusting strategies as regular
updates and dynamic content provide timely coverage. Key differentiators of this
solution include unlimited access across the enterprise, use of Custom Search
Folders(TM), and access to vast databases of licensed content and large web
databases. Clients experience savings in employee time because divine handles
development and updates.
divine SinglePoint(TM) is a fully hosted solution, developed and
maintained by divine's staff, that allows knowledge workers simultaneously use
all of their information sources, such as licensed subscription sources, the
Web, and an online business library of 70 million pages, with one login, one
search, and one user interface. Advanced search technology helps users to easily
and efficiently get results that are ranked by relevance and classified to a
uniform standard. Simple interface, integrated login, and customized document
access control allow SinglePoint to be rolled out enterprise-wide, simplifying
seat administration and fostering shared access of relevant information.
divine PRODUCT TRAINING
Education Service provides user administration and system administration
training to ensure successful implementation and support for each solution. We
also deliver training programs that increase organizational adoption and
effective employee utilization of divine product solutions.
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Training is designed around specific client needs and the target
audience. Training offerings include instructor-led and Web-based delivery.
Instructor-led courses are offered at client sites or hosted at our
state-of-the-art Education Centers. Additional customized training and knowledge
transfer sessions are also available to meet more intensive client needs.
Product Support and Customer Service provides our customers with
efficient, high quality support delivered by highly skilled professionals and
leveraged by well-defined processes. We utilize divine's own product suites for
a world-class approach to customer service. Support team members are focused on
meeting customers' business needs as well as providing complete knowledge about
divine's suite of products. To achieve our goals, we offer continuous global
support to customers including access to our agents via phone, e-mail and the
Web. Technical support is available anytime to answer questions about products
or assist with technical issues.
SALES AND MARKETING
OVERVIEW
We market and sell our solutions using a combination of direct and
indirect distribution channels We also use a variety of marketing programs,
executed through our channels and partners, to build awareness for our offerings
and generate sales leads. We target Global 5000 and high-growth middle market
firms, primarily in the financial services, insurance, energy, pharmaceutical,
biotechnology, and telecommunications industries. Our overall sales approach
typically includes on-site technical systems evaluations performed by our
pre-sales staff, followed by product demonstrations and negotiations with our
sales staff.
Direct Sales. Our principal sales channel is our direct sales
organization, which is organized primarily by geographic regions. Our sales
efforts are concentrated primarily in North America and Europe, but also extend
to Asia and Australia. We also maintain an inside sales organization that uses
our call centers as prospecting tools to identify and develop qualified leads
with existing clients for follow up by the direct sales organization.
Indirect Sales through Strategic Alliances. We complement our direct
sales efforts with indirect sales channels through strategic alliances with
Value-Added Resellers (VARs), Original Equipment Manufacturers (OEMs), systems
integrators, and other partners in both domestic and international markets.
Marketing. We support our sales efforts with a variety of marketing
programs designed to build brand awareness, attract prospects, and retain
clients, including: market research and industry analysis; press releases;
industry analyst briefings; customer relationship/loyalty marketing programs;
partner marketing programs; our web site (www.divine.com); email and direct mail
marketing programs; offline and online seminars and webinars; trade shows,
speaking engagements; and co-sponsored partner programs. Our internal marketing
organization produces materials describing our core capabilities, including new
services and product upgrades, such as brochures, data sheets, and white papers
as well as online presentations and demonstrations to support the sales staff.
divine PROFESSIONAL SERVICES
divine's Professional Services group delivers and sells its services
through a network of branch offices located throughout North America, Europe,
Asia, and Australia.
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divine SOFTWARE SERVICES
We offer software services through a direct sales organization with
offices worldwide, and we maintain a network of distributors and VARs to
re-license our products. Our VARs and distributors are independent organizations
that perform some or all of the following functions for our products: sales and
marketing; systems implementation; and integration and ongoing consulting and
technical support. We believe that our VARs and distributors have significant
influence over product choices made by our customers and that our VAR and
distributor relationships are an important element in our marketing, sales, and
implementation efforts. In addition, we maintain strategic alliances with
entities that provide complementary products and services, and that have the
ability to influence the customer's selection of software services.
divine MANAGED SERVICES
We market and sell our managed services primarily using our direct sales
organization. In addition, we utilize direct mail and telemarketing campaigns
targeted at information technology decision makers and advertising in magazines
targeted at developers and information service professionals. We also advertise
online and exhibit at trade shows and conferences.
ACQUISITIONS
Through integrating the products and services of acquired companies into
our infrastructure, divine extends a broader array of offerings and delivers
greater value to all our constituencies. We introduce combined product suites to
gain financial and market leverage from incremental revenue and operational
efficiencies of integration.
Since January 2001, we have completed numerous acquisitions, including:
- March 2001, SageMaker -- an enterprise information portal
solutions company. This acquisition brings a key component to our
existing enterprise information portal solution.
- April 2001, certain assets of marchFIRST -- a leading
Chicago-based provider of enterprise e-business solutions,
including marchFIRST's Central Region business unit, accounts
receivable, SAP implementation practice, VAR unit, Blue Vector
venture capital arm, and certain regional operations. This
acquisition provides a broad range of enterprise technology,
e-business strategy, brand building services, and application
hosting, all of which deepen our extended enterprise solutions.
- May 2001, DataBites, Inc. -- a software development company that
develops both wireless and wired Web content delivery
applications. DataBites' technology provides our enterprise portal
solutions instant integration capabilities with internal and
external Web-based applications and resources.
- August 2001, Fracta Networks -- a provider of user-centric content
management solutions. This acquisition expands and further
complements the suite of personal information management tools
available within our enterprise portal solutions.
- September 2001, certain assets of marchFIRST GmbH -- including the
assets that comprised its former Munich and Hamburg operations.
This acquisition, with its global client base and deep
professional services expertise, represents a milestone in our
international expansion strategy.
- October 2001, Open Market, Inc. -- a provider of content-driven
e-business solutions that enable enterprises to better manage
interactions with their site visitors, customers, employees and
channels. Open Market's enterprise-class J2EE infrastructure
enables the seamless integration of our current suite of
content-driven e-business applications, as well as supports the
development and deployment of future applications.
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- October 2001, eshare communications, Inc. -- a leading provider of
Customer Interaction Management (CIM) solutions. eshare's
offerings, added to our collaborative applications, portal
technology, Web Services infrastructure, knowledge resources, and
delivery capability, give our combined client base the ability to
deploy extended enterprise applications that build customer
loyalty and branding within their targeted communities.
- October 2001, Synchrony Communications -- an innovative customer
interaction management suite provider. This acquisition enhances
our CIM technology offerings with Synchrony's highly ranked
interaction management applications. In concert with our
acquisition of eshare communications, Inc., this positions us as
an industry leader in providing solutions for the customer
interaction cycle including inbound and outbound call management.
- October 2001, Intira Corporation and HostOne -- application
services management providers. These acquisitions establish us as
a foremost provider of facilities-based managed applications
services.
- November 2001, RoweCom, Inc. -- a global provider of high-quality
service and e-commerce solutions for purchasing and managing print
and e-content knowledge resources.
- December 2001, Eprise Corporation -- a supplier of content
management solutions. This acquisition broadens our content
management solution offerings, and positions us as one of the
first companies to address the entire spectrum of content
management and delivery needs. Eprise Participant Server's
industry-leading capabilities for putting content contribution and
management in the hands of business users, as well as its ease of
implementation and deployment, extend our ability to supply
content management solutions that fit any corporate need.
- December 2001, SoftMetric Inc. -- a provider of telephone call
center management software.
- January 2002, Data Return Corporation -- a provider of advanced
managed hosting services based on Microsoft technologies. Data
Return provides these services to businesses seeking to outsource
the deployment, maintenance, and support of their complex Web
sites. Its services include providing, configuring, operating, and
maintaining the hardware, software, and network technologies
necessary to implement and support these Web sites. Data Return
also offers additional services options, such as scalability and
architecture testing, storage solutions, and a suite of security
services, including firewalls.
- January 2002, Northern Light Technology -- a leading provider of
search and content integration solutions for enterprises. The
acquisition of Northern Light's award-winning premium content
services, enterprise search technology, and ecommerce transaction
engine enhances our comprehensive integrated content,
collaboration, and knowledge solutions for the extended
enterprise.
- February 2002, RWT Corporation (d/b/a Real World Technology, Inc.)
-- a leading provider of production management and tracking
software to manage data across the supply chain and improve plant
productivity. Real World Technology's manufacturing execution
application is a core component of our vertical-specific solutions
for the manufacturing industry.
- March 2002, Delano Technology Corporation -- agreed to be acquired
by us in a stock-based transaction that is subject to the approval
of Delano's stockholders. Delano offers customer relationship
management software that incorporates advanced analytics with
interaction capabilities on a flexible and scalable technology
platform.
We anticipate that the integration of these companies into our products
and services offering will help us to deliver a combination of professional
services, software services, and managed services to our
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customers. Our business strategy includes the acquisition of other businesses
that are complementary to ours, including other providers of enterprise software
products or professional services.
COMPETITION
The market for our products and services is relatively new, intensely
competitive, fragmented, quickly evolving, and subject to rapid technological
change. We believe the primary competitive factors in our markets include
breadth of offerings, price, flexibility, scalability, functionality, ease of
use, ease of deployment, reputation, brand awareness, service, and support. We
expect competition to continue to increase in the future.
We will compete with a variety of companies in each product and solutions
category, independently or on an integrated basis. Some of divine's competitors
include:
divine Professional Services. In the professional services space our
competitors include Accenture, AnswerThink, CSC, Deloitte & Touche, and
Sapient.
divine Software Services. In the software services space our competitors
include Art Technology Group (ATG), Interwoven, Documentum, and Vignette.
We also compete with Concerto, Avaya, Stratasoft, SER Solutions, and
SunDial in the CIM Telephony space; eRoom, Lotus, Intraspect, Jabber, and
Placeware in the Collaboration space; EBSCO Subscription Services, Swets
Blackwell, Screamingmedia, Dialog -- NewsEdge, and Yellowbrix in the
Information Services space; and Broadvision, Documentum, Interwoven,
Stellent, and Vignette in the content management space.
divine Managed Services. In the managed services space our competitors
include Digex, Genuity, IBM, Loudcloud, Navisite, and Qwest
Communications.
We may not be able to compete successfully against current and future
competitors, and competitive pressures faced by us could hurt our business and
financial results. Furthermore, many of our current and potential competitors
have longer operating histories, significantly greater financial, technical,
product development and marketing resources, greater name recognition and a
larger customer base than we do. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion, and sale of their
products and solutions than we can. Also, larger companies such as IBM,
Microsoft, Seibel, and Oracle may expand their product lines and bundle their
products to discourage users from buying competing offerings. Additionally, many
competitors have established and will likely continue to establish cooperative
relationships among themselves or with third parties in order to increase their
market penetration.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
Due to the Internet's popularity and increasing use, new laws and
regulations may be adopted that could have an adverse effect on us. In
particular, states may impose discriminatory, multiple, or special taxes on the
Internet in the event the current moratorium on the application of these taxes,
due to end on November 1, 2003, is not extended. If this moratorium ends,
Federal taxes also may be imposed on the use of the Internet. These state and
federal taxes could cause a decrease in the volume of e-commerce and, therefore,
the demand for our products and services. The enactment of any additional laws
or regulations, including international laws and regulations, could impede the
growth of the Internet and e-commerce, which could decrease our revenue and
place additional financial burdens on our business.
Federal, state, or foreign agencies have also adopted, and may continue
to adopt, laws or regulations affecting the use of outbound call processing
systems. These laws or regulations could limit the market for our products, or
expose us to liability, which could adversely affect our business, operating
results, and financial condition.
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PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trade secret, and
trademark laws, confidentiality procedures, and contractual provisions to
protect our proprietary rights in our products and technology. We hold numerous
United States and foreign patents covering processes and technologies used in
telephony-based call management systems, such as inbound/outbound call blending,
call progress analysis, and screen pops of the called person's account
information. We also hold several patents that assert claims for certain aspects
or uses of electronic commerce software, such as distributed commerce; secure,
real-time payment using credit and debit cards over the Internet; and the use of
"electronic shopping carts" and session identifiers. We have a number of pending
domestic and foreign patent applications on innovations for which patents have
not yet been issued and we continually assess our technology for potential
patent filings.
We require software licensees to enter into license agreements that
impose certain restrictions on their use of our software. We have also taken
steps to avoid disclosure of our trade secrets, including requiring those
persons with access to our proprietary technology and information to enter into
confidentiality agreements with us. In addition to our United States common law
rights in our trademarks and service marks, we pursue the registration of our
trademarks and service marks in the United States Patent and Trademark Office
and equivalent foreign agencies.
EMPLOYEES
As of December 31, 2001, we had approximately 3,600 employees. We believe
that our relations with our employees are generally good.
RISK FACTORS
WE HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST, AND WE EXPECT TO INCUR
ADDITIONAL LOSSES IN THE FUTURE.
We incurred net losses of approximately $9,407,000 for the period from
inception on May 7, 1999 through December 31, 1999, aproximately $470,319,000
for the year ended December 31, 2000, and approximately $369,824,000 for the
year ended December 31, 2001. The majority of these losses in 1999 and 2000 were
related to the consolidated operations of our associated companies and charges
we took to reduce the carrying values of these associated companies. The
majority of our loss in 2001, however, was related to the operation of our
business and our operation of businesses we have acquired. We expect to incur
additional losses for at least the next year. In addition, changes to our
business strategy, operating plans, and product lines, and any restructuring
activity, may cause us to incur additional expenses. Our financial results also
will be affected by our operation of businesses that we may acquire in the
future, some of which may have incurred substantial losses.
Our operating plan depends on us achieving significant increases in
revenue and cash receipts and significant decreases in expenses. There is a
substantial risk, however, that our revenue and cash receipts will not grow at a
sufficient rate, and that we will not be able to reduce our expenses to keep
them in line with our revenue. If we are unable to meet our revenue and expense
management goals, we will need to significantly reduce our workforce, sell
certain of our assets, enter into strategic relationships or business
combinations, discontinue some or all of our operations, or take other similar
restructuring actions. While we expect that these actions would result in a
reduction of recurring costs, they also may result in a reduction of recurring
revenues and cash receipts. It is also likely that we would incur substantial
non-recurring costs to implement one or more of these restructuring actions.
OUR LIQUIDITY IS LIMITED.
We have never generated positive cash flows from operations. Our current
liquidity and capital resources are limited. To succeed, we must in the near
term reduce our rate of cash consumption and
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improve our cash position. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
OUR STOCKHOLDERS MAY BE SIGNIFICANTLY DILUTED.
We are exploring a number of alternatives to generate cash, including
acquiring other entities that have substantial cash balances, selling certain
assets, and new debt or equity financings. We do not currently have in place any
agreements to provide us any of these sources of funds, and these sources of
funds may not be available to us on favorable terms, if they are available to us
at all. In addition, any of these transactions also could result in significant
equity dilution to the holders of our common stock at the time of the
transaction, or later. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ NATIONAL MARKET, THE LIQUIDITY,
VISIBILITY, AND PRICE OF OUR COMMON STOCK MAY DECREASE.
Since our initial public offering in July 2000, our common stock has been
listed on the Nasdaq National Market. Shares of our common stock could be
delisted from the Nasdaq National Market if we fail to satisfy the continued
listing requirements of the Nasdaq National Market, including the minimum bid
price of $1.00 per share. On February 14, 2002, we received a letter from Nasdaq
informing us that, among other things, for the past 30 consecutive trading days,
the price of our common stock had closed below the $1.00 per share requirement
for continued inclusion in the Nasdaq National Market. In addition, the letter
notified us that if the minimum bid price for our common stock had not closed
above $1.00 for at least 10 consecutive trading days before May 15, 2002, our
common stock would be delisted from the Nasdaq National Market, pending any
appeals to Nasdaq that we may make. In the event that our common stock has not
regained compliance with this minimum bid price requirement by May 15, 2002, we
intend to appeal any delisting procedure and to submit to our stockholders a
proposal to effect a reverse stock split through a share combination.
If our common stock is delisted from the Nasdaq National Market, we would
be forced to list our common stock on the Nasdaq SmallCap Market, OTC Bulletin
Board, or some other quotation medium, depending upon our ability to meet the
specific listing requirements of those quotation systems. If this happens, an
investor might find it more difficult to buy and sell, or to obtain accurate
price quotations for, shares of our common stock. This lack of visibility and
liquidity could further decrease the price of our common stock. In addition,
delisting from the Nasdaq National Market might negatively impact our reputation
and, as a consequence, our business.
WE HAVE BEEN IN BUSINESS FOR ONLY TWO YEARS, HAVE LITTLE OPERATING HISTORY, AND
HAVE A NEW BUSINESS STRATEGY THAT MAY CONTINUE TO CHANGE, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR BUSINESS.
We were formed in May 1999 and began operations as an Internet holding
company engaged in business-to-business e-commerce through a community of
associated companies. We announced a new strategy to focus on enterprise Web
solutions in February 2001. Because we have only recently begun operating under
this new business strategy, there is limited data upon which you can evaluate
our prospects. As we continue to analyze business plans and internal operations
in light of market developments, we may decide to make further substantial
changes in our business plan and organization. These changes in business
strategy may include moving into areas in which we have little or no experience.
Furthermore, our future business strategy will depend on our ability to
successfully acquire and integrate other businesses as we continue to seek to
expand our portfolio of products and services. We are, and will remain for the
foreseeable future, subject to risks, expenses, and uncertainties frequently
encountered by young companies, and it will continue to be difficult to evaluate
our business and its likelihood of success.
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OUR OVERALL PERFORMANCE AND QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND WILL
BE AFFECTED BY THE REVENUES AND EXPENSES GENERATED FROM THE PRODUCTS AND
SERVICES OF BUSINESSES WE ACQUIRE AND WILL BE AFFECTED BY FLUCTUATIONS IN THE
SALES OF THESE PRODUCTS AND SERVICES.
We expect the revenues of businesses we acquire to comprise a significant
portion of our revenues in the future. In particular, we expect the revenues of
RoweCom Inc., a provider of knowledge resources which we recently acquired, to
represent a significant portion of our revenues because RoweCom historically has
recognized as revenue its cost of the knowledge resource it sells plus the fee
retained by RoweCom. Fluctuations in the revenues generated from our offering of
customer interaction management ("CIM") solutions, content management, knowledge
resources, and professional services will likely impact our overall performance,
and risks relating to our CIM solutions, content management, knowledge
resources, and professional services may affect our success as a whole.
Moreover, our revenues and results of operations have varied
substantially from quarter to quarter. We expect large fluctuations in our
future quarterly operating results due to a number of factors, including:
- the completion of acquisitions and the increased revenues and
expenses associated with the acquired businesses;
- the success of, and costs associated with, acquisitions, joint
ventures, or other strategic relationships;
- losses or charges incurred by associated companies that may
include significant write-downs, write-offs, and impairment
charges;
- the level of product and price competition;
- the length of our sales and implementation processes;
- the size and timing of individual transactions;
- seasonal trends;
- the mix of products and services sold;
- software defects and other product quality problems;
- the timing of new product introductions and enhancements by us and
our competitors;
- customer order deferrals in anticipation of enhancements or new
products to be offered by us and our competitors;
- changes in foreign currency exchange rates;
- customers' fiscal constraints; and
- general economic conditions.
Because RoweCom's cash flow is seasonal in nature, RoweCom periodically
will have to rely on financing from us or third parties to support its needs for
working capital. RoweCom has an established practice of paying publishers 30 to
60 days before receipt of its customers' funds. Consequently, RoweCom
anticipates making substantial additional expenditures in the fourth quarter of
each year, while receiving the majority of its cash receipts relating to those
purchases late in the first quarter of the following year. Given these seasonal
cash flow imbalances, if RoweCom has an unexpected demand for liquid capital, or
does not have financing available on commercially reasonable terms, or at all,
when needed, it could have a material adverse effect on our future results of
operations and financial condition.
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IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR ACQUISITION STRATEGY OR ADDRESS THE
RISKS ASSOCIATED WITH ACQUISITIONS, OUR GROWTH AND ABILITY TO COMPETE MAY BE
IMPAIRED.
Our business strategy includes the acquisition of other businesses that
are complementary to ours, including other providers of enterprise software
products, professional services, or managed applications. We may not be able to
identify suitable acquisition candidates available for sale at reasonable
prices, consummate any acquisitions, or successfully integrate any acquired
businesses into our operations. Acquisitions, including our recently completed
acquisitions of eshare communications, Inc., Open Market, Inc., RoweCom Inc.,
Eprise Corporation, and Data Return Corporation, and our pending acquisition of
Delano Technology Corporation, involve a number of special risks and challenges,
including:
- diversion of management's attention;
- expenses incurred to effect the transactions;
- assimilation of the operations and personnel of acquired
companies;
- inability to eliminate redundant expenses;
- incorporation of acquired products into existing product lines;
- adverse short-term effects on reported operating results;
- assumption of the liabilities of acquired companies;
- loss of acquired customers;
- adverse reaction by our customers, vendors, and the capital
markets if we are unable to consummate announced acquisitions;
- possible loss of key employees; and
- difficulty of presenting a unified corporate image.
If we are unable to successfully implement our acquisition strategy or address
the risks associated with acquisitions, our growth and ability to compete may be
impaired.
If we engage in future acquisitions, we might finance these acquisitions
with available cash, the proceeds from possible debt financing, the issuance of
additional equity securities (common or preferred stock), or a combination of
the foregoing. We may not be able to arrange adequate financing on acceptable
terms. If we proceed with one or more significant future acquisitions, we may
use a substantial portion of our available cash to consummate the acquisitions.
If we consummate one or more significant acquisitions by issuing additional
equity securities, the market price of our common stock could decline and
stockholders could suffer significant dilution. Furthermore, sellers may be
reluctant to accept divine common stock as consideration at its recent price
level and given its historical volatility, in which case our ability to complete
further acquisitions could be significantly limited.
For most of the businesses that we may acquire, we will likely have to
record significant goodwill and other intangible assets, and generally accepted
accounting principles may require us to recognize substantial amortization
charges on the other intangible assets, reducing our future reportable earnings.
We also will have to periodically test our goodwill and other intangible assets
for impairment. If we determine that the value of the goodwill and/or the
intangible assets have been impaired, we will be required to recognize
substantial charges that would adversely affect our operating results. In
addition, these acquisitions could involve significant non-recurring
acquisition-related charges, such as the write-off or write-down of software
development costs or other intangible items.
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OUR FAILURE TO RETAIN KEY PERSONNEL MAY NEGATIVELY AFFECT OUR BUSINESS.
Our success depends on our ability to retain senior executives and other
key employees who are critical to the continued advancement, development, and
support of our products and services and ongoing sales and marketing efforts.
The loss of any key personnel or any significant group of employees could
negatively affect our future business and prospects. If our management does not
succeed in their roles, or we are not able to effectively allocate management
responsibilities and cause our officers and senior managers to operate
effectively as a group, our business could be negatively affected.
Employee morale and our ability to attract and retain qualified employees
may also be adversely affected by the decline and substantial fluctuation in the
market price of our common stock since its initial public offering, as many of
our employees hold options with exercise prices far greater than our recent
stock price.
REVENUES FROM OUR PROFESSIONAL SERVICES DIVISION ARE DIFFICULT TO PREDICT
BECAUSE THEY ARE DERIVED FROM PROJECT-BASED ENGAGEMENTS.
For the year ended December 31, 2001, we derived approximately 77% of our
revenues from professional services. Almost all of these revenues were from
project-based client engagements, which vary in size and scope. As a result, the
revenues of our professional services division are difficult to predict because
a client that accounts for a significant portion of these revenues in one period
may not generate a similar amount of revenues, if any, in subsequent periods. In
addition, because many of our professional services engagements involve
sequential stages, each of which may represent a separate contractual
commitment, a client may choose not to retain us for subsequent stages of an
engagement or for new professional services projects.
IF WE CANNOT KEEP OUR BILLABLE PROFESSIONALS ENGAGED ON CLIENT PROJECTS, OUR
FUTURE REVENUES COULD DECLINE AND OUR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED.
Virtually all the client contracts of our professional services division
allow the client to terminate our services on relatively short notice and do not
guarantee us any specific or minimum amount of business from the client. To the
extent that any significant clients decrease their use of our professional
services, delay an engagement, or terminate their relationship with us, the
revenues of our professional services division could decline substantially and
our overall operating results could be adversely affected to the extent we are
unable to quickly redeploy our billable professionals to other client
engagements.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS, AND COMPETITIVE PRESSURES FACED BY US COULD HURT OUR BUSINESS AND
FINANCIAL RESULTS.
The market for our products and services is intensely competitive,
fragmented, and subject to rapid change. We compete with a variety of companies
that provide software services, professional services, and managed services
independently or on an integrated basis. We may not be able to compete
successfully against current and future competitors, and competitive pressures
faced by us could hurt our business and financial results. Furthermore, many of
our current and potential competitors have longer operating histories;
significantly greater financial, technical, product development, and marketing
resources; greater name recognition; and a larger customer base than we do.
IF WE DO NOT EXPAND OUR CUSTOMER BASE, WE MAY NEVER BECOME PROFITABLE AND OUR
STOCK PRICE WILL LIKELY DECLINE.
The market for many of our products and services is newly emerging. As a
result, we cannot accurately estimate the potential demand for them. We believe
that market acceptance of many of our products and services will depend
principally on our ability to:
- timely develop or acquire products and services that meet changing
customer needs;
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- effectively market our products and services;
- hire, train, and retain a sufficient number of qualified sales and
marketing personnel;
- provide high-quality and reliable customer support for our
products;
- distribute and price our products and services in a manner that is
more appealing to customers than that of our competitors;
- develop a favorable reputation among our customers, potential
customers, and participants in the software industry; and
- withstand downturns in general economic conditions or conditions
that would slow corporate spending on software products and
professional services.
Our inability to accomplish any of the foregoing may limit our ability to expand
our customer base. If our customer base does not expand, we may never become
profitable and our stock price will likely decline.
OUR SUCCESS DEPENDS UPON THE MARKET FOR INTERNET SERVICES, WHICH, ALONG WITH THE
GENERAL ECONOMY, IS EXPERIENCING A DOWNTURN.
During late 2000 and 2001, and particularly since September 11, 2001, the
market for Internet services and technology experienced a significant decline.
This decline is at least partly attributable to funding difficulties experienced
by many companies, a general economic slowdown, and instability in the financial
markets. These developments have caused many of our current and potential
customers and clients to cancel, reduce, and/or delay some projects. A prolonged
economic slowdown or continued uncertainty about the future of the market for
Internet services also will adversely affect our business and financial results.
If demand for our products and services does not improve, increased competition
for business may result in significant decreases in the prices we charge for our
products and services. The market for our products and services may not improve
in a timely manner or to the extent necessary to allow us to achieve and sustain
profitability or viability in the near future.
OUR SUCCESS WILL DEPEND UPON THE ABILITY OF OUR PRODUCTS TO WORK WITH A LARGE
VARIETY OF HARDWARE, SOFTWARE, DATABASE, AND NETWORKING SYSTEMS.
The success of our products will depend on the ability of our products to
integrate and be compatible with customer systems, particularly hardware
systems, operating systems, and data sources, as well as or better than
competing products. The success of our products will also depend on the ability
of our existing products to work well with one another, with new products we
develop, and with new software developed by third parties. We currently serve,
and intend to continue to serve, a customer base with a wide variety of
hardware, software, database, and networking systems. If we cannot support an
increasing number of systems in the future, we might not gain broad market
acceptance.
CUSTOMERS WILL BE LESS LIKELY TO ACCEPT OUR PRODUCTS IF WE ARE UNABLE TO
INTRODUCE IN A TIMELY MANNER NEW SOFTWARE PRODUCTS AND ENHANCEMENTS THAT MEET
INDUSTRY REQUIREMENTS.
The market for our software products is subject to rapid technological
change, changing customer needs, frequent new product introductions, and
evolving industry standards that may render our existing products and services
obsolete. As a result, unforeseen changes in customer and technological
requirements for application features, functions, and technologies could limit
our ability to develop market share or could rapidly erode our position in those
markets in which we have an established presence. Our growth and future
operating results will depend in part upon our ability to develop and introduce
new applications that anticipate, meet, or exceed technological advances in the
marketplace, meet changing customer requirements, respond to competitive
products, and achieve market acceptance.
19
New products, platforms, and language support typically require long
development and testing periods. New products or enhancements may not be
released according to schedule or may contain defects when released. Either
situation could result in adverse publicity, loss of sales, delay in market
acceptance of our products, or customer claims against us, any of which could
harm our business. Our product acquisition, development, and testing efforts
have required, and are expected to continue to require, substantial investments.
We may not possess sufficient resources to make these necessary investments.
We also expect to develop and introduce new and enhanced versions of
products as an integrated suite. In addition to the risks and uncertainties
inherent in the development and introduction of new products, we will face
significant challenges in developing and introducing new products and versions
that work together effectively and allow customers to achieve the benefits of a
broader product offering. We may not be able to identify or overcome these
challenges.
IF WE CANNOT CROSS-SELL THE PRODUCTS AND SERVICES OF OUR ACQUIRED COMPANIES TO
OUR OTHER CUSTOMERS, WE WILL NOT ACHIEVE ONE OF THE EXPECTED BENEFITS OF OUR
ACQUISITIONS.
After we acquire a company, we intend to offer the products and services
of that company to our existing customers and the customers of our other
acquired companies, and to offer our products to the existing customers of the
acquired company. One company's customers may not have an interest in the other
companies' products and services. If we fail to cross market our products and
services, we will not achieve one of the expected benefits of our acquisitions,
and this failure could have a material adverse effect on our business, financial
condition, and operating results.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THERE ARE DEFECTS IN OUR SOFTWARE OR
WE ARE UNABLE TO ACQUIRE THIRD-PARTY SOFTWARE OR HARDWARE THAT IS ERROR-FREE.
Software products as complex as those that we offer may contain errors
that could occur at any point in a product's life cycle. We have, in the past,
discovered software errors in certain of our products and have experienced
delays in shipment or implementation of products or services during the period
required to correct these errors. Despite extensive testing by us and by our
current and potential customers, errors in our software may be found in the
future. This could result in a loss of, or delay in, market acceptance and
sales; diversion of development resources; injury to our reputation; or
increased service and warranty cost. In particular, the call center environment
is characterized by a wide variety of standard and non-standard configurations
that make pre-release testing for programming or compatibility errors very
difficult and time consuming and will limit our ability to uncover all defects
prior to shipment and installation at a customer's location. We also license
certain software used in our products from third parties, and our products are
designed to operate on certain hardware platforms manufactured by third parties.
Third-party software or hardware may contain errors that we depend upon others
to correct. These errors could cause problems with the installation and
operation of our products, which could harm our business.
WE MAY FACE POTENTIAL LIABILITY TO CUSTOMERS IF OUR SERVERS, SYSTEMS, OR
PRODUCTS, OR OUR CUSTOMERS' SYSTEMS, FAIL.
Our software, portal, and applications products and managed and
professional services are often critical to the operation of our customers'
businesses and provide benefits that may be difficult to quantify. If one of our
servers, systems, or products, or a customer's system, fails, the customer could
make a claim for substantial damages against us, regardless of our
responsibility for that failure. The limitations of liability set forth in our
contracts may not be enforceable in all instances and may not otherwise protect
us from liability for damages. Our insurance coverage may not continue to be
available on reasonable terms or in sufficient amounts to cover one or more
large claims. In addition, the insurer might disclaim coverage as to any future
claim. If we experience one or more large claims against us that exceed
available insurance coverage or result in changes in our insurance policies,
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including premium increases or the imposition of large deductible or
co-insurance requirements, our business and financial results could be hurt.
WE COULD LOSE OUR COMPETITIVE ADVANTAGE IF WE FAIL TO ADEQUATELY PROTECT OUR
PROPRIETARY RIGHTS, AND ANY RELATED LITIGATION COULD BE COSTLY AND TIME
CONSUMING.
We rely on a combination of patent, copyright, trade secret, and
trademark laws, confidentiality procedures, and contractual provisions to
protect our proprietary rights in our products and technology. These measures
may not be adequate to protect our trade secrets and proprietary technology. As
a result, unauthorized third parties may copy or otherwise obtain and use our
products or technology. We may not be able to detect all instances of
infringement. Furthermore, we may be subject to additional risks as we enter
into transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protection of our rights may be
ineffective in these countries. If we must engage in litigation to defend and
enforce our intellectual property rights, either domestically or in other
countries, we could face substantial costs and diversion of resources,
regardless of the outcome of that litigation. Any future attempt by us to
enforce our intellectual property rights might not be successful, might result
in royalties that are less than the cost of such enforcement efforts, or might
result in the loss of the intellectual property altogether. Even if we succeed
in protecting our intellectual property, others may independently develop
similar technologies or products that do not infringe on our intellectual
property.
OTHER COMPANIES MAY CLAIM THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD HARM OUR BUSINESS.
Third parties may claim that we are infringing their intellectual
property rights. We expect that the risk of infringement claims will rise as the
number of products and competitors in our industry grows and the functionality
of products in different industry segments overlaps. To develop our services and
products, we may need to acquire licenses for intellectual property to avoid
infringement of a third party's product. These licenses may not be available on
commercially reasonable terms, if at all. Former employers of our present and
future employees may assert claims that these employees improperly disclosed
confidential or proprietary information to us. Any such claims could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays, or require us to pay
money damages or enter into royalty or licensing agreements. These royalty or
licensing agreements may not be available on terms acceptable to us, if at all.
In the event of a successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology on
commercially reasonable terms, or at all, our business, operating results, and
financial condition could be materially and adversely affected.
WE MAY NOT BE ABLE TO PREVENT ONLINE SECURITY BREACHES, WHICH COULD INTERRUPT
OUR OPERATIONS, DAMAGE OUR REPUTATION, AND EXPOSE US TO LIABILITY.
A party that is able to circumvent our security systems or the security
systems of our customers could steal proprietary information or cause
interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Our insurance policies have coverage limits and exclusions that may prevent
reimbursement for losses caused by security breaches. Furthermore, our servers
may be vulnerable to computer viruses, physical or electronic break-ins, and
similar disruptions. We may need to expend significant additional capital and
other resources to protect against security breaches or to alleviate problems
caused by any breaches. Despite these efforts, we may not be able to prevent all
security breaches.
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RESTRICTIONS RELATING TO THE PRIVACY OF INTERNET USERS AND THE COLLECTION AND
USE OF ONLINE DATA COULD LIMIT THE UTILITY OF THE PERSONALIZATION FUNCTIONALITY
OF OUR PRODUCTS AND, THEREFORE, THE ATTRACTIVENESS OF THOSE PRODUCTS TO
CUSTOMERS.
One of the principal features of the products of eshare communications,
Inc., Open Market, Inc., Eprise Corporation, and Data Return Corporation, each
of which we recently acquired, and Delano Technology Corporation, which we
recently agreed to acquire, is the ability to develop and maintain profiles of
online users to assist business managers in personalizing content and in
displaying tailored commercial offers to specific online users. By limiting the
ways that this feature can be used, proposed and existing legal restrictions on
the collection and use of information relating to Internet users could
materially and adversely impact eshare's, Open Market's, Eprise's, Data
Return's, and Delano's products. For example, legislation has been proposed in
some jurisdictions that would regulate the practice of placing small information
files, or "cookies," on a user's hard drive to gather information. Likewise,
regulation of the practice of online preference marketing is also under
consideration in many jurisdictions. Moreover, legislation regulating online and
offline data collection is already in place in the United States and elsewhere,
including the European Union. Although regulatory and legislative efforts in
this area are relatively new and still developing, they continue to gain
attention, and continued regulation and legislation in this area could adversely
affect the demand for eshare's, Open Market's, Eprise's, Data Return's, and
Delano's products.
OUR KEY PERSONNEL HAVE ENTERED INTO NON-COMPETE AGREEMENTS THAT COULD PREVENT US
FROM ENGAGING IN CERTAIN ACTIVITIES AND ACQUIRING INTERESTS IN SOME COMPANIES.
Andrew J. Filipowski, our chairman and chief executive officer; Michael
P. Cullinane, our executive vice president, chief financial officer, and
treasurer and a director; and Paul L. Humenansky, our president and chief
operating officer and a director, have entered into consulting and non-compete
agreements with PLATINUM technology International, inc. , now a wholly owned
subsidiary of Computer Associates International, Inc. These agreements prohibit
Mr. Filipowski until June 29, 2007, and each of Messrs. Cullinane and Humenansky
until June 29, 2004, from participating or engaging, directly or indirectly, in
the development, manufacture, marketing, or distribution of any products or
services offered by PLATINUM as of March 29, 1999, or any products or services
offered by PLATINUM after that date in the development of which they had
actively participated. PLATINUM was, as of March 29, 1999, and continues to be,
engaged in the business of developing, marketing, and supporting software
products for managing information technology infrastructures and providing
related professional services. As of March 29, 1999, PLATINUM also offered
products and services for the creation, deployment, and management of Web
content. Under these agreements, Messrs. Filipowski, Cullinane, and Humenansky
also are prohibited from soliciting, or assisting another person to solicit or
attempt to solicit, persons or entities that were current customers of PLATINUM
or its affiliates before the end of the respective consulting periods of Messrs.
Filipowski, Cullinane, and Humenansky, unless the solicitation of these
customers is for goods or services unrelated to any activity that competes with
PLATINUM.
To manage divine's business effectively in light of these agreements,
divine has consulted with PLATINUM and Computer Associates before making any
acquisition to confirm that a breach of these agreements would not result. These
consulting and non-compete agreements could limit our business opportunities,
which could impair our success.
DELAYS IN SALES AND THE IMPLEMENTATION CYCLE FOR CIM SOLUTIONS AND MANAGED
APPLICATIONS COULD ADVERSELY AFFECT US.
If we experience delays in, or cancellations of, sales or implementations
of CIM solutions and managed applications, our business and financial results
could be hurt. To sell these products, we generally must provide a significant
level of education to prospective customers regarding their use and benefits. In
addition, prospective customers generally make a significant commitment of
resources in
22
connection with the implementation of these products. For these and other
reasons, the length of time between the date of initial contact with the
potential customer and the installation and use of these solutions has generally
been six months or more. Our implementation cycle could be lengthened in the
future by delays over which we have little or no control, increases in the size
and complexity of our installations, and the number of third-party systems with
which our products must be integrated. In addition, any unexpected delays in
individual implementations could generate negative publicity and expose us to
liability claims from our customers.
OUR STRATEGY TO EXPAND OUR INTERNATIONAL OPERATIONS IS SUBJECT TO MANY UNIQUE
RISKS THAT MAY PREVENT US FROM MAINTAINING OR INCREASING OUR INTERNATIONAL
REVENUES.
A significant element of our business strategy is to expand our
operations in international markets. For example, we expect our recent
acquisitions of RoweCom, Open Market, eshare, and marchFIRST GmbH to
significantly increase our international presence, as each of these companies
generates a significant amount of its revenues outside the United States. This
projected expansion will require significant management attention and financial
resources. Because of the difficulty in penetrating new markets, we may not be
able to maintain or increase international revenues. Our international
operations are subject to a number of inherent risks, which will increase as the
international operations expand, including:
- significant volatility in the level and timing of business;
- the impact of possible recessionary environments in economies
outside the United States;
- changes in foreign legal and regulatory requirements;
- changes in tariffs;
- the costs of localizing products for foreign markets and
integrating products with foreign system components;
- longer accounts receivable collection periods and greater
difficulty in accounts receivable collection;
- difficulties and costs of staffing and managing foreign
operations;
- reduced protection for intellectual property rights in some
countries;
- potentially adverse tax consequences;
- political and economic instability; and
- the higher cost of foreign service delivery.
Although expenses incurred in foreign countries typically have been
denominated in the local currencies, revenues generated by international sales
typically have been paid in U.S. dollars, British pounds, or Euros. We could
experience fluctuations in currency exchange rates in the future that would have
a material adverse impact on our international operations.
OUR GROWTH IN OPERATIONS WILL LIKELY DEPEND UPON THE SUCCESSFUL
DEVELOPMENT OF DIRECT AND INDIRECT SALES CHANNELS.
Our ability to achieve significant revenue growth in the future will
greatly depend on our ability to recruit and train sufficient technical and
direct sales personnel and to outsource effectively our customer-support
functions. We also believe that our future growth will depend on our ability to
continue to develop and maintain indirect sales channels, including VARs and
distributors. Additionally, our investment of significant resources to develop
these indirect sales channels could adversely affect our operating results if
they do not generate sufficient additional revenues.
23
If we are unable to recruit and retain qualified VARs and distributors,
our results of operations could be adversely affected. Increased indirect sales
also could adversely affect our average selling prices and result in lower gross
margins because lower unit prices typically are charged on sales made through
indirect channels. Sales of products through indirect channels will reduce our
gross profits from our services because VARs and distributors provide these
services.
As indirect sales increase, our direct contact with our customer base
will decrease, and we may have more difficulty accurately forecasting sales,
evaluating customer satisfaction, and recognizing emerging customer
requirements. In addition, VARs and distributors may develop, acquire, or market
products competitive with our products. Our strategy of marketing products
directly to customers and indirectly through VARs and distributors may result in
distribution channel conflicts. Our direct sales efforts may compete with those
of our indirect channels and, to the extent different VARs and distributors
target the same customers, VARs and distributors may also come into conflict
with each other. Any channel conflicts that develop may have a material adverse
effect on our relationships with VARs and distributors or hurt our ability to
attract new VARs and distributors.
THE MARKET PRICE OF OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE, WHICH COULD
CAUSE LITIGATION AGAINST US AND PREVENT OUR STOCKHOLDERS FROM RESELLING THEIR
SHARES AT OR ABOVE THE PRICES AT WHICH THEY ACQUIRED THEM.
From our initial public offering in July 2000 through the date of this
report, the price per share of our common stock has ranged from a high of $12.44
to a low of $0.42. The market price of our common stock has been, and is likely
to continue to be, highly volatile and subject to wide fluctuations due to
various factors, many of which are beyond our control, including:
- quarterly variations in operating results;
- volatility in the stock market;
- volatility in the general economy, including as a result of any
additional terrorist attacks or responses to terrorist attacks;
- changes in interest rates;
- announcements of acquisitions, technological innovations, or new
software, services, or products by us or our competitors; and
- changes in financial estimates and recommendations by securities
analysts.
In addition, there have been large fluctuations in the prices and trading
volumes of securities of many technology, Internet, CRM, and CIM product and
related professional-service companies. Broad market and industry factors may
decrease the market price of our common stock. As a result, our stockholders may
be unable to resell their shares of our common stock at or above the prices at
which they were acquired. In the past, volatility in the market price of a
company's securities has often led to securities class action litigation. This
litigation could result in substantial costs to us and divert our attention and
resources, which could harm our business. Declines in the market price of our
common stock or failure of the market price to increase could also harm our
ability to retain key employees, our access to capital, and other aspects of our
business, which also could harm our business.
24
OUR STOCKHOLDER RIGHTS PLAN AND PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
OUR BY-LAWS, AND DELAWARE LAW COULD DELAY OR DETER TENDER OFFERS OR TAKEOVER
ATTEMPTS THAT MAY OFFER OUR STOCKHOLDERS A PREMIUM FOR THEIR COMMON STOCK.
Our stockholder rights plan and provisions in our certificate of
incorporation, our by-laws, and Delaware law could make it more difficult for a
third party to acquire control of us, even if that transaction would be
beneficial to our stockholders. These impediments include:
- the rights issued in connection with the stockholder rights plan
that will substantially dilute the ownership of any person or
group that acquires 15% or more of our common stock unless the
rights are first cancelled or redeemed by our board of directors,
in its discretion;
- the classification of our board of directors into three classes
serving staggered three-year terms;
- the ability of our board of directors to issue shares of preferred
stock with rights as it deems appropriate without stockholder
approval;
- a requirement that special meetings of our board of directors may
be called only by our chairman, president, or a majority of our
board of directors;
- a prohibition against action by written consent of our
stockholders;
- a requirement that our stockholders comply with advance-notice
provisions to bring director nominations or other matters before
meetings of our stockholders; and
- the adoption of a provision of Delaware law that prohibits us from
entering into some business combinations with interested
stockholders without the approval of our board of directors.
The existence of the stockholder rights plan and these provisions may
deprive our stockholders of an opportunity to sell their shares at a premium
over prevailing prices. The potential inability of our stockholders to obtain a
control premium could adversely affect the market price for our common stock.
ITEM 2. PROPERTIES
Our corporate headquarters and principal operating facilities are
currently located in approximately 126,000 square feet of leased space at 1301
N. Elston Avenue, Chicago, Illinois, which is rented under a lease with 8 years
remaining. We also have administrative and other offices in approximately 76,000
square feet of office space in Lisle, Illinois, which is rented under a lease
with nine years remaining, and an office for our professional services group in
approximately 50,000 square feet of office space in Chicago, Illinois, which is
rented under a lease with nine years remaining.
We also have a number of other substantial offices that we have assumed
in connection with our various business acquisitions. These offices include:
- approximately 120,000 square feet of office space in Burlington,
Massachusetts, which is the former headquarters of Open Market,
Inc. and is rented under a lease with eight years remaining;
- approximately 100,000 square feet of office space in Irving,
Texas, which is the former headquarters of Data Return Corporation
and is rented under a lease with approximately 65,000 square feet
with one year remaining and approximately 35,000 square feet with
four years remaining;
25
- approximately 100,000 square feet of office space in Norcross,
Georgia, which is the former headquarters of eshare
communications, Inc. and is rented under a lease with four years
remaining; and
- approximately 78,000 square feet of office space in Framingham,
Massachusetts, which is the former headquarters of Eprise
Corporation and is rented under a lease with nine years remaining.
We are also leasing space for operational, professional services group,
sales, and support centers located throughout North America, Europe, Asia, and
Australia.
Our offices are sufficient to meet our present needs, and we do not
anticipate any difficulty in securing additional office space, as needed, on
terms acceptable to us. We are also attempting to sublease or terminate various
of the leases for offices of the businesses that we acquired as we consolidate
and integrate our acquired business operations, eliminate redundancies, and
reduce our workforce.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various claims and litigation that involve routine
matters incidental to the operation of our business. In addition, we are a party
to the following legal proceedings.
EL UNIVERSAL ON LINE DE MEXICO, S.A. DE C.V. V. OPEN MARKET, INC.
On September 14, 2001, Open Market, Inc., which we acquired on October
19, 2001, was served with a complaint filed on behalf of El Universal On Line de
Mexico, S.A. de C.V. in the Middlesex County Superior Court for the Commonwealth
of Massachusetts. The complaint alleges, among other things, that certain Open
Market software purchased by El Universal through a representative of Open
Market did not perform as warranted or represented, that Open Market breached
implied warranties on international sale of goods, and that it fraudulently
induced El Universal to purchase the software. El Universal is claiming damages,
including consequential damages for, among other things, loss of business, of
approximately $5,000,000. We filed a motion to dismiss the case in October 2001.
We are in the early stages of the litigation. We intend to defend the case
vigorously.
IN RE OPEN MARKET, INC. SECURITIES LITIGATION
Six putative class actions were filed between June 14, 2000 and August
10, 2000, against Open Market and certain of its officers and directors in the
United States District Court for the District of Massachusetts. These actions,
each filed on behalf of an alleged class of Open Market stockholders who
purchased Open Market common stock between November 18, 1999 and April 18, 2000,
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. In particular, they allege, among
other things, that during the putative class period, the defendants sought to
mislead the investing public by overstating Open Market's prospects and the
quality of its products. The plaintiffs are seeking monetary damages and other
appropriate relief. On January 25, 2001, the court entered an order
consolidating these actions into one action. This consolidated case is
captioned: In re: Open Market Securities Litigation, C.A. No. 00-CV-11162. On
April 13, 2001, the plaintiffs filed their consolidated class action complaint.
On May 29, 2001, Open Market filed a motion seeking dismissal of all counts of
the consolidated complaint. On August 3, 2001, the plaintiffs' filed their
motion in opposition to the defendants' motion to dismiss. On September 7, 2001,
the defendants filed their reply to the plaintiffs' opposition motion. On
November 20, 2001, the court heard oral argument on the defendants' motion to
dismiss. We are in the early stages of the litigation, but we believe Open
Market and the other defendants have meritorious defenses against this suit. If
the court denies the motion to dismiss, we intend to defend the case vigorously.
26
INTERNATIONAL MARKETING CORPORATION (IMC) V. MELITA INTERNATIONAL CORPORATION
(ESHARE COMMUNICATIONS, INC.)
IMC is a former customer of eshare communications, Inc., which we
acquired on October 23, 2001. IMC purchased, from eshare, software and
maintenance on a PhoneFrame network obtained from AT&T. In May 1999, IMC filed
suit in Ontario, Canada against eshare and AT&T. This lawsuit alleges breach of
contract, negligence, misrepresentation, and/or conspiracy, and claims damages
of $10,000,000. Notwithstanding this claim, IMC recently offered to settle the
case for $250,000. eshare declined the settlement offer, and discovery is
scheduled to begin in the near future. We are in the early stages of the
litigation, and intend to defend the case vigorously.
RIFKIN ET AL V. ROWECOM
On February 22, 2001, RoweCom Inc., which we acquired on November 6,
2001, was served with a lawsuit brought by two former employees and shareholders
of RoweCom, David Rifkin and Julie Beckerman. In that case, the plaintiffs
alleged that RoweCom had breached its employment agreements with the plaintiffs,
resulting in constructive termination of their employment with RoweCom. In
addition, the plaintiffs alleged that RoweCom failed to register certain
securities with the Securities and Exchange Commission, causing the plaintiffs
to be unable to sell their RoweCom stock at an advantageous price. The lawsuit
seeks damages of $1,400,000. We are in the early stages of the litigation.
RoweCom believes that the lawsuit is without merit and we intend to defend the
case vigorously.
IN RE ROWECOM & DATA RETURN INITIAL PUBLIC OFFERING SECURITIES LITIGATION
RoweCom and Data Return are each one of numerous companies that have been
named as defendants by purchasers of securities in public offerings in certain
purported class actions brought in the U.S. District Court for the Southern
District of New York, In re: Initial Public Offering Securities Litigation, 21
MC 92 (SAS), On behalf of Plaintiff, et al. v. RoweCom Inc., et al., and On
behalf of Plaintiff, et al. v. Data Return Corp., et al. The complaints also
name one or more of each company's underwriters and certain officers and
directors of each company in their respective initial public offerings. The
complaints allege violations of the federal securities laws regarding statements
in each company's initial public offering registration statement and prospectus
concerning the underwriters' activities in connection with the underwriting of
each company's common shares to the public. The actions seek rescission of the
plaintiff's alleged purchases of common shares and other damages and costs
associated with the litigation. Various plaintiffs have filed similar actions
asserting virtually identical allegations against more than 100 other companies.
We are in the early stages of this litigation, believe that we have
meritorious defenses to these lawsuits, and will vigorously defend them.
CYBERGUARD CORPORATION V. DATA RETURN CORPORATION
On November 2, 2001, CyberGuard Corporation filed a lawsuit against Data
Return in the United States District Court of the Southern District of Florida
alleging Data Return breached a Master Purchase and Sale Agreement by
discontinuing the purchase of certain hardware and software firewalls.
CyberGuard is seeking, among other remedies, damages of approximately
$4,200,000. Data Return has responded that the firewalls never functioned
properly and that it was not obligated to purchase malfunctioning equipment. We
have denied all of CyberGuard's allegations and have moved to dismiss the
complaint. We intend to defend the case vigorously.
27
ELECTRO RENT CORP. V. DIVINE, INC.
Electro Rent Corp filed suit against divine, inc. alleging breach of
contract, unjust enrichment and conversion in connection with certain leased
equipment. Electro Rent is seeking, among other remedies, approximately
$1,200,000. divine has recently answered the complaint. We intend to defend the
case vigorously.
AERO FULFILLMENT SERVICES, INC. V. ORACLE CORPORATION. AND DIVINE/WHITMAN-HART,
INC.
On December 1, 2001, Aero Fulfillment Services, Inc. ("Aero") filed suit
against Oracle Corporation and divine/Whitman-Hart, Inc ("dWH") alleging breach
of contract, unjust enrichment/restitution, negligent misrepresentation, and
breach of fiduciary duty by dWH. Aero is seeking in excess of $1,500,000 in
damages from dWH. dWH believes that these claims are without merit as the
conduct at issue occurred prior to dWH's acquisition of certain of the assets of
marchFIRST, Inc. and dWH did not assume responsibility for the liability
attendant to such conduct.
Aero has yet to effect service of process on dWH in this action.
Representatives of Aero and dWH are currently engaged in settlement discussions,
though no settlement has been reached. If a settlement cannot be reached and
Aero effects service of process on dWH, we intend to vigorously defend this
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following summarizes the votes of our stockholders at a Special
Meeting of Stockholders held on October 19, 2001:
MATTER FOR AGAINST ABSTAIN NON-VOTE SHARES VOTED
- -------- ---------- -------- -------- -------- ------------
Proposal to approve the issuance of divine,
inc. Class A common stock in the merger with
eshare communications, Inc. ................... 110,140,342 514,779 93,466 0 110,748,587
Proposal to approve the issuance of divine,
inc. Class A common stock in the merger with
Open Market, Inc .............................. 110,098,730 512,974 136,883 0 110,748,587
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our class A common stock is traded on the Nasdaq National Market, Inc.
("Nasdaq") under the symbol "DVIN." On December 31, 2001, the last reported sale
price of our common stock on Nasdaq was $0.74 per share. At March 27, 2002,
there were approximately 2,250 record holders of our common stock. The table
below sets forth the high and low sales prices per share of our common stock on
Nasdaq for the periods indicated.
We have not paid any dividends on our common stock. We intend to continue
to retain any earnings to finance our growth and for general corporate purposes.
We do not anticipate paying any dividends in the foreseeable future.
MARKET INFORMATION
COMMON STOCK
------------
HIGH LOW
---- ---
Period From July 11, 2000 (initial public offering):
3rd Quarter $ 12.44 $ 3.62
4th Quarter 4.25 1.00
Year Ended December 31, 2001:
1st Quarter $ 2.06 $ 1.00
2nd Quarter 2.85 1.09
3rd Quarter 2.15 0.55
4th Quarter 0.85 0.42
RECENT SALES OF UNREGISTERED SECURITIES
We issued 5,500,000 shares of our class A common stock in December 2001
to pay, in full, promissory notes issued to the former stockholders of Synchrony
Communications, Inc. in connection with our acquisition of 100% of the stock of
Synchrony in October 2001. We also issued warrants to purchase 44,756 shares of
our class A common stock in connection with this acquisition in October 2001.
In October 2001, we acquired, through divine/Whitman-Hart, inc., one of
our wholly owned subsidiaries, the assets of marchFIRST, Inc.'s HostOne
application hosting unit. We issued 8,196,722 shares of our class A common stock
to Microsoft Corporation in exchange for the cancellation of debt owned by
marchFIRST to Microsoft in connection with this acquisition in October 2001.
In November 2001, we issued 8,000,000 shares of our class A common stock
in connection with our acquisition of the 62.6% of Latin Amercian Econetworks
N.V. (known also as Dolphin Interventures) that we did not already own.
In November 2001, we issued 165,667 shares of our class A common stock to
certain former management of SageMaker, Inc. in connection with our acquisition
of SageMaker in May 2001.
In December 2001, we issued 255,937 shares of our class A common stock to
certain former employees of Parlano, Inc. in connection with our acquisition of
Parlano in September 2001.
In December 2001, we issued 4,801,368 shares of class A common stock in
connection with our acquisition of Softmetric, Inc.
29
Unless otherwise noted, all of our class A common stock issued in the
transactions described above were issued in transactions exempt from
registration pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
consolidated financial statements for the years ended December 31, 2001 and 2000
and the period from May 7, 1999 (inception) through December 31, 1999. You
should read this information together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
PERIOD FROM
MAY 7, 1999
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------- DECEMBER 31,
2001 2000 1999
-------------- ------------------ ------------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ................................. $ 199,598 $ 44,079 $ 1,037
Total operating expenses ................. 531,270 346,621 10,465
Net loss applicable to common stockholders (369,824) (528,182) (12,927)
Basic and diluted net loss per share
applicable to common stockholders ........ $ (2.06) $ (7.84) $ (4.59)
Shares used in computing basic and
diluted net loss per share ............... 179,224,722 67,390,746 2,816,074
DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ...... $104,480 $252,533 $162,841
Working capital ................ 79,907 254,228 138,280
Total assets ................... 874,711 420,181 238,872
Long-term obligations .......... 101,294 7,777 281
Total stockholders' equity ..... $251,759 $367,883 $205,234
For an explanation of the determination of the number of shares used in
computing basic and diluted net loss per share, see Note 1(p) of the notes to
our consolidated financial statements.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We provide extended enterprise solutions for our base of over 20,000
customers. We offer Web-based software and technology that allows the critical
business units and functional areas of our clients to operate in a more cohesive
manner. We also offer the services necessary to deploy these software solutions
and to integrate them with existing software and technical systems. Our product
and service offerings allow us to provide a comprehensive solution for our
clients. Additionally, we offer our customers a single point of accountability
as our solutions extend across the enterprise. Our extended enterprise solution
is comprised of the following key components:
divine Professional Services combines our knowledge of how to design and
deploy software solutions with our expertise in technology,
infrastructure, and marketing services and offers services for legacy
systems integration, brand extension, call center automation, business
process optimization, operational strategy consulting, SAP installation,
supply chain and customer management, and technology infrastructure
consulting.
divine Software Services deploys software solutions that focus on
collaboration, workflow, and relationship and content management such as
voice-based customer contact tools, auto-response applications, telephony
webinars (Web-based seminars), secured messaging, team interaction,
content acquisition, organization and management, content delivery, and
training programs.
divine Managed Services builds, hosts, manages, monitors, and secures
clients' critical applications by offering design and engineering of
managed hosting solutions; installation, configuration, and testing of
hardware and software systems; ongoing maintenance, back-ups, and
upgrades; performance and security monitoring; and technical support.
We focus on Global 5000 and high-growth middle market firms, government
agencies, and educational institutions. We expect that our revenues in future
periods will be generated principally through our extended enterprise solutions.
We began operations as divine interVentures, inc. on June 30, 1999,
engaging in business-to-business e-commerce through a community of associated
companies in which we invested. In 1999 and 2000, we acquired interests in 40
associated companies, established a total of 13 associated companies when we
identified opportunities consistent with our former business strategy, and also
further developed our operational procedures and capabilities.
In February 2001, we announced our strategy to primarily focus on
enterprise Web solutions and changed our name to divine, inc. Since that time,
we have not reflected separately our interests in associated companies that
provide solutions for the extended enterprise. Instead, the operations of these
businesses are considered a part of our core business strategy. Our remaining
associated companies, offering software and services focused on e-commerce and
vertical markets, were included in our divine interVentures segment. As of
December 31, 2001, we have completely written off our investments in the
associated companies in our divine interVentures portfolio, other than amounts
included in available-for-sale securities. We do not expect to invest additional
funds into these companies in future periods.
Through integrating the products and services of acquired companies into
our infrastructure, we extend a broader array of offerings and delivers greater
value to all our constituencies. We introduce combined product suites to gain
financial and market leverage from incremental revenue and operational
efficiencies of integration.
31
Since January 2001, we have completed numerous acquisitions, including:
- March 2001, SageMaker -- an enterprise information portal
solutions company. This acquisition brings a key component to our
existing enterprise information portal solution.
- April 2001, certain assets of marchFIRST -- a leading
Chicago-based provider of enterprise e-business solutions,
including marchFIRST's Central Region business unit, accounts
receivable, SAP implementation practice, VAR unit, Blue Vector
venture capital arm, and certain regional operations. This
acquisition provides a broad range of enterprise technology,
e-business strategy, brand-building services and application
hosting, all of which deepen our extended enterprise solutions.
- May 2001, DataBites, Inc. -- a software development company that
develops both wireless and wired Web content delivery
applications. DataBites' technology provides our enterprise portal
solutions instant integration capabilities with internal and
external Web-based applications and resources.
- August 2001, Fracta Networks -- a provider of user-centric content
management solutions. This acquisition expands and further
complements the suite of personal information management tools
available within our enterprise portal solutions.
- September 2001, certain assets of marchFIRST GmbH -- including the
assets that comprised its former Munich and Hamburg operations.
This acquisition, with its global client base and deep
professional services expertise, represents a milestone in our
international expansion strategy.
- October 2001, Open Market, Inc. -- a provider of content-driven
e-business solutions that enable enterprises to better manage
interactions with their site visitors, customers, employees and
channels. Open Market's Java 2 Enterprise Edition, or J2EE,
infrastructure enables the seamless integration of our current
suite of content-driven e-business applications, as well as
supports the development and deployment of future applications.
- October 2001, eshare communications, Inc. -- a leading provider of
Customer Interaction Management (CIM) solutions. eshare's
offerings, added to our collaborative applications, portal
technology, Web Services infrastructure, knowledge resources, and
delivery capability, give our combined client base the ability to
deploy extended enterprise applications that build customer
loyalty and branding within their targeted communities.
- October 2001, Synchrony Communications -- an innovative CIM suite
provider. This acquisition enhances our CIM technology offerings
with Synchrony's highly ranked interaction management
applications. In concert with our acquisition of eshare
communications, Inc., this positions us as an industry leader in
providing solutions for the customer interaction cycle including
inbound and outbound call management.
- October 2001, Intira Corporation and HostOne -- application
services management providers. These acquisitions establish us as
a foremost provider of facilities-based managed applications
services.
- November 2001, RoweCom, Inc. -- a global provider of high-quality
service and e-commerce solutions for purchasing and managing print
and e-content knowledge resources.
- December 2001, Eprise Corporation -- a supplier of content
management solutions. This acquisition broadens our content
management solution offerings, and positions us as one of the
first companies to address the entire spectrum of content
management and delivery needs. Eprise Participant Server's
industry-leading capabilities for putting content contribution and
management in the hands of business users, as well as its ease of
implementation and
32
deployment, extend our ability to supply content management
solutions that fit any corporate need.
- December 2001, SoftMetric Inc. -- a provider of telephone call
center management software.
- January 2002, Data Return Corporation -- a provider of advanced
managed hosting services based on Microsoft technologies. Data
Return provides these services to businesses seeking to outsource
the deployment, maintenance, and support of their complex Web
sites. Its services include providing, configuring, operating, and
maintaining the hardware, software, and network technologies
necessary to implement and support these Web sites. Data Return
also offers additional services options, such as scalability and
architecture testing, storage solutions, and a suite of security
services, including firewalls.
- January 2002, Northern Light Technology -- a leading provider of
search and content integration solutions for enterprises. The
acquisition of Northern Light's award-winning premium content
services, enterprise search technology, and ecommerce transaction
engine enhances our comprehensive integrated content,
collaboration, and knowledge solutions for the extended
enterprise.
- February 2002, RWT Corporation (d/b/a Real World Technology, Inc.)
-- a leading provider of production management and tracking
software to manage data across the supply chain and improve plant
productivity. Real World Technology's manufacturing execution
application is a core component of our vertical-specific solutions
for the manufacturing industry.
- March 2002, Delano Technology Corporation -- agreed to be acquired
by us in a stock-based transaction that is subject to the approval
of Delano's stockholders. Delano offers customer relationship
management software that incorporates advanced analytics with
interaction capabilities on a flexible and scalable technology
platform.
We anticipate that the integration of these companies into our products
and services offering will help us to deliver a combination of professional
services, software services, and managed services to our customers. Our business
strategy includes the acquisition of other businesses that are complementary to
ours, including other providers of enterprise software products or professional
services.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE CONSOLIDATED FINANCIAL STATEMENTS
As previously discussed, we have held ownership interests in many
associated companies since our inception. Under our new strategic focus, our
acquisitions are almost exclusively acquisitions of 100% of the stock of certain
companies that fit our operating strategy. The following discussion regarding
the principles of consolidations is meant to explain how we accounted for
investments in associated companies focused on e-business and vertical markets,
which accounted for the majority of our consolidated operations in 1999 and
2000. These companies were considered part of our divine interVentures portfolio
throughout 2001. The significance of the operations of these associated
companies on our consolidated operations decreased throughout 2001, and as of
December 31, 2001, we had completely written off our investments in the
associated companies in our divine interVentures portfolio, other than amounts
included in available-for-sale securities.
CONSOLIDATION
Associated companies in which we own, directly or indirectly, more than
50% of the outstanding voting power are accounted for under the consolidation
method of accounting. Under this method, an associated company's results of
operations are reflected within our consolidated statement of operations.
Earnings or losses attributable to other stockholders of a consolidated
associated company are identified as "minority interest" in our consolidated
statement of operations. Minority interest adjusts our consolidated net results
of operations to reflect only our share of the earnings or losses of a
33
consolidated associated company. As of December 31, 2001, we did not reflect any
minority interest liability on our consolidated balance sheet. The results of
operations of our consolidated associated companies are reflected in our
consolidated financial statements from the acquisition date of the related
company.
EQUITY METHOD
Associated companies in which we own 50% or less of the outstanding
voting power, but over which we exercise significant influence, are accounted
for under the equity method of accounting. Whether or not we exercise
significant influence with respect to an associated company depends on an
evaluation of several factors including, among other things, representation on
the associated company's board of directors, ownership percentage, and voting
rights associated with our holdings in the associated company. Under the equity
method of accounting, an associated company's results of operations are not
reflected within our consolidated operating results. However, our share of the
earnings or losses of that associated company is identified as "equity in losses
of associated companies" in our consolidated statement of operations.
The net effect of an associated company's results of operations on our
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because, under each of
these methods, only our share of the earnings or losses of an associated company
is reflected in the net loss in our consolidated statement of operations.
However, the presentation of the consolidation method differs dramatically from
the equity method of accounting. The consolidation method presents associated
company results in the applicable line items within our consolidated financial
statements. In contrast, the equity method of accounting presents associated
company results in a single category, "equity in losses of associated companies"
within our consolidated statement of operations.
COST METHOD
Associated companies not accounted for under either the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, our share of the earnings and losses of these
companies is not included in our consolidated statements of operations unless
earnings or losses are distributed.
We record our ownership interest in equity securities of our associated
companies accounted for under the cost method at the lesser of cost or fair
value. Those cost method associated companies that have readily determinable
fair values based on quoted market prices are classified in accordance with
Statement of Financial Accounting Standards No. 115, " Accounting for Certain
Investments in Debt and Equity
Securities."
DECONSOLIDATION
In October 2000, Oilspot.com, Inc. ("Oilspot") repurchased an amount of
its shares from us that reduced our ownership in Oilspot from 55.6% to 28.5%. As
part of this transaction, the $1,500,000 note payable by us to Oilspot, and the
related interest due, was cancelled. Immediately following that repurchase, we
exchanged our remaining ownership interest in Oilspot for an ownership interest
of 3.0% in FuelQuest, Inc. in connection with the acquisition of Oilspot by
FuelQuest. Beginning in October 2000, we accounted for our investment in
FuelQuest on the cost basis.
In January 2001, we restructured our ownership interest in i-Street, Inc.
(i-Street), such that our voting ownership in i-Street was reduced from 63.8% to
25.1%. Beginning in January 2001, we accounted for our interest in i-Street
under the equity method.
34
RESULTS OF OPERATIONS
We were formed in May 1999. The discussion below regarding our results of
operations includes comparisons between the year ended December 31, 2001, the
year ended December 31, 2000, and the period from May 7, 1999 (inception)
through December 31, 1999 (period ended December 31, 1999). However, as of
December 31, 1999, our business was in the very early stage and consisted mainly
of a relatively small number of equity interests in business-to-business
internet companies (associated companies). Additionally, for the year ended
December 31, 2000, our operations were derived almost exclusively from our
ownership interests in these associated companies, many of which were in the
early stages of devlopment. Throughout 2001, as we have acquired companies that
fit into our strategy of providing extended enterprise solutions, these
associated companies have accounted for a continuously decreasing portion of our
operations. The changes in our core business since our inception significantly
affect the comparability of our operations for the year ended December 31, 2001,
the year ended December 31, 2000, and the period ended December 31, 1999, so as
to make such a comparison almost meaningless.
YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000
General
Beginning in the first quarter of 2001, we segregated our operations into
two operating segments. Our software, services, and hosting segment encompasses
the operations surrounding our core strategy of delivering extended enterprise
solutions. Our divine interVentures segment encompasses the operations of our
remaining portfolio of associated companies, focusing primarily on e-commerce
and vertical markets. Our operations for the year ended December 31, 2001 were
considerably different than our operations for the year ended December 31, 2000.
This is because, beginning in 2001, we changed our business strategy from being
an Internet holding company actively engaged in business-to-business e-commerce
through our community of associated companies to becoming a leader in Web-based
solutions for the extended enterprise. Our operations during this period were
significantly affected by our acquisitions in 2001, which have provided us with
a larger customer base and an increased revenue stream. During the year ended
December 31, 2000, our operations resulted primarily from our consolidated
associated companies in the business-to-business e-commerce sector, many of
which were in the early stages of development and generated significant losses
with comparably low revenue. All of these consolidated associated companies have
discontinued operations, have been sold, or are now included as part of our core
business strategy. Additionally, we held investment interests in eight
associated companies accounted for under the equity method of accounting as of
December 31, 2001 which carried no book value on our consolidated balance sheet
as of that date. Conversely, we held investment interests in 15 associated
companies accounted for under the equity method as of December 31, 2000 that
carried approximately $57,000,000 of book value on our consolidated balance
sheet as of that date. This decrease in equity-method associated companies has
led to decreases in our equity in losses of associated companies.
Revenues
We generated revenues totaling $199,598,000 for the year ended December
31, 2001, which is an increase of $155,519,000 over revenues of $44,079,000 for
the year ended December 31, 2000. The total revenues for the year ended December
31, 2001 included $46,224,000 from the sale of products, all of which was
generated by our software, services, and hosting segment. Product revenues
included $26,567,000 from software sales contracts, $8,020,000 from sales of
computer hardware, and $8,702,000 from sales of content. Revenues generated from
sales of content, as well as $20,303,000 of the revenues generated from software
sales contracts, was generated in the fourth quarter of 2001. The increase in
these revenues in the fourth quarter reflects the impact on our revenues of
significant acquisitions during the quarter, namely RoweCom (content) and
eshare, Open Market, and Eprise (software sales
35
contracts). The total revenues also included $153,374,000 from the sale of
services, generated almost exclusively by our software, services and hosting
segment, which included $137,554,000 from the operations of
divine/Whittman-Hart, $7,042,000 from managed services, and $3,712,000 from
software implementation services. At December 31, 2001, we had deferred revenue
of $303,663,000, of which $269,316,000 related to sales of content. This
deferred revenue will result in a significant increase in our revenues
recognized during 2002.
For the year ended December 31, 2000, we generated revenues of
$44,079,000. The total revenues for the year ended December 31, 2000 included
$5,316,000 from the sale of products, including $2,267,000 related to on-line
sales of retail goods and $2,787,000 related to software sales contracts. The
total revenues also included $38,763,000 from the sale of services, including
$9,646,000 from web design services, $6,396,000 from marketing and public
relations services, $4,524,000 from software maintenance contracts, $4,446,000
from Web-based advertising, $3,492,000 from facilities management, $2,388,000
from hosting services, and $2,296,000 from inventory management services.
Revenues of $8,605,000 were generated from transactions with our equity method
associated companies for the year ended December 31, 2000.
Cost of Revenues
For the year ended December 31, 2001, our cost of revenues were
$179,853,000, exclusive of $740,000 of amortization of stock-based compensation.
This is an increase of $139,642,000 over the $40,211,000 (exclusive of
$1,274,000 of amortization of stock-based compensation) cost of revenues we
incurred for the year ended December 31, 2000. Cost of revenues for the year
ended December 31, 2001 included $155,963,000 of direct costs of providing
services, which consisted principally of $138,735,000 of salaries and benefits,
$3,685,000 of rent and facilities services,$5,646,000 of travel costs, and
$5,199,000 of office and computer supplies expense. Cost of revenues for 2001
also included $23,890,000 of direct costs of providing products. Of the direct
costs of providing products, $19,106,000 was incurred in the fourth quarter of
2001. The increase in these costs in the fourth quarter reflects the impact on
our cost of revenues of significant acquisitions during the quarter, namely
RoweCom, eshare, Open Market, and Eprise. At December 31, 2001, we had deferred
publisher costs of $238,522,000 related to sales of content. These deferred
costs will result in a significant increase in our cost of revenues recognized
during 2002.
Cost of revenues for the year ended December 31, 2000 included
$35,941,000 of direct costs of providing services, consisting primarily of
salaries and benefits, professional services, rent and facilities services,
supplies expenses, and marketing expenses. Cost of revenues for 2000 also
included $4,270,000 of direct costs of providing products.
Selling, General, and Administrative Expenses
For the year ended December 31, 2001, we incurred selling, general, and
administrative expenses of $176,649,000, exclusive of $8,613,000 of amortization
of stock-based compensation. This represents an increase of $26,205,000 over the
$150,444,000 (exclusive of $46,367,000 of amortization of stock-based
compensation) of selling, general, and administrative expenses for the year
ended December 31, 2000. These expenses for the year ended December 31, 2001
consisted primarily of $93,887,000 of employee benefits and related
compensation, $12,143,000 of travel costs, $20,064,000 of facility costs,
consisting primarily of rent expense, $12,120,000 of fees for professional
services, including legal, consulting, and accounting, and $11,268,000 of
depreciation expense.
Selling, general, and administrative expenses for the year ended December
31, 2000 consisted primarily of $73,606,000 of employee benefits and related
compensation, $16,289,000 of marketing costs, $12,000,000 of travel costs,
$9,820,000 of facility costs, consisting primarily of rent expense, and
$9,752,000 of fees for professional services, including legal, consulting, and
accounting.
36
Research and Development Expenses
For the year ended December 31, 2001, we incurred research and
development expenses of $37,004,000 exclusive of $314,000 of amortization of
stock-based compensation. This represents an increase of $24,968,000 over the
$12,036,000 (exclusive of $428,000 of amortization of stock-based compensation)
of research and development expenses for the year ended December 31, 2000. These
expenses for the year ended December 31, 2001 consisted primarily of $27,636,000
of employee benefits and related compensation, $2,833,000 of professional fees,
and $2,486,000 of facility costs. Research and development expenses for the year
ended December 31, 2000 consisted primarily of $5,792,000 of employee benefits
and related compensation, $2,677,000 of professional fees, and $1,779,000 of
marketing expenses.
Bad Debt Expense
For the year ended December 31, 2001, we recorded bad debt expense of
$23,379,000. This represents an increase of $17,193,000 over the $6,186,000 of
bad debt expense recorded for the year ended December 31, 2000. Bad debt expense
for the year ended December 31, 2001 related mainly to accounts receivable of
the publicly traded companies acquired by us in the fourth quarter of 2001, as
well as uncollectible accounts receivable of divine/Whittman-Hart.
Amortization of Intangible Assets
For the year ended December 31, 2001, we incurred amortization expense of
$16,091,000 on our goodwill and other intangible assets. This represents a
decrease of $4,997,000 from the $21,088,000 of amortization expense recorded by
us for the year ended December 31, 2000. The decrease is mainly due to the fact
that our goodwill and other intangible assets were significantly reduced in the
last half of 2000 because of impairment charges.
Acquired Technology -- In-process Research and Development
For the year ended December 31, 2001, we recorded in-process research and
development charges of $13,741,000. Acquired in-process technology charges
relate to acquisitions in which a portion of the purchase price was allocated to
acquired in-process technology and expensed immediately because the technology
acquired had not reached technological feasibility based on the status of design
and development activities. No such charges were recorded during the year ended
December 31, 2000.
Impairment of Intangible and Other Assets
For the year ended December 31, 2001, we recorded impairment charges of
$37,864,000 related to intangible and other assets. This represents a decrease
of $19,762,000 from the $57,626,000 of similar impairment charges recorded for
the year ended December 31, 2001. These charges included, but were not limited
to, write-offs of our goodwill and other intangible assets associated with our
acquisitions of SageMaker and DataBites, and our acquisition of certain assets
of marchFIRST. Also included in these impairment charges for the year ended
December 31, 2001 was our write-off of notes receivable from certain of our
employees related to the exercise of stock options and costs associated with an
agreement to shut down the operations of Emicom.
For the year ended December 31, 2000, we recorded impairment charges of
$57,626,000 for other than temporary declines in the carrying value of certain
consolidated associated companies. These charges included, but were not limited
to, write-offs of our investments in BeautyJungle, Brandango, and OfficePlanIt,
each of which have ceased all meaningful operations.
37
Impairment of Prepaid Co-location and Bandwidth Services
For the year ended December 31, 2001, we recorded impairment charges of
$25,000,000 on prepaid co-location and bandwidth services. This prepaid asset
was originally recorded when we entered into an agreement with Level 3
Communications for the purchase of a minimum of $100,000,000 of co-location and
bandwidth services over a four-year period. Of this amount, $25,000,000 would
have been credited to us as consideration for Level 3's purchase of our common
shares in a private placement concurrent with our IPO in July 2000. In August
2001, we agreed to repurchase the 5,555,555 shares of our Class A common stock
owned by Level 3 in exchange for $5,555,555 and warrants to purchase 2,200,000
shares of our class A common stock at an exercise price of $1.19 per share. We
also agreed to cancel our agreement relating to the purchase of $100,000,000 of
co-location and bandwidth services and to eliminate our prepaid credit of
$25,000,000.
Impairment of Facilities
For the year ended December 31, 2001, we recorded impairment charges of
$12,022,000 related mainly to certain operating leases of divine/Whittman-Hart.
These charges consisted of the net value of future cash payments to honor
operating leases on facilities that we are no longer utilizing. For the year
ended December 31, 2000, we recorded an impairment charge of $10,961,000,
including declines in the carrying value of property owned by us, improvements
made to properties that we no longer consider recoverable and charges related to
certain of our operating leases, consisting mainly of the net value of future
cash payments to honor operating leases on facilities that we are no longer
utilizing.
Amortization of Stock-Based Compensation
For the year ended December 31, 2001, we incurred a non-cash expense of
$10,200,000 related to the issuance, prior to our initial public offering (IPO),
of shares of restricted stock and grants of options to employees, directors, and
consultants under our 1999 Stock Incentive Plan with exercise prices lower than
the fair value of the class A common stock on the dates of grant. We also
incurred a one-time charge of $132,000 related to the issuance of options to
members of our advisory committee. Also for the year ended December 31, 2001, we
recovered $665,000 of previously recognized compensation expense related to
non-vested options of terminated employees, and we repurchased a total of 99,362
shares of restricted class A common stock that were previously owned by
terminated employees.
During September 2000, we reduced the exercise price of options granted,
and restricted stock purchased, under our stock incentive plan prior to our IPO
to $9.00 being the IPO price of our class A common stock, if the exercise price
of such options or the purchase price of such restricted shares was greater than
the IPO price, and if the holder agreed to the change. We also repurchased
during September 2000, 3,820,735 shares of restricted class A common stock,
issued upon exercise of options granted under our 1999 Stock Incentive Plan, at
the respective exercise prices, which ranged from $4.50 to $9.00. Any
consideration in excess of the exercise price, as adjusted, was refunded to
these holders. As a result of the downward repricing of restricted shares and
options, we recorded a one-time stock-based compensation charge of $3,209,000.
Each of the holders of the repurchased restricted stock received a replacement
option grant for the same number of shares with an exercise price of $9.00 per
share. All of these replacement options are exercisable and vest as to 25% of
the options on the first anniversary of the original option grant, and
thereafter in equal monthly installments over the next three years. For those
replacement options repriced downward, we will recognize stock-based
compensation expense for any amount by which the fair value of our class A
common stock exceeds $9.00 per share during the remaining vesting period. For
the year ended December 31, 2000, we repurchased an additional 613,774 shares of
restricted class A common stock from terminated employees.
38
From January 1, 2000 through September 21, 2000, we incurred an
additional non-cash expense of $5,896,000 related to our issuance to our
employees of shares of common stock of our majority-owned associated companies
that we established. Effective September 22, 2000, we repurchased these minority
interests from our employees. These repurchases were made at the initial
investment cost plus 8% for our executive officers and at two times the initial
investment cost for the other employees that owned those shares. The aggregate
purchase price for all of these shares was $93,000. As a result of these
repurchases, we accelerated our recognition of the remaining $18,330,000 of
stock-based compensation related to these shares.
Interest Income and Expense
Interest income for the year ended December 31, 2001 was $8,932,000 and
was earned from the investment of our available cash balances. This is a
decrease of $6,651,000 from the $15,583,000 of interest income earned during the
year ended December 31, 2000. Interest expense for the year ended December 31,
2001 was $3,681,000 and was incurred primarily from our long-term debt. This is
an increase of $1,824,000 over the $1,857,000 of interest expense incurred
during the year ended December 31, 2000, which was incurred primarily from notes
payable to associated companies.
Other Expense, Net
Other expense, net for the year ended December 31, 2001 was $4,135,000.
This is an increase of $3,834,000 over the $301,000 of other expense for the
year ended December 31, 2000. Other expense, net for the year ended December 31,
2001 consisted primarily of other than temporary declines in fair value of
$14,711,000 and $4,181,000 in our available-for-sale investments in CMGI, and
360networks, respectively, offset by the sale of our investments in Farms.com,
Ltd. and Sequoia Software Corporation, which resulted in realized gains of
$7,225,000 and $6,611,000, respectively. Additionally, we recorded a gain on
disposal of assets of $367,000 and other net gains of $554,000.
Income Taxes
We recorded no income tax provision or benefit for the years ended
December 31, 2001 and 2000. Because we have no history of taxable income through
December 31, 2001, the tax benefit associated with our net losses has been fully
reserved. As of December 31, 2001 we had total net operating loss carryforwards
of $116,546,000, of which $27,608,000 may be utilized by us to reduce future
consolidated taxable income, if any. Of the total net operating loss
carryforwards, $43,235,000 are attributable to majority-owned subsidiaries not
includible in our consolidated tax group. Although each majority-owned
subsidiary excluded from our consolidated tax group may utilize its net
operating loss carryforwards to reduce separate future income taxes, if any,
such carryforwards may not offset our consolidated taxable income, if any. Of
the total net operating loss carryforwards, $45,703,000 relate to
pre-acquisition net operating losses attributable to acquired companies. Our
ability to utilize such pre-acquisition losses is substantially limited by
current tax laws. In addition, our utilization of the net operating loss
carryforwards may be limited under Internal Revenue Code Section 382 as a result
of prior ownership changes. The net operating loss carryforwards will expire
from 2019 through 2021.
In assessing whether or not the deferred tax assets will be realized, we
consider whether it is more likely than not that some or all of the deferred tax
assets will not be realized. Based upon our historical net operating losses and
projections for future tax losses, we believe it is more likely than not that we
will not realize the deferred tax assets. Thus, we have provided a full
valuation allowance against the net deferred tax assets as of December 31, 2001.
39
Minority Interest
Minority interest of approximately $4,270,000 and $18,169,000 represents
the non-controlling stockholders' share of our consolidated associated
companies' net losses for the years ended December 31, 2001 and 2000,
respectively.
Net Gain on Stock Transactions of Associated Companies
Net gain on stock transactions of associated companies of $667,000 for
the year ended December 31, 2001 relates to the net increase in the value of our
investments in associated companies resulting from the issuance of stock by
these companies to outside investors at prices higher than the value at which we
have carried these investments and other stock transactions of these associated
companies. The net gain for the year ended December 31, 2001 was attributable to
issuances of stock by Outtask, which accounted for $199,000, and other
associated companies, which accounted for $468,000. Net gain on stock
transactions of associated companies of $4,375,000 for the year ended December
31, 2000 was attributed mainly to issuances of stock by Launchworks, which
accounted for $4,430,000 and closerlook, which accounted for $847,000. The gain
was reduced by a loss of $1,011,000 resulting from the redemption of shares by
Mercantec.
Equity in Losses of Associated Companies
Equity in losses of associated companies resulted from our minority
ownership interests we account for, or accounted for, under the equity method.
Equity in losses of associated companies includes our proportionate share of
equity method associated companies' losses, which totaled $13,317,000 in net
losses for the year ended December 31, 2001 and $53,627,000 in net losses for
the year ended December 31, 2000. Equity in losses of associated companies also
includes amortization of our net excess investment over the equity in the net
assets of these associated companies, which totaled $6,287,000 for the year
ended December 31, 2001 and $36,994,000 for the year ended December 31, 2000.
Impairment of Investment in Equity Method and Cost Method Associated
Companies
For the year ended December 31, 2001, we recorded impairment charges of
$36,633,000 for other than temporary declines in the carrying values of certain
equity and cost method associated companies. As of December 31, 2001, we have
completely written off our investments in associated companies accounted for
under the equity basis and cost basis of accounting. For the year ended December
31, 2000, we recorded impairment charges of $113,125,000 for other than
temporary declines in the carrying values of certain equity and cost method
associated companies. These charges included the write-down of our net
investment in BidBuyBuild to $200,000, which was the value at which it was sold
in October 2000, and the write-down of our net investment in iSalvage to
$72,000. iSalvage has ceased all meaningful business operations. The impairment
charges also included write-offs of our investments in CapacityWeb, Entrepower,
PocketCard, and Whiplash, each of which has ceased all meaningful operations. In
conjunction with the sale of BidBuyBuild, we also received a warrant to acquire
5% of the shares of BidBuyBuild with an exercise price of approximately
$100,000. In addition, the carrying values of certain other equity and cost
method associated companies were written down to their estimated fair values as
of December 31, 2000.
Extraordinary Gain
For the year ended December 31, 2001, we reported an extraordinary gain
of $12,032,000, which included $11,195,000 and $837,000, respectively, related
to our acquisitions of the outstanding equity that we did not already own of
Emicom and Latin Capital. These extraordinary gains represented the excess of
the fair value of the net assets acquired over the fair value of our
consideration given in
40
conjunction with these acquisitions. We did not report an extraordinary gain for
the year ended December 31, 2000.
YEAR ENDED DECEMBER 31, 2000 VS. PERIOD ENDED DECEMBER 31, 1999
General
During the year ended December 31, 2000, we acquired controlling majority
voting interests in BeautyJungle.com, Inc., bid4real.com, inc., NetUnlimited,
Oilspot.com, Inc., Panthera Productions LLC, Parlano, Inc., ViaChange.com, Inc.,
Web Design Group and Westbound Consulting, Inc., and made contributions to our
wholly owned subsidiary, Skyscraper Management, L.L.C., through which we managed
Skyscraper Ventures, L.P. as general partner, for total aggregate consideration
of $68,043,000, including $5,000,000 in the form of promissory notes, all of
which have since been paid. In addition, we issued a total of 10,000,000 shares
of our series F preferred stock, with a fair value of $4.80 per share, in
connection with our acquisition of Parlano. These shares were converted into
1,666,666 shares of class A common stock upon completion of our initial public
offering. We also acquired significant minority ownership interests in 18 new
associated companies, which we account for under the equity method of
accounting, for total consideration of $216,388,000, including $75,971,000 in
the form of promissory notes, all of which have since been paid. In addition, we
issued a total of 3,000,000 shares of our series F preferred stock, with a fair
value of $4.80 per share, which converted into 499,999 shares of class A common
stock upon completion of our initial public offering, in connection with our
acquisitions of two of the 18 equity method companies, closerlook and Perceptual
Robotics. In April 2000, we made an additional investment in OpinionWare.com,
Inc., an associated company since December 1999, that caused OpinionWare to
become a consolidated associated company, whereas it was an equity method
associated company prior to this additional investment. In August 2000, we made
an additional investment in iFulfillment, Inc., an associated company since
January 2000, that caused us to account for iFulfillment as a consolidated
associated company instead of an equity method associated company.
Revenues
We generated revenues totaling $44,079,000 for the year ended December
31, 2000, which is an increase of $43,042,000 over revenues of $1,037,000 for
the period ended December 31, 1999. The total revenues for the year ended
December 31, 2000 included $5,316,000 from the sale of products, including
$2,267,000 related to on-line sales of retail goods and $2,787,000 related to
software sales contracts. The total revenues also included $38,763,000 from the
sale of services, including $9,646,000 from web design services, $6,396,000 from
marketing and public relations services, $4,524,000 from software maintenance
contracts, $4,446,000 from Web-based advertising, $3,492,000 from facilities
management, $2,388,000 from hosting services, and $2,296,000 from inventory
management services. Revenues of $8,605,000 were generated from transactions
with our equity method associated companies for the year ended December 31,
2000. Substantially all of these revenues were generated by the operations of
our associated companies.
For the period ended December 31, 1999, we generated revenues of
$1,037,000. These revenues included $275,000 in management fees as general
partner of Platinum Venture Partners I and II. These revenues also included
$272,000 related to software sales contracts and maintenance contracts of
mindwrap, one of our consolidated associated companies. Other sources of
revenues included $135,000 in Web-based advertising, and other infrastructure
service revenues such as public relations, consulting and facilities management.
Revenues of $293,000 were generated from transactions with our equity method
associated companies for the period ended December 31, 1999.
41
Cost of Revenues
For the year ended December 31, 2000, our cost of revenues were
$40,211,000, exclusive of $1,274,000 of amortization of stock-based
compensation. This is an increase of $39,183,000 over the $1,028,000 (exclusive
of $5,000 of amortization of stock-based compensation) cost of revenues we
incurred for the period ended December 31, 1999. Cost of revenues for the year
ended December 31, 2000 included $35,941,000 of direct costs of providing
services, which consisted principally of salaries and benefits, professional
services, rent and facilities services, supplies expenses, and marketing
expenses. Cost of revenues for 2000 also included $4,270,000 of direct costs of
providing products. Cost of revenues for the period ended December 31, 1999
included $794,000 of direct costs of providing services, consisting primarily of
salaries and benefits, and $234,000 of direct costs of providing products.
The types of revenues to which the cost of revenues for the year ended
December 31, 2000 were attributed included web consulting ($10,385,000 cost of
revenues), public relations revenues ($6,972,000 cost of revenues), facilities
management services ($4,272,000 cost of revenues), inventory management services
($3,716,000 cost of revenues), Web-based advertising ($3,402,000 cost of
revenues), commissions revenue ($3,190,000 cost of revenues) and hosting
services and related product sales ($5,351,000 cost of revenues).
The types of revenues to which the cost of revenues for the period ended
December 31, 1999 were attributed included management fees ($236,000 cost of
revenues), software and related maintenance revenues ($165,000 cost of
revenues), Web-based advertising ($160,000 cost of revenues), and other
infrastructure service revenues such as public relations, consulting, and
facilities management ($466,000 cost of revenues).
Selling, General, and Administrative Expenses
For the year ended December 31, 2000, we incurred selling, general, and
administrative expenses of $150,444,000, exclusive of $46,367,000 of
amortization of stock-based compensation. This represents an increase of
$142,482,000 over the $7,962,000 (exclusive of $740,000 of amortization of
stock-based compensation) of selling, general, and administrative expenses for
the period ended December 31, 1999. These expenses for the year ended December
31, 2000 consisted primarily of $73,606,000 of employee benefits and related
compensation, $16,289,000 of marketing costs, $12,000,000 of travel costs,
$9,820,000 of facility costs, consisting primarily of rent expense, and
$9,752,000 of fees for professional services, including legal, consulting, and
accounting. Selling, general, and administrative expenses for 1999 included
$3,851,000 of employee benefits and related compensation, $1,449,000 of travel
costs, $865,000 of professional services, and $332,000 of facility costs.
Research and Development Expenses
For the year ended December 31, 2000, we incurred research and
development expenses of $12,036,000, exclusive of $428,000 of amortization of
stock-based compensation. This represents an increase of $11,903,000 over the
$133,000 (exclusive of $2,000 of amortization of stock-based compensation) of
research and development expenses for the period ended December 31, 1999. These
expenses for the year ended December 31, 2000 consisted primarily of $5,792,000
of employee benefits and related compensation, $2,677,000 of professional fees,
and $1,779,000 of marketing expenses.
Bad Debt Expense
For the year ended December 31, 2000, we recorded bad debt expense of
$6,186,000. We recorded no bad debt expense for the period ended December 31,
1999.
42
Amortization of Intangible Assets
For the year ended December 31, 2000, we incurred amortization expense of
$21,088,000 on our intangible assets. This represents an increase of $20,493,000
over the $595,000 of amortization expense for the period ended December 31,
1999. The increase was due to the substantial number of investments in
associated companies that we made in 2000, and the related increase in
amortizable intangible assets.
Impairment of Intangible and Other Assets
For the year ended December 31, 2000, we recorded impairment charges of
$57,626,000 for other than temporary declines in the carrying values of certain
intangible and other assets. These charges included, but were not limited to,
write-offs of our goodwill and other intangible assets related to our
investments in BeautyJungle, Brandango, and OfficePlanIt, each of which have
ceased all meaningful operations.
Additionally, we recorded an impairment charge of $10,961,000, including
declines in the carrying value of property owned by us, improvements made to
properties that we no longer consider recoverable and charges related to certain
of our operating leases, consisting mainly of the net value of future cash
payments to honor operating leases on facilities that we are no longer
utilizing.
Amortization of Stock-Based Compensation
For the year ended December 31, 2000, we incurred a non-cash expense of
$28,489,000 related to the issuance, prior to our IPO, of shares of restricted
stock and grants of options to employees, directors, and consultants under our
1999 Stock Incentive Plan with exercise prices lower than the fair value of the
class A common stock on the dates of grant. Also for the year ended December 31,
2000, we recovered $7,854,000 of previously recognized compensation expense
related to options of terminated employees that had not vested.
During September 2000, we reduced the exercise price of options granted,
and restricted stock purchased, under our stock incentive plan prior to our IPO
to $9.00 being the IPO price of our class A common stock, if the exercise price
of such options or the purchase price of such restricted shares was greater than
the IPO price, and if the holder agreed to the change. We also repurchased
during September 2000, 3,820,735 shares of restricted class A common stock,
issued upon exercise of options granted under our 1999 Stock Incentive Plan, at
the respective exercise prices, which ranged from $4.50 to $9.00. Any
consideration in excess of the exercise price, as adjusted, was refunded to
these holders. As a result of the downward repricing of restricted shares and
options, we recorded a one-time stock-based compensation charge of $3,209,000.
Each of the holders of the repurchased restricted stock received a replacement
option grant for the same number of shares with an exercise price of $9.00 per
share. All of these replacement options are exercisable and vest as to 25% of
the options on the first anniversary of the original option grant, and
thereafter in equal monthly installments over the next three years. For those
replacement options repriced downward, we will recognize stock-based
compensation expense for any amount by which the fair value of our class A
common stock exceeds $9.00 per share during the remaining vesting period. For
the year ended December 31, 2000, we repurchased an additional 613,774 shares of
restricted class A common stock from terminated employees.
Each of the holders of the repurchased restricted stock received a
replacement option grant for the same number of shares with an exercise price of
$9.00 per share. All of these replacement options are exercisable and vest as to
25% of the options on the first anniversary of the original option grant, and
thereafter in equal monthly installments over the next three years. For those
replacement options repriced downward, we will recognize stock-based
compensation expense in the future for any amount by which the fair value of our
class A common stock exceeds $9.00 per share. After giving effect to
43
these changes, as of December 31, 2000, 15,430,225 shares of our class A common
stock had been issued under our stock incentive plan, upon exercise of
outstanding options or otherwise, at prices ranging from $1.19 to $13.50 per
share, and we had outstanding options to purchase 6,559,649 shares of class A
common stock under our stock incentive plan, with exercise prices ranging from
$1.19 to $13.50 per share. The total unearned stock-based compensation related
to the outstanding options and restricted stock at December 31, 2000 was
$36,641,000.
From January 1, 2000 through September 21, 2000, we incurred an
additional non-cash expense of $5,896,000 related to our issuance to our
employees of shares of common stock of our majority-owned associated companies
that we established. Effective September 22, 2000, we repurchased these minority
interests from our employees. These repurchases were made at the initial
investment cost plus 8% for our executive officers and at two times the initial
investment cost for the other employees that owned those shares. The aggregate
purchase price for all of these shares was $93,000. As a result of these
repurchases, we accelerated our recognition of the remaining $18,329,000 of
stock-based compensation related to these shares.
For the period ended December 31, 1999, we incurred a non-cash expense of
$747,000 related to the issuance of shares of restricted stock and grants of
options to employees and directors under our 1999 Stock Incentive Plan with
exercise prices lower than the fair value of the class A common stock on the
dates of the grant. We did not recover any previously recognized compensation
expense in 1999.
Interest Income and Expense
Interest income for the year ended December 31, 2000 was $15,583,000 and
was earned from the investment of our available cash balances. This is an
increase of $13,994,000 over the $1,589,000 of interest income earned during the
period ended December 31, 1999. Interest expense for the year ended December 31,
2000 was $1,857,000 and was incurred primarily from notes payable to associated
companies. This is an increase of $1,652,000 over the $205,000 of interest
expense incurred during the period ended December 31, 1999, which was related
primarily to borrowings under a previous line of credit.
Other Expense
Other expense for the year ended December 31, 2000 was $301,000. No other
expenses were recorded for the period ended December 31, 1999.
Income Taxes
We recorded no income tax provision or benefit for the year ended
December 31, 2000 or the period ended December 31, 1999. Because we have no
history of taxable income through December 31, 2000, the tax benefit associated
with our net losses was fully reserved.
In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. Based upon our historical net operating losses and
projections for future tax losses, we believe it is more likely than not that we
will not realize the deferred tax assets. Thus, we have provided a full
valuation allowance against the net deferred tax assets as of December 31, 2000.
Minority Interest
Minority interest of $18,169,000 and $51,000 represents the
non-controlling stockholders' share of our consolidated associated companies'
net losses for the year ended December 31, 2000 and the period ended December
31, 1999, respectively.
44
Net Gain on Stock Transactions of Associated Companies
Net gain on stock transactions of associated companies of $4,375,000 for
the year ended December 31, 2000 relates to the net increase in the value of our
investments in associated companies resulting from the issuance of stock by
these companies to outside investors at prices higher than the value at which we
have carried these investments and other stock transactions of these associated
companies. The gain was attributed mainly to issuances of stock by Launchworks,
which accounted for $4,430,000 and closerlook, which accounted for $847,000. The
gain was reduced by a loss of $1,011,000 resulting from the redemption of shares
by Mercantec. Because none of our associated companies had any such stock
transactions during the period ended December 31, 1999, we had no such gains or
losses during that period.
Equity in Losses of Associated Companies
Equity in losses of associated companies resulted from our minority
ownership interests we account for, or accounted for, under the equity method.
Equity in losses of associated companies includes our proportionate share of
equity method associated companies' losses, which totaled $53,627,000 in net
losses for the year ended December 31, 2000 and $672,000 in net losses for the
period ended December 31, 1999. Equity in losses of associated companies also
includes amortization of our net excess investment over the equity in the net
assets of these associated companies, which totaled $36,994,000 for the year
ended December 31, 2000 and $742,000 for the period ended December 31, 1999.
Impairment of Investment in Equity Method and Cost Method Associated Companies
For the year ended December 31, 2000, we recorded impairment charges of
$113,125,000 for other than temporary declines in the carrying values of certain
equity and cost method associated companies. These charges included the
write-down of our net investment in BidBuyBuild to $200,000, which was the value
at which it was sold in October 2000, and the write-down of our net investment
in iSalvage to $72,000. iSalvage has ceased all meaningful business operations.
The impairment charges also included write-offs of our investments in
CapacityWeb, Entrepower, PocketCard, and Whiplash, each of which has ceased all
meaningful operations. In conjunction with the sale of BidBuyBuild, we also
received a warrant to acquire 5% of the shares of BidBuyBuild with an exercise
price of $100,000. In addition, the carrying values of certain other equity and
cost method associated companies were written down to their estimated fair
values as of December 31, 2000.
SUMMARY OF CURRENTLY EXPECTED FIXED CHARGES
The following table summarizes the fixed charges as of December 31, 2001
that we currently expect to incur over the next four years for amortization of
identifiable intangible assets and unearned stock-based compensation:
YEAR
--------------------------------------------------------------
AMORTIZATION OF: 2002 2003 2004 2005
----------- ----------- ----------- -----------
Identifiable Intangible Assets ... $14,539,000 $14,539,000 $14,292,000 $11,000,000
(primarily developed technology)
Unearned Stock-Based Compensation* 8,270,000 8,002,000 382,000 --
----------- ----------- ----------- -----------
Total .......... $22,809,000 $22,541,000 $14,674,000 $11,000,000
=========== =========== =========== ===========
* These unearned stock-based compensation charges do not reflect potential
additional charges associated with options granted to employees which are
accounted for under the variable method of accounting as well as options
granted to consultants. The future value of these potential charges
45
cannot be estimated at this time because the charges will be based on the
future value of our stock.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had cash and cash equivalents, current
restricted cash, and available-for-sale securities of $140,732,000, which
represented a decrease of $126,348,000 from $267,080,000 as of December 31,
2000. The net decrease in cash and cash equivalents was due primarily to net
cash used in operating activities of $237,872,000, net cash provided in the
acquisition, deconsolidation, and divestiture of ownership interests in
associated companies of $86,348,000, cash used for capitalized acquisition costs
of $16,830,000, cash provided by the sale of ownership interests in associated
companies of $26,247,000, cash provided from the issuance of notes payable of
$17,605,000, and cash used to acquire property and equipment of $11,781,000.
In January 2001, we entered into a $25,000,000 line of credit with
LaSalle Bank N.A. This line of credit is cash collateralized and is available
for working capital financing and general corporate purposes other than
permanent financing for acquisitions of interests in associated companies. As of
December 31, 2001, we had established letters of credit of $16,360,000 against
this line of credit. These letters of credit include $6,135,000 for assumed debt
of RoweCom, $4,868,000 for a note payable to marchFIRST GmbH, and $5,357,000 as
collateral for various real estate and equipment leases.
As of December 31, 2001, we had current restricted cash of $32,566,000,
which represented an increase of $30,423,000 from $2,143,000 as of December 31,
2000. Current restricted cash as of December 31, 2001 included $17,461,000 that
secured the $16,360,000 in letters of credit from LaSalle Bank N.A. described
above, $10,000,000 that collateralized $9,000,000 of loans payable by RoweCom to
publishers, and $5,105,000 for other future RoweCom obligations to publishers.
In May 2001, we received $13,174,000 for our 2,335,000 shares of Sequoia
Software Corporation as part of the acquisition of Sequoia by Citrix Systems,
Inc. At December 31, 2001, we had $3,686,000 in available-for-sale securities.
This amount includes shares of Neoforma.com and CMGI.
We examine all of the associated companies in our divine interVentures
portfolio to assess their potential for financial success as part of our
organization, whether on a stand-alone basis or otherwise. This examination
includes consideration of each associated company's development of its business
plans and objectives and progress toward achievement of its performance goals.
As of December 31, 2001, we have completely written off our investments in the
associated companies in our divine interVentures portfolio, other than amounts
included in available-for-sale securities, and we do not expect to make
additional investments in these associated companies.
In connection with purchases of our shares of class A and class C common
stock by private investors concurrent with our initial public offering in July
2000:
(1) we agreed under our Alliance Agreement with Microsoft to
purchase $9,600,000 of software products, $4,700,000 of consulting
services and $1,000,000 of product support services from Microsoft through
January 2004, to expend $4,000,000 over four years to promote Microsoft
solutions, to open an accelerator facility in Seattle, the cost for which
would be determined as the size and scope of the accelerator was
finalized, and to dedicate up to $50,000,000 in capital to projects and
acquisitions in the Seattle area. As of December 31, 2001, we had
purchased, or entered into binding agreements to purchase, a total of
$4,084,000 of software products, $738,000 of consulting services, and
$366,000 of product support services toward these obligations. In
connection with our acquisition of HostOne in October 2001, we agreed with
Microsoft that we would use our best efforts to amend the Alliance
Agreement to provide, among other things: that we will commit to be a
Microsoft .NET partner and develop products and services that are
coordinated with Microsoft's products and its .NET strategy; that we will
identify other
46
opportunities to promote Microsoft products; and that Microsoft will
promote our products and services.
(2) we entered into an agreement concerning the purchase of a
minimum of $100,000,000 of co-location and bandwidth services from Level 3
over a four-year period, $25,000,000 of which would have been credited to
us as consideration for Level 3's purchase of shares from us. In August
2001, we agreed to repurchase the 5,555,555 shares of our common stock
owned by Level 3 in exchange for $5,555,555 and the issuance warrants to
purchase 2,200,000 shares of our common stock. We paid the cash in two
equal installments in August and December 2001, and issued the warrants in
two equal installments in August 2001 and January 2002. Additionally, we
agreed with Level 3 to cancel our commitment to purchase $100,000,000 of
co-location and bandwidth services and to eliminate our prepaid credit of
$25,000,000.
(3) we agreed to purchase a minimum of $5,000,000 of computer
equipment and software, storage solutions, and professional services from
Compaq over four years. As of December 31, 2001, we have purchased
$1,890,000 of products and services from Compaq toward this obligation.
In two separate transactions in April 2001, we acquired certain assets
from marchFIRST, Inc., including, but not limited to, its former Whittman-Hart
operations, its SAP software implementation practice, and its value-added
reseller business. Additionally, we acquired accounts receivable with a face
value of $102.8 million. The acquired business is held by our newly formed
subsidiary, divine/Whittman-Hart, Inc. We paid to marchFIRST $12,500,000 in cash
and divine/Whittman-Hart issued marchFIRST a promissory note. The note is a
$57.5 million balloon note, due on April 12, 2006 but accelerated to the extent
of 50% of free cash flow from divine/Whittman-Hart's operations and which is
secured by the assets of divine/Whittman-Hart. We have the option to pay the
note with cash or by issuing shares of our class A common stock. This note bears
interest at the Wall Street Journal prime rate of interest. In conjunction with
our acquisition of marchFIRST assets, we also assumed $12.0 million of accrued
compensation and benefit obligations for the employees transferred with the
acquired businesses. marchFIRST also is eligible to receive up to an aggregate
of $55.0 million in bonus payments, payable to the extent that 50% of free cash
flow from divine/Whittman-Hart's operations during the next five years exceeds
divine/Whittman-Hart's obligation under the promissory notes. We do not
guarantee the promissory notes from divine/Whittman-Hart to marchFIRST, but the
terms of the promissory notes restrict payments from divine/Whittman-Hart to us.
In September 2001, through a wholly owned subsidiary, we acquired certain
assets and assumed certain liabilities of marchFIRST GmbH. For these assets we
issued a note payable in the amount of 5,369,000 euros (approximately $4,894,000
at December 31, 2001), which is included within current notes payable in our
consolidated balance sheets as of December 31, 2001. The note is due on
September 1, 2002. We have the option to pay the note with cash or by issuing
shares of our class A common stock.
In connection with our acquisition of Synchrony Communications, Inc. in
October 2001, we acquired debt with balances totalling of $1,761,000 as of
December 31, 2001, of which $1,167,000 is due in twelve equal monthly
installments in 2002 and $594,000 is due in three equal monthly installments
during the first three months of 2003.
Aleksander Szlam, who served as one of our directors in 2000, was the
Chairman and Chief Executive Officer of eshare communications, Inc. while he
served on our board of directors. In connection with our acquisition of eshare
in October 2001, we entered into two separate stock repurchase arrangements with
Mr. Szlam covering the shares of our common stock that Mr. Szlam received in the
acquisition. These arrangements gave Mr. Szlam the right to sell back a portion
of his shares to us at an agreed upon price (put option), while also giving us
the right to buy back the same number of shares from Mr. Szlam at the same price
(call option). In December 2001, the first buyback period, which covers
5,428,800 shares, was extended to be coterminous with the second buyback period.
47
The second buyback period is effective for the time period beginning six months
after the merger (April 23, 2002) and ending 18 months after the merger (April
23, 2003), and covers 5,959,200 shares of our common stock. The agreed-upon
purchase price for the related put and call options is $0.53 per share. This
means that for one year beginning on April 23, 2002, Mr. Szlam has the right to
sell to us, and we have a separate right to buy from Mr. Szlam, up to 11,388,000
shares of our common stock at a price of $0.53 per share.
In conjunction with our acquisition of RoweCom Inc. in November 2001, we
acquired current notes payable with balances totalling of $15,931,000 as of
December 31, 2001. These balances consisted of loans from publishers of
$9,000,000, of which $6,775,000 was paid on January 4, 2002 with the remainder
due April 15, 2002, $5,775,000 in other debt due April 15, 2002, and the current
portion of a loan of $1,156,000 due in four equal quarterly installments from
March 31, 2002 to December 31, 2002. In addition, we acquired other RoweCom
long-term debt with balances of $5,046,000 as of December 31, 2001, which is due
in quarterly installments from March 31, 2003 to September 30, 2006.
In December 2001, we signed a revolving loan agreement for $20,000,000
with Fleet Capital Corporation. The loans under that agreement are
collateralized by eligible accounts receivable balances of the domestic
operations of RoweCom, and the loans are repaid from the net operating receipts
of the domestic operations of RoweCom. The balance outstanding under that
revolving loan agreement was $17,083,000 as of December 31, 2001 and is included
within current notes payable in our consolidated balance sheets. During the
quarter ended March 31, 2002, we made payments of $17,083,000 on this loan
agreement and we also borrowed $3,943,000, which represented the balance
outstanding as of March 31, 2002. The payments resulted from RoweCom's domestic
collections from customers being in excess of payments to publishers in 2002.
The expiration date of this revolving loan agreement is April 15, 2002.
In connection with our acquisition of RoweCom, we assumed a factoring
arrangement previously in place between RoweCom's French subsidiary (RoweCom
France) and a European factoring company. The arrangement allows the factoring
company to purchase, without recourse, $55,000,000 of RoweCom France accounts
receivable during the period October 1, 2001 to September 30, 2002. The
factoring arrangement is structured so that we receive 90% of the face value of
the accounts receivable upon sale to the factoring company, with the remaining
10% due to us upon the ultimate collection of the accounts receivable by the
factoring company. Our cost for this arrangement is 0.37% of the face value of
the sold accounts receivable, which is paid when the accounts receivable are
transferred to the factoring company.
The operations of RoweCom Inc. historically have resulted in cyclical
cash flows throughout the year, with the fourth calendar quarter historically
resulting in the highest required funding level by RoweCom. The seasonal fourth
quarter funding requirements are due to the required publisher payments to
publishers in excess of collections from customers.
During January, February, and March 2002, we used net cash for operating
activities of approximately $19 million, $30 million, and $17 million,
respectively. Of these amounts, approximately $1 million, $4 million, and $1
million, respectively, related to cash used for non-recurring operating
activities, primarily severance of non-continuing employees and termination of
contractual obligations of certain acquired companies. Cash activity during the
first quarter of 2002 also included a net increase of approximately $7 million
related to cash received from acquired companies and borrowings, partially
offset by cash paid for acquisitions. The cash activity for the first quarter of
2002 excludes approximately $17 million of RoweCom's domestic collections in
excess of publisher disbursements during January, February, and early March that
were used for gross paydowns of the Fleet Capital Corporation revolving loan
agreement as described above. Our cash flows from operating activities can vary
significantly from month to month, depending on the timing of operating cash
receipts and payments and other working capital changes, especially accounts
receivable, accounts payable, accrued
48
expenses, and other current assets and liabilities. As of March 31, 2002, we had
estimated cash and cash equivalents and available for sale securities of
approximately $80 million, which included approximately $35 million of current
restricted cash.
Our operating plan depends on us achieving significant increases in
revenue and cash receipts and significant decreases in expenses. We expect that
our revenue and cash receipts will increase as we continue to integrate the
product and service offerings of our acquired businesses, and we intend to
decrease some of our operating costs, primarily through workforce and payroll
reductions. Based on these forecasts, we believe that our existing unrestricted
cash and cash equivalents, accounts receivable, and new cash generated from our
operations will be sufficient to fund our operations and capital requirements at
least through December 31, 2002. There is a substantial risk, however, that our
revenue and cash receipts will not grow at a sufficient rate, and that we will
not be able to reduce our expenses to keep them in line with our revenue. If we
are unable to meet our revenue and expense management goals, we will need to
significantly reduce our workforce, sell certain of our assets, enter into
strategic relationships or business combinations, discontinue some or all of our
operations, or take other similar restructuring actions. While we expect that
these actions would result in a reduction of recurring costs, they also may
result in a reduction of recurring revenues and cash receipts. It is also likely
that we would incur substantial non-recurring costs to implement one or more of
these restructuring actions.
We are also exploring a number of alternatives to generate cash,
including acquiring other entities that have substantial cash balances, selling
certain assets, and new debt or equity financings. We do not currently have in
place any agreements to provide us any of these sources of funds, and these
sources of funds may not be available to us on favorable terms, if they are
available to us at all. In addition, any of these transactions also could result
in significant equity dilution to the holders of our common stock at the time of
the transaction, or later.
Our outstanding contractual obligations, leasehold commitments, and
outstanding debt balances as of December 31, 2001 are set forth in the following
tables. These amounts represent amounts due by us for the periods indicated
under non-cancelable contracts, leases, and loan arrangements.
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
-----------------------------------------------------------------
2005 AND
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 AFTER
-------- -------- -------- -------- --------
Lines of Credit ..................... $ 17,083 $ 17,083 $ -- $ -- $ --
Notes Payable in Cash or Common Stock 4,894 4,894 -- -- --
Other Notes Payable ................. 15,439 15,439 -- -- --
Long-Term Debt Payable in Cash or
Common Stock ........................ 57,500 -- -- -- 57,500
Other Long-Term Debt ................ 8,116 2,322 1,982 1,311 2,501
Capital Lease Obligations ........... 2,452 1,114 804 534 --
Operating Leases .................... 171,928 29,473 26,378 24,159 91,918
Other Long-Term Obligations* ........ 67,222 -- -- 17,222 50,000
Other+ .............................. 6,036 6,036 -- -- --
-------- -------- -------- -------- --------
Total ........... $350,670 $ 76,361 $ 29,164 $ 43,226 $201,919
======== ======== ======== ======== ========
* Includes obligations under our Alliance Agreement with Microsoft to
purchase software products, consulting services, and product support
services from Microsoft of $10,112,000 by January 2004; obligations to
promote Microsoft Solutions of $4,000,000 by July 2004 and open an
accelerator facility in Seattle; and dedicate up to $50,000,000 in
capital to projects and acquisitions in the Seattle area with no time
period specified. In connection with our acquisition of HostOne in
October 2001, we agreed with Microsoft that we would use our best efforts
to amend the Alliance
49
Agreement to provide, among other things: that we will commit to be a
Microsoft.NET partner and develop products and services that are
coordinated with Microsoft's products and its .NET strategy; that we will
identify other opportunities to promote Microsoft products; and that
Microsoft will promote our products and services. In addition, includes an
obligation to purchase computer equipment and software, storage solutions,
and professional services from Compaq of $3,110,000 by July 2004.
+ Represents the potential net amount due to Mr. Szlam in connection with
our acquisition of eshare in October 2001. From April 23, 2002 to April
23, 2003, Mr. Szlam has the right to sell to us, and we have a separate
right to buy from Mr. Szlam, up to 11,388,000 shares of our common stock
at a price of $0.53 per share. Amounts due as reflected in the table
above assume a put by Mr. Szlam.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations , and Statement No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001. SFAS
No. 141 also specifies criteria that intangible assets acquired in a purchase
method business combination must meet in order to be recognized and reported
apart from goodwill, noting that any purchase price allocable to workforce in
place may not be accounted for separately. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. We have adopted the provisions of
SFAS No. 141 effective July 1, 2001. We will adopt the provisions of SFAS No.
142 beginning on January 1, 2002.
In December 2001, the FASB staff issued Topic No. D-103, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred (Topic D-103), which is effective for fiscal years beginning after
December 15, 2001. Topic D-103 requires that certain out-of-pocket expenses
rebilled to customers be recorded as revenue versus an offset to the related
expense. Comparative financial statements for prior periods must be conformed to
this presentation. We currently record rebilled out-of-pocket expenses as an
offset to the related expense and, accordingly, effective January 1, 2002, we
will change our presentation to reflect rebilled expenses as revenue.
SIGNIFICANT ACCOUNTING POLICIES
We prepare the consolidated financial statements of divine in conformity
with accounting principles generally accepted in the United States of America.
We are required to make certain estimates, judgments and assumptions that we
believe are reasonable based upon the information available. These estimates,
judgments and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies which
we believe are the most critical to aid in fully understanding and evaluating
our financial results are as follows:
Revenue Recognition
Software transactions are accounted for in accordance with SOP 97-2,
Software Revenue Recognition, as amended. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements, such as software
products, upgrades/enhancements, post-contract customer
50
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The revenue allocated to software licenses
where the separate service elements are not essential to functionality of the
other elements is generally recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the fee is fixed or
determinable, and collectibility is probable. When the separate service elements
are essential to the functionality of the other elements, software license
revenues are recognized according to the contract accounting provisions outlined
in SOP 81-1, Accounting for Performance of Construction-Type and Certain
Performance-Type Contracts , specifically the percentage-of-completion method.
The revenue allocated to post-contract customer support is recognized ratably
over the term of the support, and revenue allocated to service elements such as
training, installation and customization is recognized as the services are
performed.
The majority of our software license arrangements include flexible
contractual provisions that, among other things, allow customers to receive
unspecified future software products. Under these arrangements, we recognize
revenue attributable to the software products ratably over the term of the
license arrangement commencing upon delivery of the currently available software
products.
Revenue from consulting services is provided under fixed price and time
and materials contracts. For fixed price contracts, revenue is recorded on the
basis of the estimated percentage of completion of services rendered. Losses, if
any, on fixed price contracts are recognized when the loss is determined. For
time and materials contracts, revenue is recorded at contractually agreed upon
rates as the costs are incurred.
Revenue from equipment sales is recognized upon shipment.
Revenue generated from subscription orders for third-party publications
is recognized over the subscription period.
Management fees are recognized as revenue over the period of the
management service.
Any significant increase in product failure rates or service quality, and
the resulting credit returns or non-payments by customers, could have a material
adverse impact on our operating results for the period in which such events
could materialize.
Goodwill and Other Intangible Assets
We account for our acquisitions of consolidated companies under the
purchase method of accounting pursuant to SFAS No. 141, Business Combinations .
Other intangible assets that are separable from goodwill and have determinable
useful lives are valued separately and amortized over their useful lives.
Goodwill represents mainly the excess of cost over net assets of acquired
businesses that are consolidated. Goodwill and other identifiable intangible
assets that do not have determinable useful lives and are not valued separately
are not amortized pursuant to SFAS No. 142, Goodwill and Other Intangible Assets
... Goodwill is reviewed for impairment on an ongoing basis. Other identifiable
intangible assets consist mainly of developed technology and are generally
amortized over two to four years.
On a continuous basis, but no less frequently than at the end of each
quarterly reporting period, we evaluate the carrying value for financial
statement purposes of our goodwill and other intangible assets. We account for
the impairment of goodwill and other intangible assets in relation to the
operating performance and future undiscounted cash flows of the reporting units
of the underlying businesses when indications of impairment are present. Such
indications of impairment include, but are not limited to, the actual
performance of reporting units compared with budgeted performance, layoffs
within reporting units and associated facilities impairment charges, if
applicable, and market trends.
51
Any significant deterioration of the actual or projected cash flows of
certain of our businesses, significant changes in the strategic manner or use of
our assets, or significant negative industry trends could result in future
impairment charges of these businesses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Equity Price Risk -- At December 31, 2001, we had $3,686,000 of
available-for-sale equity securities. These securities represent companies in
the Internet and hi-tech sectors, both of which have experienced significant
volatility, specifically in the last twenty one months. These investments are at
risk in the event of a downturn in the public markets in general or a downturn
in their specific sectors. However, these investments accounted for only 0.4% of
our total assets at December 31, 2001.
Interest Rate Risk -- At December 31, 2001, we had $137,046,000 in cash
and cash equivalents and restricted cash. A decrease in market rates of interest
would have no material effect on the value of these assets, as they are
short-term financial instruments with a fair value approximating our cost basis.
Cash equivalents consist mainly of money market accounts, short-term treasury
bills, and commercial paper. The carrying values of other financial instruments,
such as accounts receivable, notes receivable, accounts payable, and notes
payable approximate fair value as well because of their short-term nature. The
carrying value of long-term debt approximates fair value due to the variable
rates at which the underlying notes bear interest.
At December 31, 2001, we had $84,868,000 of notes payable and long-term
debt carried at variable interest rates. A hypothetical 1% change in market
rates of interest would not have a material effect on our net loss.
Foreign Currency Exchange Risk -- Our financial market risk includes
risks associated with our acquisition of companies with operations outside the
United States. This risk is mainly derived from our fourth quarter acquisitions
of eshare, Open Market, Rowecom, and Eprise. Through December 31, 2001, we have
recorded a $940,000 foreign currency translation adjustment in other
comprehensive income as a result of fluctuations in foreign currency exchange
rates. We do not currently engage in any activities for the purpose of hedging
foreign currency.
Impairment Risk -- At December 31, 2001, we had goodwill and other
intangible assets of $211,075,000 related almost exclusively to our acquisition
of companies in the fourth quarter of 2001. We will assess the net realizable
value of the assets acquired from these companies on a regular basis to
determine if we have incurred any other than temporary decline in the value of
our capital investment. For the year ended December 31, 2001, we incurred
$37,864,000 in impairment charges related mainly to the intangible and other
assets associated with our investment in consolidated companies, mainly in our
software, services, and hosting segment. None of these impairment charges
related to the acquisitions that comprise our balance of goodwill and other
intangible assets at December 31, 2001. For the year ended December 31, 2001, we
also incurred $36,633,000 of impairment charges related to our investment in
equity-method and cost-method associated companies in our divine interVentures
segment. We have no investments in equity- or cost-basis associated companies
reflected on our balance sheet as of December 31, 2001. Finally, for the year
ended December 31, 2001, we recorded $25,000,000 of impairment expense related
to the write-off of prepaid co-location and bandwidth services and $12,022,000
of impairment expense related to our future commitments under operating leases.
We may incur additional impairment charges in future periods.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
-------
DIVINE, INC. AND SUBSIDIARIES
Independent Auditors' Report 54
Consolidated Balance Sheets as of December 31, 2001 and 2000 55
Consolidated Statements of Operations for the years ended December
31, 2001 and 2000 and the period ended December 31, 1999 56
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001 and 2000 and the period ended December 31, 1999 57 - 60
Consolidated Statements of Cash Flows for the years ended December
31, 2001 and 2000 and the period ended December 31, 1999 61
Notes to Consolidated Financial Statements 62
53
INDEPENDENT AUDITORS' REPORT
The Board of Directors
divine, inc.:
We have audited the accompanying consolidated balance sheets of divine,
inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2001 and 2000, and for the period from May 7, 1999
(inception) through December 31, 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 divine, inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000,
and for the period from May 7, 1999 (inception) through December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Chicago, Illinois
March 29, 2002
54
DIVINE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 104,480 $ 252,533
Restricted cash ............................................ 32,566 2,143
Accounts receivable, less allowance for doubtful accounts
of $6,983 and $6,863 ..................................... 200,833 7,678
Available-for-sale securities .............................. 3,686 12,404
Notes receivable ........................................... 332 179
Prepaid expenses ........................................... 10,495 1,959
Deferred publisher costs ................................... 238,522 --
Other current assets ....................................... 10,651 4,903
----------- -----------
Total current assets .................................... 601,565 281,799
Property and equipment, net .................................. 44,335 33,820
Goodwill and other intangible assets, net of accumulated
amortization of $4,097 and $21,170 ......................... 211,075 8,621
Ownership interests in associated companies .................. -- 65,939
Prepaid co-location and bandwidth services ................... -- 25,000
Restricted cash .............................................. 1,075 1,000
Other noncurrent assets ...................................... 16,661 4,002
----------- -----------
Total assets ............................................ $ 874,711 $ 420,181
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 18,013 $ 10,193
Publisher payables ......................................... 70,703 --
Accrued payroll expenses ................................... 11,658 1,631
Accrued professional fees .................................. 3,804 2,091
Current portion of facilities impairment ................... 7,723 2,257
Current portion of capital leases .......................... 899 2,868
Notes payable and current portion of long-term debt ........ 39,738 521
Deferred revenue ........................................... 303,663 1,431
Other accrued expenses and current liabilities ............. 65,457 6,579
----------- -----------
Total current liabilities ............................... 521,658 27,571
Long-term debt ............................................... 63,294 826
Long-term facilities impairment .............................. 22,155 3,006
Capital leases ............................................... 1,293 3,801
Other noncurrent liabilities ................................. 14,552 144
Minority interest ............................................ -- 16,950
Stockholders' equity:
Class A common stock, $.001 par value; 2,500,000,000 shares
authorized; 371,408,945 and 128,382,154 shares issued;
365,997,791 and 127,390,478 shares outstanding .......... 366 128
Class C common stock, $.001 par value; 100,000,000 shares
authorized; 0 and 6,777,777 shares issued and outstanding -- 7
Additional paid-in capital ................................ 1,171,853 956,110
Notes receivable from exercise of stock options ........... -- (5,636)
Unearned stock-based compensation ......................... (16,654) (36,641)
Accumulated other comprehensive loss ...................... (3,861) (20,011)
Treasury stock, at cost; 4,077,821 and 741,676 shares ..... (9,639) (5,592)
Accumulated deficit ....................................... (890,306) (520,482)
----------- -----------
Total stockholders' equity .............................. 251,759 367,883
----------- -----------
Total liabilities and stockholders' equity .............. $ 874,711 $ 420,181
=========== ===========
See accompanying notes to consolidated financial statements.
55
DIVINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
MAY 7, 1999
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
2001 2000 1999
------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Products $ 46,224 $ 5,316 $ 313
Services 153,374 38,763 724
------------- ------------- -------------
Total revenues 199,598 44,079 1,037
------------- ------------- -------------
Operating expenses:
Cost of revenues:
Products (exclusive of $57, $123, and $0 of
amortization of stock-based compensation) 23,890 4,270 234
Services (exclusive of $683, $1,151, and $5 of
amortization of stock-based compensation) 155,963 35,941 794
------------- ------------- -------------
Total cost of revenues 179,853 40,211 1,028
Selling, general and administrative (exclusive of
$8,613, $46,367, and $740 of amortization of
stock-based compensation) 176,649 150,444 7,962
Research and development (exclusive of $314, $428,
and $2 of amortization of stock-based compensation) 37,004 12,036 133
Bad debt expense 23,379 6,186 --
Amortization of intangible assets 16,091 21,088 595
Acquired technology: in-process research and
development 13,741 -- --
Impairment of intangible and other assets 37,864 57,626 --
Impairment of prepaid co-location and bandwidth
services 25,000 -- --
Impairment of facilities 12,022 10,961 --
Amortization of stock-based compensation 9,667 48,069 747
------------- ------------- -------------
Total operating expenses 531,270 346,621 10,465
------------- ------------- -------------
Operating loss (331,672) (302,542) (9,428)
------------- ------------- -------------
Other income (expense):
Interest income 8,932 15,583 1,589
Interest expense (3,681) (1,857) (205)
Other expense, net (4,135) (301) --
------------- ------------- -------------
Total other income 1,116 13,425 1,384
------------- ------------- -------------
Loss before minority interest, net gain on stock
transactions of associated companies, equity
in losses of associated companies, impairment
of investment in equity method, cost method
associated companies, and extraordinary gain (330,556) (289,117) (8,044)
Minority interest 4,270 18,169 51
Net gain on stock transactions of associated companies 667 4,375 --
Equity in losses of associated companies (19,604) (90,621) (1,414)
Impairment of investment in equity method and cost
method associated companies (36,633) (113,125) --
------------- ------------- -------------
Net loss before extraordinary gain (381,856) (470,319) (9,407)
Extraordinary gain 12,032 -- --
------------- ------------- -------------
Net loss (369,824) (470,319) (9,407)
Accretion of redeemable preferred stock dividends -- (8,037) --
Accretion of preferred stock dividends -- (9,070) (3,520)
Deemed dividends -- (40,756) --
------------- ------------- -------------
Net loss applicable to common stockholders $ (369,824) $ (528,182) $ (12,927)
============= ============= =============
Basic and diluted net loss per share before
extraordinary gain $ (2.13) $ (7.84) $ (4.59)
Extraordinary gain 0.07 -- --
------------- ------------- -------------
Basic and diluted net loss per share
applicable to common stockholders $ (2.06) $ (7.84) $ (4.59)
============= ============= =============
Shares used in computing basic and diluted
net loss per share 179,224,722 67,390,746 2,816,074
See accompanying notes to consolidated financial statements
56
DIVINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
RECEIVABLE
FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EXERCISE
--------------------- --------------------- PAID-IN OF STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS
----------- ------ ----------- ------ ---------- ----------
Balance at May 7, 1999 (inception) -- $ -- -- $ -- $ -- $ --
Comprehensive loss:
Net loss -- -- -- -- -- --
Total comprehensive loss
Issuance of Class A common stock -- -- 3,449,956 4 17 --
Issuance of Class B common stock -- -- 2,041,662 2 10 --
Issuance of Series A-1 preferred stock 9,236,600 9 -- -- 2,287 --
Issuance of Series A-2 preferred stock 37,750,000 38 -- -- 9,387 --
Issuance of Series B-1 preferred stock 2,712,000 3 -- -- 1,341 --
Issuance of Series B-2 preferred stock 20,100,000 20 -- -- 10,018 --
Issuance of Series C preferred stock 190,062,125 190 -- -- 189,031 --
Exercise of stock options --
Class A common stock -- -- 341,658 -- 1,537 --
Unearned stock-based compensation -- -- -- -- 27,408 --
Stock-based compensation -- -- -- -- -- --
----------- ------ ----------- ------ ---------- ----------
Balance at December 31, 1999 259,860,725 260 5,833,276 6 241,036 --
Comprehensive loss:
Net loss -- -- -- -- -- --
Other comprehensive loss:
Unrealized holding loss during
the year -- -- -- -- -- --
Total comprehensive loss
Issuance of Series F preferred stock 11,500,000 11 -- -- 14,719 --
Conversion from Class B common stock
to Class A common stock -- -- (2,041,662) (2) -- --
ACCUMULATED
UNEARNED OTHER TOTAL
STOCK-BASED TREASURY ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION STOCK DEFICIT INCOME EQUITY
------------ -------- ----------- ------------- ------------
Balance at May 7, 1999 (inception) $ -- $ -- $ -- $ -- $ --
Comprehensive loss:
Net loss -- -- (9,407) -- (9,407)
-------
Total comprehensive loss (9,407)
-------
Issuance of Class A common stock -- -- -- -- 21
Issuance of Class B common stock -- -- -- -- 12
Issuance of Series A-1 preferred stock -- -- -- -- 2,296
Issuance of Series A-2 preferred stock -- -- -- -- 9,425
Issuance of Series B-1 preferred stock -- -- -- -- 1,344
Issuance of Series B-2 preferred stock -- -- -- -- 10,038
Issuance of Series C preferred stock -- -- -- -- 189,221
Exercise of stock options --
Class A common stock -- -- -- -- 1,537
Unearned stock-based compensation (27,408) -- -- -- --
Stock-based compensation 747 -- -- -- 747
------------ -------- ----------- ------------- ------------
Balance at December 31, 1999 (26,661) -- (9,407) -- 205,234
Comprehensive loss:
Net loss -- -- (470,319) -- (470,319)
Other comprehensive loss:
Unrealized holding loss during
the year -- -- -- (20,011) (20,011)
--------
Total comprehensive loss (490,330)
--------
Issuance of Series F preferred stock -- -- -- -- 14,730
Conversion from Class B common stock
to Class A common stock -- -- -- -- (2)
See accompanying notes to consolidated financial statements.
57
DIVINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
RECEIVABLE
FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EXERCISE
--------------------- --------------------- PAID-IN OF STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS
----------- ------ ----------- ------ ---------- ----------
Conversion of Class A common stock from
Class B common stock -- $ -- 2,041,662 $ 2 $ -- $ --
Conversion of preferred stock to
Class A common stock, net of 1/6
conversion factor (271,360,725) (271) 45,226,788 45 226 --
Conversion of redeemable preferred
stock to Class A common stock net of
1/6 conversion factor and capital
raising costs -- -- 35,880,721 36 223,134 --
Issuance of Class C common stock, net
of offering costs -- -- 23,288,511 23 193,440 --
Conversion from Class C common stock to
Class A common stock -- -- (16,510,734) (17) -- --
Conversion to Class A common stock from
Class C common stock -- -- 16,510,734 17 -- --
Issuance of Class A common stock in
conjunction with initial public
offering, net of offering costs -- -- 14,285,000 14 109,230 --
Issuance of Class A common stock
exclusive of initial public offering
shares, net of capital raising costs -- -- 8,527,046 9 73,887 --
Deemed dividends related to beneficial
conversion feature of Series E & F
preferred stock -- -- -- -- 25,814 --
Deemed dividends related to discount on
issuance of Class C common stock -- -- -- -- 14,942 --
Accretion of redeemable preferred
stock dividends -- -- -- -- (8,037) --
Issuance of Class A common stock through
the Employee Stock Purchase Plan -- -- 425,712 1 762 --
Dilution gain on equity transactions
by associated companies -- -- -- -- 1,021 --
Exercise of stock options --
Class A common stock -- -- 5,877,670 6 34,651 --
ACCUMULATED
UNEARNED OTHER TOTAL
STOCK-BASED TREASURY ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION STOCK DEFICIT INCOME EQUITY
------------ -------- ----------- ------------- ------------
Conversion of Class A common stock from
Class B common stock $ -- $ -- $ -- $ -- $ 2
Conversion of preferred stock to
Class A common stock, net of 1/6
conversion factor -- -- -- -- --
Conversion of redeemable preferred
stock to Class A common stock net of
1/6 conversion factor and capital
raising costs -- -- -- -- 223,170
Issuance of Class C common stock, net
of offering costs -- -- -- -- 193,463
Conversion from Class C common stock to
Class A common stock -- -- -- -- (17)
Conversion to Class A common stock from
Class C common stock -- -- -- -- 17
Issuance of Class A common stock in
conjunction with initial public
offering, net of offering costs -- -- -- -- 109,244
Issuance of Class A common stock
exclusive of initial public offering
shares, net of capital raising costs -- -- -- -- 73,896
Deemed dividends related to beneficial
conversion feature of Series E & F
preferred stock -- -- (25,814) -- --
Deemed dividends related to discount on
issuance of Class C common stock -- -- (14,942) -- --
Accretion of redeemable preferred
stock dividends -- -- -- -- (8,037)
Issuance of Class A common stock through
the Employee Stock Purchase Plan -- -- -- -- 763
Dilution gain on equity transactions
by associated companies -- -- -- -- 1,021
Exercise of stock options --
Class A common stock -- -- -- -- 34,657
See accompanying notes to consolidated financial statements.
58
DIVINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
RECEIVABLE
FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EXERCISE
---------------- ----------------- PAID-IN OF STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS
------ ------ ------ ------ ------- -------
Issuance of notes receivable to exercise stock
options ........................................... -- $ -- -- $ -- $ -- $ (31,154)
Repurchase and retirement of Class A common stock and
reduction of related notes receivable ............... -- -- (4,434,509) (4) (26,513) 25,518
Unearned stock-based compensation ................... -- -- -- -- 106,274 --
Stock-based compensation ............................ -- -- -- -- 3,209 --
Recovery of unearned stock-based compensation ....... -- -- -- -- (51,434) --
Capital raising costs of subsidiaries ............... -- -- -- -- (250) --
Payout of fractional shares ......................... -- -- (284) -- (1) --
Indirect ownership of shares of the Company's Class A
common stock owned by equity method associated
companies ......................................... -- -- (741,676) (1) -- --
----- ----- ----------- ------ ------- -------
Balance at December 31, 2000 ........................ -- -- 34,168,255 135 956,110 (5,636)
Comprehensive loss:
Net loss ..................................... -- -- -- -- -- --
Other comprehensive loss:
Unrealized holding gain .................. -- -- -- -- -- --
Less: reclassification
adjustments of realized losses
included in net loss ....................
Foreign currency translation ............. -- -- -- -- -- --
Total comprehensive loss .....................
Issuance of Class A common stock .................... -- -- 233,895,941 233 206,729 --
Issuance of warrants in conjunction with acquisitions -- -- -- -- 3,804 --
Issuance of warrants to acquire the Company's common
stock ............................................. -- -- -- -- 822 --
Issuance of stock options in conjunction with
acquisitions ...................................... -- -- -- -- 13,636 --
Issuance of Class A common stock through the Employee
Stock Purchase Plan ................................. -- -- 1,327,715 1 1,097 --
Issuance of Class A common stock through the exercise
of stock options .................................. -- -- 41,387 -- 19 --
ACCUMULATED
UNEARNED OTHER TOTAL
STOCK-BASED TREASURY ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION STOCK DEFICIT INCOME EQUITY
------------ ----- ------- ------ ------
Issuance of notes receivable to exercise stock
options ........................................... $ -- $ -- $ -- $ -- $ (31,154)
Repurchase and retirement of Class A common stock and
reduction of related notes receivable ............... -- -- -- -- (999)
Unearned stock-based compensation ................... (106,274) -- -- -- --
Stock-based compensation ............................ 44,860 -- -- -- 48,069
Recovery of unearned stock-based compensation ....... 51,434 -- -- -- --
Capital raising costs of subsidiaries ............... -- -- -- -- (250)
Payout of fractional shares ......................... -- -- -- -- (1)
Indirect ownership of shares of the Company's Class A
common stock owned by equity method associated
companies ......................................... -- (5,592) -- -- (5,593)
--------- ------ --------- ------- --------
Balance at December 31, 2000 ........................ (36,641) (5,592) (520,482) (20,011) 367,883
Comprehensive loss:
Net loss ..................................... -- -- (369,824) -- (369,824)
Other comprehensive loss:
Unrealized holding gain .................. -- -- -- 4,809 4,809
Less: reclassification
adjustments of realized losses
included in net loss .................... 12,281 12,281
Foreign currency translation ............. -- -- -- (940) (940)
--------
Total comprehensive loss ..................... (353,674)
--------
Issuance of Class A common stock .................... -- -- -- -- 206,962
Issuance of warrants in conjunction with acquisitions -- -- -- -- 3,804
Issuance of warrants to acquire the Company's common
stock ............................................. -- (822) -- -- --
Issuance of stock options in conjunction with
acquisitions ...................................... -- -- -- -- 13,636
Issuance of Class A common stock through the Employee
Stock Purchase Plan ................................. -- -- -- -- 1,098
Issuance of Class A common stock through the exercise
of stock options .................................. -- -- -- -- 19
See accompanying notes to consolidated financial statements.
59
DIVINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
RECEIVABLE
FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EXERCISE
---------------- ------------------ PAID-IN OF STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS
------ ------ ------ ------ ------- -------
Conversion from Class C common stock to
Class A common stock ...................... -- $ -- (6,777,777) $ (7) $ -- $ --
Conversion to Class A common stock from
Class C common stock ...................... -- -- 6,777,777 7 -- --
Dilution loss on equity transactions by
associated companies ...................... -- -- -- -- (38) --
Repurchase and retirement of Class A
common stock .............................. -- -- (99,362) -- (64) --
Non-cash executive compensation ............. -- -- -- -- -- 2,306
Stock-based compensation .................... -- -- -- -- 132 --
Issuance of stock awards .................... -- -- -- -- 279 --
Repayment of notes receivable from exercise
of stock options .......................... -- -- -- -- -- 260
Impairment write-off of notes receivable
from exercise of stock options ............ -- -- -- -- -- 3,070
Unearned stock-based compensation ........... -- -- -- -- -- --
Recovery of unearned stock-based compensation -- -- -- -- (10,673) --
Purchase of treasury stock, at cost, and
recovery of shares from escrow ............ -- -- (3,336,145) (3) -- --
--- ---- ----------- ---- ---------- -------
Balance at December 31, 2001 ................ -- $ -- 365,997,791 $366 $1,171,853 $ --
=== ==== =========== ==== ========== =======
ACCUMULATED
UNEARNED OTHER TOTAL
STOCK-BASED TREASURY ACCUMULATED COMPREHENSIVE STOCKHOLDERS
COMPENSATION STOCK DEFICIT INCOME EQUITY
------------ ----- ------- ------ ------
Conversion from Class C common stock to
Class A common stock ...................... $ -- $ -- $ -- $ -- $ (7)
Conversion to Class A common stock from
Class C common stock ...................... -- -- -- -- 7
Dilution loss on equity transactions by
associated companies ...................... -- -- -- -- (38)
Repurchase and retirement of Class A
common stock .............................. -- -- -- -- (64)
Non-cash executive compensation ............. -- -- -- -- 2,306
Stock-based compensation .................... 9,535 -- -- -- 9,667
Issuance of stock awards .................... -- -- -- -- 279
Repayment of notes receivable from exercise
of stock options .......................... -- -- -- -- 260
Impairment write-off of notes receivable
from exercise of stock options ............ -- -- -- -- 3,070
Unearned stock-based compensation ........... (221) -- -- -- (221)
Recovery of unearned stock-based compensation 10,673 -- -- -- --
Purchase of treasury stock, at cost, and
recovery of shares from escrow ............ -- (3,225) -- -- (3,228)
-------- ------- --------- ------- ---------
Balance at December 31, 2001 ................ $(16,654) $(9,639) $(890,306) $(3,861) $ 251,759
======== ======= ========= ======= =========
See accompanying notes to consolidated financial statements.
60
DIVINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
MAY 7, 1999
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net loss ........................................................... $(369,824) $(470,319) $ (9,407)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 29,661 27,266 693
Acquired technology: in-process research and development ........ 13,741 -- --
Extraordinary gain .............................................. (12,032) -- --
Stock-based compensation ........................................ 9,667 48,069 747
Noncash compensation expense from the forgiveness of notes
receivable from the exercise of stock options .................. 2,310 -- --
Other noncash compensation expense .............................. 654 -- --
Bad debt expense ................................................ 23,379 6,186 --
Equity in losses of associated companies ........................ 19,604 90,621 1,414
Net gain on stock transactions of associated companies .......... (667) (4,375) --
Impairment charges .............................................. 111,519 181,712 --
Minority interest ............................................... (4,270) (18,169) (51)
Gain on the sale of assets ...................................... (539) -- --
Realized loss on other than temporary impairment of available-
for-sale securities, net ....................................... 12,280 -- --
Realized gain on sale of associated companies ................... (7,397) -- --
Changes in assets and liabilities, excluding effects from
acquisitions:
Restricted cash ............................................ (30,923) (3,143) --
Accounts receivable ........................................ (6,801) (10,031) (577)
Deferred offering costs .................................... -- 1,612 (1,612)
Prepaid expenses ........................................... (2,913) (1,047) (27)
Deferred publisher costs ................................... (190,885) -- --
Other current assets ....................................... (3,371) (8,942) (462)
Accounts payable ........................................... 2,729 (1,672) 2,641
Publisher payables ......................................... 35,198 -- --
Accrued expenses and other liabilities ..................... (5,652) 7,554 5,816
Deferred revenue ........................................... 136,660 886 121
-------- -------- --------
Net cash used in operating activities ................... (237,872) (153,792) (704)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment ................................ (11,781) (45,676) (2,636)
Acquisitions, deconsolidation, and divestiture of ownership
interests in associated companies, including cash acquired ........ 86,348 (174,002) (43,238)
Capitalized acquisition costs ...................................... (16,830) -- --
Sale of ownership interests in associated companies ................ 26,247 1,990 --
Purchase of available-for-sale securities .......................... -- (4,181) --
Proceeds from the sale of property and equipment ................... 1,357 -- --
Purchase of real estate options .................................... (5,750) -- --
Net issuance (repayment) on notes receivable ....................... (131) 3,936 (4,075)
-------- -------- --------
Net cash provided by (used in) investing activities ..... 79,460 (217,933) (49,949)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock, net of issuance costs -- 230,720 211,924
Proceeds from initial public offering, net of issuance costs ....... -- 109,244 --
Proceeds from private placements concurrent with initial public
offering ....................................................... -- 218,597 --
Net repayments of notes payable to associated companies ............ -- (101,187) --
Proceeds from issuance of notes payable ............................ 17,605 -- --
Change in current notes receivable ................................. (1,571) -- --
Issuance of shares under Employee Stock Purchase Plan .............. 1,098 763 --
Proceeds from the issuance of common stock, net of issuance costs .. -- -- 33
Issuance of long-term debt ......................................... -- 2,643 --
Repayment of long-term debt ........................................ (421) (2,140) --
Proceeds from the exercise of stock options ........................ 19 4,261 1,537
Repurchase and cancellation of exercised stock options ............. (64) (1,233) --
Purchase of treasury stock and cash placed in escrow for future
purchase of treasury stock ....................................... (5,627) -- --
Capital raising costs of subsidiaries and payment of fractional
shares .......................................................... -- (251) --
Proceeds from repayments of notes receivable from the exercise of
stock options ................................................... 260 -- --
-------- -------- --------
Net cash provided by financing activities ............... 11,299 461,417 213,494
-------- -------- --------
Effect of exchange rates on cash ...................................... (940) -- --
Net (decrease) increase in cash and cash equivalents .................. (148,053) 89,692 162,841
Cash and cash equivalents at beginning of period ...................... 252,533 162,841 --
-------- -------- --------
Cash and cash equivalents at end of period ............................ $ 104,480 $ 252,533 $ 162,841
Supplemental disclosures: ========= ========= =========
Interest paid ...................................................... $ 1,142 $ 1,467 $ 27
Noncash financing and investing activities:
Issuance of notes payable, common stock, options, and warrants
in conjunction with acquisitions .............................. 284,415 85,316 22,500
Repayment of note payable from issuance of common stock ......... 6,875 -- --
Issuance of notes receivable from exercise of stock options ..... -- 31,154 --
Retirement of notes receivable from exercise of stock options ... -- 25,518 --
Issuance of stock in exchange for service credit or stock ....... -- 40,317 400
See accompanying notes to consolidated financial statements.
61
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
divine interVentures, inc. (the Company) was incorporated in the State of
Delaware on May 7, 1999 and commenced operations on June 30, 1999. The Company
began by engaging in business-to-business e-commerce through a community of
associated companies in which it invested. From September 30, 1999 to December
31, 2000, the Company acquired interests in 40 associated companies and
established a total of 13 associated companies whose opportunities were
consistent with the Company's business strategy.
In February 2001, the Company announced its strategy to focus primarily on
extended enterprise solutions, and changed its name to divine, inc. Since then,
interests in the Company's associated companies that provide products and/or
services consistent with the Company's core business strategy are no longer
reflected separately but have become integrated into the Company's core business
strategy and operating model as a fully integrated set of products and services.
The Company's other associated companies, offering software and services focused
on e-commerce and vertical markets, have been included in the Company's divine
interVentures segment since December 31, 2000. As of December 31, 2001, the
Company has completely written off its investments in the associated companies
in the divine interVentures portfolio, other than amounts included in
available-for-sale securities.
divine is a service and software company focused on solutions for the
extended enterprise. divine helps its clients maximize profits through better
collaboration, interaction, and knowledge sharing throughout the entire value
chain, including suppliers, partners, employees, and customers. The Company
facilitates its customers' integration of advanced enterprise Web solutions with
their business strategies and existing infrastructures by providing a
combination of professional services, Web-based technology, and managed
applications capabilities. The Company focuses its offerings on Global 5000 and
high-growth middle market firms and services customers located mainly in the
United States and throughout North America, Europe, Asia, and Australia.
(b) Principles of Consolidation
As discussed above, the Company has held ownership interests in many
associated companies since its inception. Under the Company's new strategic
focus, the Company's acquisitions are almost exclusively acquisitions of 100% of
the stock of certain companies that fit its operating strategy. The following
discussion regarding the principles of consolidation is meant to explain how the
Company accounted for investments in associated companies focused on e-business
and vertical markets, which accounted for the majority of the Company's
consolidated operations in 1999 and 2000. These companies were considered part
of the Company's divine interVentures portfolio throughout 2001. The
significance of the operations of these associated companies on the consolidated
operations of the Company decreased throughout 2001, and as of December 31,
2001, the Company has completely written off its investments in the associated
companies in its divine interVentures portfolio, other than amounts included in
available-for-sale securities.
Consolidation. Associated companies in which the Company owns, directly or
indirectly, more than 50% of the outstanding voting power are accounted for
under the consolidation method of accounting. Under this method, an associated
company's results of operations are reflected within the Company's consolidated
statements of operations from the acquisition date forward. Earnings or losses
62
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
attributable to other stockholders of a consolidated associated company are
identified as "minority interest" in the Company's consolidated statements of
operations. Minority interest adjusts the Company's consolidated net results of
operations to reflect only its share of the earnings or losses of an associated
company. Transactions between the Company and its consolidated associated
companies are eliminated in consolidation.
Equity Method. Associated companies in which the Company owns 50% or less
of the outstanding voting power, but over which the Company exercises
significant influence, are accounted for under the equity method of accounting.
Whether or not the Company exercises significant influence with respect to an
associated company depends on an evaluation of several factors including, among
other things, representation on the associated company's board of directors,
ownership percentage and voting rights associated with the Company's holdings in
the associated company. If the Company owns at least 20%, but not more than 50%,
of the outstanding voting power of an associated company, the Company accounts
for its interests under the equity method. Under the equity method of
accounting, associated companies' results of operations are not reflected within
the Company's consolidated operating results. However, the Company's share of
the earnings or losses of these associated companies, from the acquisition date
forward, is identified as "equity in losses of associated companies" in the
Company's consolidated statements of operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of associated companies accounted for under the equity
method of accounting is amortized on a straight-line basis over three years,
which the Company believes to be the minimum number of years for which the
associated companies will be successfully implementing their business plans,
based on various factors such as their revenue models and technology, and the
industries in which they operate. This amortization adjusts the Company's share
of the "equity in losses of associated companies" in the Company's consolidated
statements of operations.
Cost Method. Associated companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, the Company's share of the
earnings and losses of these companies is not included in the Company's
consolidated statements of operations.
The Company records its ownership interest in equity securities of its
associated companies accounted for under the cost method at cost, unless the
securities have readily determinable fair values based on quoted market prices,
in which case these interests would be accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
(c) Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
Cash equivalents at December 31, 2001 are invested principally in money market
accounts, short-term treasury bills, and commercial paper.
(d) Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents. The Company maintains its
cash accounts with various banks. The total domestic cash balances of the
Company are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000 per depositor, per bank. In addition, a significant portion of the cash
held by
63
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company in domestic brokerage accounts at December 31, 2001 is protected
with coverage provided through commercial insurers. The Company had uninsured
cash and cash equivalents at December 31, 2001 of $103,653,000.
(e) Financial Instruments
Cash equivalents, accounts receivable, notes receivable, prepaid expenses,
deferred publisher costs, accounts payable, publisher payables, accrued
expenses, deferred revenue, and notes payable are carried at cost which
approximates fair value due to the short-term maturity of these instruments.
Long-term debt is carried at cost which approximates fair value due to the
variable rates at which the underlying notes bear interest.
(f) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which are generally forty years for buildings, twelve years for machinery and
equipment, seven years for furniture and fixtures, and three years for computer
equipment and software. Amortization of leasehold improvements is computed over
the shorter of the lease term or estimated useful life of the assets.
(g) Software Development Costs
Costs associated with the planning and designing phase of software
development, including coding and testing activities necessary to establish
technological feasibility, are classified as research and development costs, and
expensed as incurred. Once technological feasibility has been determined,
material costs incurred in the construction phase of software development,
including coding and testing, and product quality assurance, are to be
capitalized. To date, no software development costs have been capitalized as
technological feasibility has been achieved substantially concurrent with the
general release of the Company's software products.
(h) Software Developed for Internal Use
The Company expenses costs related to the development of software for
internal use. Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, does not materially
affect the Company.
(i) Web Site Development Costs
The Company expenses costs incurred for web site development. Emerging
Issues Task Force (EITF) Issue No. 00-2, Accounting for Web Site Development
Costs, does not materially affect the Company.
(j) Revenue Recognition
Software transactions are accounted for in accordance with SOP 97-2,
Software Revenue Recognition, as amended. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements, such as software
products, upgrades/enhancements, post-contract customer support, installation
and training to be allocated to each element based on the relative fair values
of the elements. The revenue allocated to software licenses where the separate
service elements are not essential to functionality of the other elements is
generally recognized when persuasive evidence of an arrangement exists, delivery
of the product has occurred, the fee is fixed or determinable, and
64
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
collectibility is probable. When the separate service elements are essential to
the functionality of the other elements, software license revenues are
recognized according to the contract accounting provisions outlined in SOP 81-1,
Accounting for Performance of Construction-Type and Certain Performance-Type
Contracts, specifically the percentage-of-completion method. The revenue
allocated to post-contract customer support is recognized ratably over the term
of the support, and revenue allocated to service elements such as training,
installation and customization is recognized as the services are performed.
The majority of the Company's software license arrangements include
flexible contractual provisions that, among other things, allow customers to
receive unspecified future software products. Under these arrangements, the
Company recognizes revenue attributable to the software products ratably over
the term of the license arrangement commencing upon delivery of the currently
available software products.
Revenue from consulting services is provided under fixed price and time
and materials contracts. For fixed price contracts, revenue is recorded on the
basis of the estimated percentage of completion of services rendered. Losses, if
any, on fixed price contracts are recognized when the loss is determined. For
time and materials contracts, revenue is recorded at contractually agreed upon
rates as the costs are incurred.
Revenue from equipment sales is recognized upon shipment.
Revenue generated from subscription orders for third-party publications is
recognized over the subscription period.
Management fees are recognized as revenue over the period of the
management service.
(k) Goodwill and Other Intangible Assets
The Company accounts for its acquisitions of consolidated companies under
the purchase method of accounting pursuant to SFAS No. 141, Business
Combinations. Other intangible assets that are separable from goodwill and have
determinable useful lives are valued separately and amortized over their useful
lives. Goodwill represents mainly the excess of cost over net assets of acquired
businesses that are consolidated. Goodwill and other identifiable intangible
assets that do not have determinable useful lives and are not valued separately
are not amortized pursuant to SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill is reviewed for impairment on an ongoing basis. Other
identifiable intangible assets consist mainly of developed technology and are
generally amortized over two to four years.
Prior to its adoption of SFAS No. 141 on July 1, 2001, the Company
accounted for its acquisitions and the related amortization of goodwill and
other intangible assets under Accounting Principles Board Opinion No. 16,
Business Combinations (APB No. 16). Under APB No. 16, the Company amortized all
of its goodwill and other intangible assets over two or three years. The Company
continued to amortize, through December 31, 2001, its remaining goodwill and
other intangible assets resulting from business combinations occurring prior to
July 1, 2001.
For the years ended December 31, 2001 and 2000, and for the period ended
December 31, 1999, the Company recorded amortization expense of $12,757,000,
$51,640,000, and $1,121,000, respectively, related to goodwill and certain
intangible assets, as well as net excess investment over the equity in net
assets of equity-method associated companies, that are no longer being amortized
in accordance with SFAS No. 142. Had the Company not recorded these amortization
expenses, net loss before extraordinary gain would have been $369,099,000 for
the year ended December 31, 2001. Net loss
65
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
applicable to common stockholders for the years ended December 31, 2001 and
2000, and for the period ended December 31, 1999 would have been $357,067,000,
$476,542,000, and $4,806,000, respectively. Net loss per share applicable to
common stockholders would have been $(1.99), $(7.07), and $(4.19), respectively.
(l) Impairment Valuation
On a continuous basis, but no less frequently than at the end of each
quarterly reporting period, the Company evaluates the carrying value for
financial statement purposes of its goodwill and other intangible assets. The
Company accounts for the impairment of goodwill and other intangible assets in
relation to the operating performance and future undiscounted cash flows of the
reporting units of the underlying businesses when indications of impairment are
present. Such indications of impairment include, but are not limited to, the
actual performance of reporting units compared with budgeted performance,
layoffs within reporting units and associated facilities impairment charges, if
applicable, and market trends.
(m) Gain or Loss on Issuance of Stock by Associated Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time an
associated company accounted for under the consolidation or equity method issues
its stock at a price different from the associated company's book value per
share, the Company's share of the associated company's net equity changes. If at
that time, the associated company is not a newly formed, non-operating entity,
nor a research and development start-up or development stage company, nor is
there question as to the associated company's ability to continue in existence,
the Company records the change in its share of the associated company's net
equity as a gain or loss in its consolidated statements of operations.
Otherwise, the Company records the change in its share of the associated
company's net equity as an increase or decrease in its additional paid-in
capital.
(n) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(o) Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees , and related interpretations. Accordingly, compensation cost of stock
options is measured as the excess, if any, of the fair value of the Company's
stock at the date of grant over the option exercise price and is charged to
operations over the vesting period. Income tax benefits attributable to stock
options exercised are credited to additional paid-in capital.
66
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(p) Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, Earnings
per Share . Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents and convertible preferred stock is included in the
calculation of diluted earnings per share only when the effect of their
inclusion would be dilutive. Because the Company reported a net loss for all
periods presented, potentially dilutive securities have not been included in the
shares used to compute net loss per share.
Had the Company reported net income for the year ended December 31, 2001,
the weighted average number of shares outstanding would have potentially been
diluted by 29,553,095 common equivalent shares, assuming the exercise of all
outstanding stock options and by 1,707,634 common equivalent shares, assuming
the exercise of all outstanding warrants.
Had the Company reported net income for the year ended December 31, 2000,
the weighted average number of shares outstanding would have potentially been
diluted by 41,631,000 common equivalent shares, assuming the conversion of
preferred stock from the date of issuance of that preferred stock. All preferred
stock of the Company was converted into common stock upon the completion of the
Company's initial public offering on July 18, 2000. Had the Company reported net
income for the year ended December 31, 2000, the weighted average number of
shares outstanding would have potentially been further diluted by 3,189,000
common equivalent shares, assuming the exercise of stock options.
Had the Company reported net income for the period ended December 31,
1999, the weighted average number of shares outstanding would have potentially
been diluted by 14,992,500 common equivalent shares, assuming the conversion of
preferred stock and an additional 619,000 common stock equivalent shares,
assuming the exercise of stock options.
(q) Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Excluding net income (loss), the Company's source of
comprehensive income (loss) is from net unrealized appreciation (depreciation)
on its available-for-sale securities and from net gain (loss) on foreign
currency translation. The Company reports comprehensive income (loss) in the
consolidated statements of stockholders' equity.
(r) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(s) Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to current period presentations.
67
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(t) Foreign Currency Translation
Since the Company does business in foreign countries, fluctuations in
exchange rates of various foreign currencies affect the Company's financial
position and results of operations. Assets and liabilities of foreign
subsidiaries are translated to U.S. dollars using the exchange rates in effect
at the end of the reporting period. The revenue and expense accounts of foreign
subsidiaries are translated to U.S. dollars at the average exchange rates for
the reporting period. The gains or losses that result from translation are shown
in accumulated other comprehensive income (loss) in the stockholders' equity
section of the balance sheet.
(2) ACCOUNTS RECEIVABLE
Net accounts receivable consist of the following:
DECEMBER 31,
------------------------
2001 2000
--------- --------
(IN THOUSANDS)
Accounts receivable ............................................... $ 207,816 $ 14,541
Allowance for doubtful accounts ................................... (6,983) (6,863)
--------- --------
$ 200,833 $ 7,678
========= ========
The Company sells to customers in a wide variety of industries and markets
throughout the world. Receivables arising from these sales are generally not
collateralized. Adequate provisions have been recorded for uncollectible
receivables. There are no significant concentrations of credit risk.
The Company has an agreement under which one of its foreign subsidiaries
sells certain of its trade accounts receivable. The factoring company has the
risk of credit loss on the receivables and accordingly, there is no allowance
for doubtful accounts related to these receivables on the Company's consolidated
balance sheets.
Activity in the allowance for doubtful accounts is summarized as follows:
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------ DECEMBER 31,
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Beginning balance ......................... $ 6,863 $ 587 $ --
Balance acquired from acquisitions ........ 19,787 606 587
Bad debt expense .......................... 23,378 6,186 --
Write-offs ................................ (43,045) (516) --
------- ---- -----
Ending balance ............................ $ 6,983 $ 6,863 $ 587
========= ======= =====
68
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
DECEMBER 31,
--------------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Land and land improvements ......................... $ 9,873 $ 9,750
Buildings .......................................... 3,491 --
Machinery and equipment ............................ 1,772 7,543
Computer equipment and software .................... 22,565 17,775
Office equipment and furniture ..................... 7,615 1,622
Construction in progress ........................... 115 94
Leasehold improvements ............................. 13,453 6,289
--------- ---------
58,884 43,073
Less accumulated depreciation and amortization ..... (14,549) (9,253)
--------- ---------
$ 44,335 $ 33,820
========= =========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are summarized as follows:
DECEMBER 31,
--------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Goodwill ............................................ $ 157,247 $ 11,860
Developed technology ................................ 57,310 10,079
Customer lists ...................................... -- 5,570
Workforce in place .................................. -- 1,620
Other intangible assets ............................. 615 662
---------- ----------
215,172 29,791
Less accumulated amortization ....................... (4,097) (21,170)
---------- ----------
$ 211,075 $ 8,621
========== ==========
At December 31, 2001 the Company had $54,370,000 of amortizable intangible
assets, consisting of developed technology and other intangible assets. The
Company expects to amortize these intangible assets as follows: 2002 --
$14,539,000; 2003 -- $14,539,000; 2004 -- $14,292,000; and 2005 -- $11,000,000.
(5) BUSINESS COMBINATIONS
1999 Business Combinations Activity
On October 14, 1999, the Company acquired 1.9% of Neoforma.com, Inc.
(Neoforma) for $6,000,000. Neoforma provides business-to-business e-commerce
services in the medical products market.
On October 29, 1999, the Company acquired 2.1% of NTE, Inc. (formerly The
National Transportation Exchange, Inc.) (NTE) for $750,000. NTE offers an
electronic marketplace that aggregates suppliers and buyers of freight
transportation capacity. On January 5, 2000, the Company
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
paid $5,112,665 to acquire an additional 3.2% of NTE, thereby increasing the
Company's ownership percentage of NTE to 5.3%.
On October 29, 1999, the Company acquired 0.9% of comScore, Inc.,
(comScore) for $200,208. ComScore is a company that provides online consumer
behavior data and related consulting services.
On November 8, 1999, the Company paid $2,000,000 and issued a promissory
note for $4,000,000 for 26.5% of Whiplash, Inc. (Whiplash), which provided a
Web-based global distribution system to improve the efficiency and profitability
of sellers in the leisure travel market space. The promissory note carried
interest at 6%. The first $2,000,000 installment was paid on December 31, 1999
and the second $2,000,000 installment was paid in March 2000. In addition,
during the second quarter of 2000, the Company paid $1,250,000 in cash and
issued a note for $1,250,000 to obtain an additional interest in Whiplash.
Whiplash ceased all meaningful operations in the fourth quarter of 2000.
On November 19, 1999, the Company acquired 1.1% of Commerx, Inc. (Commerx)
for $2,500,000. Commerx provides vertical online marketplaces for industrial
markets.
On November 19, 1999, the Company paid $4,905,275 for 97% of mindwrap,
inc. (mindwrap) and their OPTIX software, which provides document imaging,
management and control to laser disk technology. As part of this acquisition,
$694,529 of debt owed by mindwrap to its parent company was forgiven.
On November 23, 1999, the Company paid $5,000,000 and issued a promissory
note for $10,000,000 for 37.4% of PocketCard Inc. (PocketCard), which provided
businesses and individuals with debit cards that allowed real-time funding over
the Internet. The promissory note carried interest at 8%. The note was paid in
$5,000,000 installments in February and March 2000. PocketCard ceased all
meaningful operations in the fourth quarter of 2000.
On November 23, 1999, the Company acquired 8.3% of Sequoia Software
Corporation (Sequoia) for $5,000,000. Sequoia provides Internet infrastructure
software to proprietary web sites designed as market makers. In February 2001,
the Company distributed 126,497 of its shares of Sequoia Software Corporation to
certain employees who participated in the Company's incentive compensation
program. This distribution decreased the Company's ownership interest in Sequoia
to 7.5%. In April 2001, the Company tendered its 2,335,000 shares of Sequoia
Software Corporation as part of a previously announced acquisition of Sequoia by
Citrix Systems, Inc. In May 2001, the Company received $13,174,000 for these
shares, which resulted in a realized gain of $6,611,000 included within other
income in the consolidated statements of operations.
On November 23, 1999, the Company paid $500,000 for 63.8% of i-Street,
Inc., which is a business-to-business media company and news portal focused on
the Internet and technology businesses in Chicago and the Midwest. In January
2001, the Company restructured its ownership interest in i-Street, such that the
Company's voting ownership in i-Street was reduced to 25.1%. As a result,
beginning in January 2001, i-Street was accounted for under the equity method of
accounting, whereas it had previously been consolidated. In July 2001, the
Company exchanged all of its outstanding preferred securities in i-Street for
36,222 shares of common stock of i-Street. The Company now holds an ownership
interest of 10.0% in i-Street.
On November 23, 1999, the Company paid $867,000 for a 43.0% interest in
Entrepower, Inc. (Entrepower), which was an on-line recruiting service provider.
Entrepower ceased all meaningful operations in the fourth quarter of 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 8, 1999, the Company paid $7,500,000 and issued a promissory
note for $7,500,000 to purchase 76.9% of LiveOnTheNet.com, Inc. (LiveOnTheNet),
which offers proprietary technology for webcasting live events online. This
promissory note carried interest at the prime rate as recorded in the Wall
Street Journal (8.5% at December 31, 1999) and was paid in full in June 2000. As
part of this acquisition, $4,514,000 of debt owed by LiveOnTheNet to its parent
company was forgiven.
On December 8, 1999, the Company acquired 44.1% of OpinionWare.com, Inc.
(OpinionWare) for $2,000,000. OpinionWare provides technology that allows
businesses to gather and analyze the opinions of large public and private online
communities. In addition, during the second quarter of 2000, the Company paid
$5,000,000 in cash to obtain an additional interest in OpinionWare. On April 30,
2000, the Company changed its method of accounting for its investment in
OpinionWare from the equity method to the consolidation method due to the
Company's additional investment.
On December 10, 1999, the Company acquired 31.8% of Outtask.com Inc.
(Outtask) for $4,000,000 and a promissory note for $3,000,000. The promissory
note carried an interest rate of 8.5% and was paid in March 2000. Outtask
provides business-to-business e-commerce applications and services to technology
and Internet companies. In February 2001, the Company contributed $4,000,000 to
Outtask.com, Inc. As a result of this contribution, the Company's ownership in
Outtask was increased to 34.2%.
2000 Business Combination Activity
On January 11, 2000, the Company acquired 51.3% of BeautyJungle.com, Inc.
(BeautyJungle) for $10,000,000. Subsequently on March 13, 2000, the Company
acquired an additional interest in BeautyJungle for $8,000,000, which increased
the Company's ownership percentage of BeautyJungle to 61.2%. BeautyJungle
offered an electronic marketplace for buyers and sellers of beauty products, but
ceased all meaningful operations in the third quarter of 2000.
On January 24, 2000, the Company acquired 54.3% of bid4real.com, inc.,
(bid4real) for $7,000,000. bid4real provided a forum on which real estate
auctions are conducted on-line. bid4real ceased all meaningful operations in
June 2001.
On January 28, 2000, the Company paid $1,000,000 and issued a promissory
note for $9,000,000 for 48.8% of iFulfillment, Inc., which provided fulfillment
and inventory management services to businesses selling products over the
Internet. The promissory note carried interest at 8.5% and was paid in
installments through May 2000. In addition, during the third and fourth quarters
of 2000, the Company paid $9,000,000 in cash to obtain an additional interest in
iFulfillment. On August 1, 2000, the Company changed its method of accounting
for its investment in iFulfillment from the equity method to the consolidation
method due to the Company's additional investment. iFulfillment ceased all
meaningful business operations in the fourth quarter of 2001. As a result, the
Company received a distribution in bankruptcy of $215,000 in January 2002
related to its investment in iFulfillment.
On January 31, 2000, the Company paid $3,000,000 and issued a promissory
note for $2,000,000 for 70.0% of ViaChange.com, Inc., which provides a forum on
which auctions of products in capital markets are conducted on-line. The
promissory note carried interest at 8.0% and was paid in May 2000. In November
2001, the Company's ownership interest in ViaChange was extinguished and
replaced with a warrant to purchase 30.0% of the common stock of ViaChange.
On February 1, 2000, the Company paid $11,500,000 and issued 500,000
shares of its series F preferred stock (with a fair value of $4.80 per share)
for 42.7% of closerlook, inc., a strategy, design and technology firm that
delivers communication, marketing and software solutions to bring its clients
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DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
closer to their customers. The Company placed an additional $1,500,000 and
1,500,000 shares of its series F preferred stock into escrow, which was returned
to the Company because closerlook did not meet certain predetermined revenue
goals for 2000. The 1,500,000 shares of series F preferred stock, which have
since been converted to 250,000 shares of the Company's class A common stock,
were cancelled in June 2001. In June 2001, the Company sold back its interest in
closerlook for nominal consideration.
On February 3, 2000, the Company acquired 36.3% of iSalvage.com, Inc.,
(iSalvage) for $6,500,000. iSalvage provided an electronic marketplace for
recycled and rebuilt automotive parts. In February 2001, iSalvage.com, Inc.,
ceased all meaningful business operations. The Company wrote down the carrying
value of its investment in iSalvage to $72,000 in 2000. In March 2001, the
Company received $194,000, representing its share of the first cash distribution
in the liquidation of iSalvage. In July 2001, the Company received $44,000,
representing its share of the final cash distribution.
On February 4, 2000, the Company paid $5,000,000 and issued a promissory
note for $4,000,000 for 32.3% of Xippix, Inc., which provided technology that
allows high-resolution imaging for companies' web sites. The promissory note
carried interest at 8.0% and was paid in May 2000. In addition, during the
second quarter of 2000, the Company paid $1,242,000 in cash to obtain an
additional interest in Xippix. In April 2001, Xippix, Inc. ceased all meaningful
business operations.
On February 8, 2000, the Company acquired 25.0% of Martin Partners, L.L.C.
(Martin Partners) for $1,670,883. Martin Partners is an executive search firm
which focuses on e-commerce and technology companies. In November 2000, the
Company sold its interest in Martin Partners back to the principals of Martin
Partners for a price equal to the Company's purchase price plus interest. The
Company recognized a loss of $39,000 on the sale of Martin Partners.
On February 10, 2000, the Company paid $2,500,000 and issued a promissory
note for $2,500,000 for 55.6% of Oilspot.com, Inc., which provides an electronic
marketplace for purchasers and suppliers of petroleum products and services. The
promissory note carried interest at 8.5%; $1,000,000 was paid in June 2000 and
$1,500,000 was forgiven in October 2000 in conjunction with Oilspot's merger
with FuelQuest, Inc. As of December 31, 2001, the Company owns less than 1% of
FuelQuest, Inc.
On February 11, 2000, the Company paid $3,000,000 and issued a promissory
note for $3,000,000 for 35.5% of BidBuyBuild, Inc. (BidBuyBuild), which provides
an electronic marketplace in the commercial and industrial construction supply
industry. The promissory note carried interest at 8.5% and was paid in April
2000. The Company sold its interest in BidBuyBuild for $200,000 in October 2000.
On February 11, 2000, the Company acquired 44.5% of CapacityWeb.com, Inc.
(CapacityWeb) for $4,500,000. CapacityWeb provided an electronic marketplace for
industrial manufacturing capacity, but ceased all meaningful operations in 2000.
On February 11, 2000, the Company paid $15,000,000 and issued 10,000,000
shares of its series F preferred stock (with a fair value of $4.80 per share)
for communication and collaboration software. This software was the basis for
Parlano, Inc. (Parlano), of which the Company obtained a 75.1% ownership
interest. Parlano markets and licenses software that allows information to be
captured, filtered and stored in corporate databases and used in knowledge
management applications. In connection with the issuance of the Company's series
F preferred stock on February 11, 2000, the Company recorded a non-cash dividend
of $7,530,000. This non-cash dividend relates to the deemed beneficial
conversion features associated with this preferred stock. The series F preferred
stock has since been converted to 1,666,666 shares of the Company's class A
common stock.
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DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On February 11, 2000, the Company paid $5,000,000 and issued a promissory
note for $5,000,000 for 45.2% of United Process Group, Inc. (UPG), formerly
eFiltration.com, Inc., which offered an electronic marketplace for the
filtration industry. The promissory note carried interest at 8.5% and was paid
in July 2000. In May 2001, UPG, Inc. repurchased the Company's ownership
interest for nominal consideration. In a separate transaction in May 2001, the
Company acquired a 24.7% interest in UPG for $500,000 plus future consulting
services valued at $320,000. One of the conditions of the new stock purchase
agreement was that the Company would not be required to make an additional
investment of $11 million, as detailed in the original purchase agreement. In
September 2001, the Company acquired the 75.3% of the equity interests of UPG
that it did not already own in exchange for nominal consideration and an
agreement to hire certain of UPG's employees. As a condition of the September
2001 transaction, the unfulfilled portion of the consulting services owed in
conjunction with the May 2001 transaction was nullified.
On February 11, 2000, the Company acquired 32.1% of iGive.com, inc.
(iGive) for $4,000,000. iGive provides technology and services to a network of
merchants, non-profit organizations and consumers which enable retail purchasers
to assist non-profit organizations.
On February 11, 2000, the Company paid $12,000,000 and issued a promissory
note for $11,500,000 for 40.4% of Mercantec, Inc., which produces software that
allows merchants to integrate e-commerce capabilities into their existing web
sites. The promissory note carried interest at 6.0%; $6,500,000 was paid in
April 2000 and $5,000,000 was paid in August 2000.
On February 11, 2000, Xqsite, Inc., of which the Company owned 80.6% on
the acquisition date, acquired 66.7% of Web Design Group, Inc. (Web Design
Group) for $7,000,000. Web Design Group provides web development and electronic
business services to companies seeking to develop and implement effective web
solutions for their operations.
On February 11, 2000, Xqsite, Inc., paid $500,000 and issued a promissory
note for $500,000 for 65.0% of Westbound Consulting, Inc., (Westbound
Consulting) which delivers customized Internet solutions through web consulting,
marketing, development and hosting services. The promissory note carried
interest at the prime rate of interest as stated in the Wall Street Journal;
$250,000 was paid by the Company in April 2000 and $250,000 was paid by Web
Design Group on behalf of Xqsite in May 2000.
On February 14, 2000, the Company paid $10,000,000 and issued 1,000,000
shares of its series F preferred stock (with a fair value of $4.80 per share)
for 33.4% of Perceptual Robotics, Inc., which offers a software system that
allows Internet users to control a robotic camera and immediately capture still
images from remote locations. The series F preferred stock has since been
converted to 166,666 shares of the Company's class A common stock.
On February 25, 2000, the Company acquired 39.7% of Launchworks, inc.
(Launchworks) for $11,428,571. Launchworks is a provider of capital and
strategic services to business-to-business e-commerce companies. During the
third quarter of 2000, the Company paid $4,050,000 in cash and issued 1,152,826
shares of its class A common stock valued at $8,095,000 to obtain an additional
interest in Launchworks. In February 2002, the Company issued 2,159,074 shares
of its class A common stock to Wirecomm Systems, Inc., a subsidiary of
Launchworks, in satisfaction of an obligation of the Company under a collar
agreement between the Company and Launchworks. Also, in further satisfaction of
the collar obligation, the Company returned 800,000 preferred shares of
Launchworks. The Company has no further obligations under the Launchworks collar
agreement.
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DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On March 8, 2000, the Company paid $2,500,000 and issued a promissory note
for $2,500,000 for 42.0% of TV House, Inc., which produces and syndicates
Internet video financial news updates designed for individual investors. The
promissory note carried interest at 8.5% and was paid in July 2000.
On March 10, 2000, the Company acquired 34.6% of Aluminium.com, Inc.
(Aluminium) for $19,250,000. Aluminium provides a business-to-business online
exchange for buying and selling all grades of aluminum raw materials. In June
2001, Aluminium, inc. ceased all meaningful business operations.
On March 15, 2000, the Company acquired 47.1% of eReliable Commerce, Inc.
(eReliable) for $4,725,000. eReliable offers technology to provide
business-to-business e-commerce web sites with customized guaranteed transaction
services.
On March 24, 2000, Host divine, inc., of which the Company owned 80.6% on
the acquisition date, acquired 76.2% of NetUnlimited, Inc. (NetUnlimited) for
$5,000,000. NetUnlimited markets various Internet technology infrastructure
services.
On March 30, 2000, the Company acquired 62.9% of Panthera Productions, LLC
(Panthera) for $2,700,000. Panthera offers a web channel for entertainment and
education that will provide users a virtual experience with animals throughout
Africa.
On April 3, 2000, the Company paid $2,000,000 and issued a promissory note
for $24,871,429 for 33.0% of Emicom Group, Inc. (Emicom). The promissory note
carried interest at 8.5% and was paid in July 2000. Emicom is a technology
holding company that provides capital and advisory services to early-stage
technology companies located in the Middle East.
On April 28, 2000, the Company paid $16,100,000 and issued a promissory
note for $16,100,000 for 41.0% of Farms.com, Ltd. (Farms). The promissory note
carried interest at 8.0% and was paid in July 2000. Farms provides an electronic
marketplace for the livestock and grain industries. In June 2001, the Company
sold back its interest in Farms for $13,000,000, which resulted in a realized
gain of $7,225,000 included within other income in the consolidated statement of
operations for the year ended December 31, 2001.
On July 26, 2000, the Company paid $17,500,000 for 37.4% of Dolphin
Interventures (formerly Latin American Econetworks N.V.), which provides capital
and strategic services to Internet and related companies throughout Latin
America.
2001 Business Combination Activity
In February 2001, the Company, through its wholly owned subsidiary divine
Global Services, Inc. (dGS), acquired the minority interest of Web Design Group
in exchange for 222,841 shares of the Company's class A common stock. Because
Web Design Group did not meet certain predetermined revenue targets in 2001, the
Company was not obligated to issue any of the 222,841 additional common shares
detailed in the purchase agreement.
In February 2001, Buzz msp inc., a wholly owned subsidiary of the Company,
was merged into dGS.
In February 2001, the operations of salespring, inc.!!, an associated
company since October 1999, were collapsed into the operations of the Company
and salespring ceased operating as an independent business.
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DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March 2001, the Company, through dGS, acquired the minority interest of
Westbound Consulting in partial satisfaction of a note payable by Westbound
Consulting to the Company. Westbound Consulting was merged into dGS. Westbound
Consulting Services Pvt. Ltd., which was a subsidiary of Westbound Consulting,
became a subsidiary of dGS and continues to have a 16.2% minority ownership.
On March 29, 2001, the Company acquired 100% of the capital stock of
SageMaker, Inc. (SageMaker) in exchange for a total of 10,533,333 shares of its
class A common stock. Of those shares, 1,333,333 shares are held in an escrow
account pending the determination of SageMaker's performance against certain
cash collection thresholds in 2001. The Company also has granted stock options
to purchase 2,200,000 shares of the Company's class A common stock, and has
agreed to grant stock options to purchase up to a maximum of $2,000,000 of the
Company's class A common stock to the continuing employees of SageMaker to the
extent SageMaker is determined to have exceeded certain cash collection
thresholds in 2001. SageMaker offers software that integrates content for
enterprise information portals.
In two separate transactions in April 2001, the Company acquired certain
assets from marchFIRST, Inc. ("marchFIRST"), including, but not limited to, its
former Whittman-Hart operations, its SAP implementation practice, and its
value-added reseller business. Additionally, the Company acquired accounts
receivable with a face value of $102.8 million. The acquired business is held by
the Company's newly formed subsidiary, divine/Whittman-Hart, Inc.
("divine/Whittman-Hart"). The Company paid to marchFIRST $12,500,000 in cash and
divine/Whittman-Hart issued marchFIRST a promissory note. The note is a $57.5
million balloon note, payable in five years but accelerated to the extent of 50%
of free cash flow from divine/Whittman-Hart's operations and which is secured by
the assets of divine/Whittman-Hart. This note bears interest at the Wall Street
Journal prime rate of interest. In conjunction with the Company's acquisition of
marchFIRST assets, divine/Whittman-Hart also assumed $12.0 million of accrued
compensation and benefit obligations for the employees transferred with the
acquired businesses. marchFIRST also is eligible to receive up to an aggregate
of $55.0 million in bonus payments, payable to the extent that 50% of free cash
flow from divine/Whittman-Hart's operations during the next five years exceeds
divine/Whittman-Hart's obligation under the promissory notes. The Company does
not guarantee the promissory notes from divine/Whittman-Hart to marchFIRST, but
the terms of the promissory notes restrict payments from divine/Whittman-Hart to
the Company.
In April 2001, the Company acquired the minority interest of OpinionWare
in exchange for 1,637,948 shares of the Company's class A common stock. In
addition, the Company issued, to OpinionWare's employees, 1,764,266 options to
purchase the Company's class A common stock.
In April 2001, the Company acquired the minority interest of
LiveOnTheNet.com, Inc. in exchange for 817,217 shares of the Company's class A
common stock, and changed the name of LiveOnTheNet.com, Inc. to LOTN, Inc.
("LOTN"). In May 2001, the Company sold certain assets, subject to certain
liabilities, of LOTN, including the name "LiveOnTheNet.com," to a newly created
entity (new LiveOnTheNet) in exchange for a promissory note in the amount of
$1,750,000. The Company owns a 25.0% interest in new LiveOnTheNet.
In May 2001, the Company acquired the minority interest of mindwrap, inc.,
an associated company since November 1999, in exchange for 50,000 shares of the
Company's class A common stock.
In May 2001, the Company acquired 100% of the stock of DataBites, Inc.
through a merger of the Company's wholly owned subsidiary, CoolBites, Inc., with
DataBites in exchange for 1,074,423 shares of the Company's class A common
stock. Additionally, the Company has granted to DataBites' continuing
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DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees options to purchase 107,500 shares of the Company's class A common
stock. DataBites provides technology that allows users to conveniently capture
content from the Internet for display on any Internet-enabled device.
In July 2001, the Company acquired the 67.0% of Emicom Group, Inc. that it
did not already own in exchange for 13,800,000 shares of the Company's class A
common stock. Additionally, the Company has granted to Emicom's continuing
employees options to purchase 2,123,067 shares of the Company's class A common
stock.
In August 2001, the Company acquired certain assets, subject to certain
liabilities, of Fracta Networks, Inc., a provider of personal content management
solutions. For these assets, the Company issued warrants to purchase 1,000,000
shares of the Company's class A common stock. Additionally, the Company has
granted to Fracta Networks' continuing employees options to purchase 468,080
shares of the Company's class A common stock.
In September 2001, through its wholly owned subsidiary, divine Germany,
the Company acquired certain assets and assumed certain liabilities of
marchFIRST GmbH, a professional services organization in Germany. For these
assets, the Company issued a note payable in the amount of 5,369,000 Euros
(approximately $4,894,000 at December 31, 2001). The note is due and payable on
or before September 1, 2002. The Company has the option to pay the note with
cash, or by issuing shares of the Company's class A common stock to the former
marchFIRST GmbH stockholders.
In September 2001, the Company acquired an additional 26.6% equity
interest in Parlano Inc. in exchange for 3,851,944 shares of the Company's class
A common stock. Additionally, the Company has granted to Parlano's continuing
employees options to purchase 958,970 shares of the Company's class A common
stock.
In October 2001, the Company acquired 100% of the stock of eshare
communications, Inc., a leading provider of customer interaction management
(CIM) solutions, in exchange for 68,435,596 shares of the Company's class A
common stock. In addition, the Company issued options to purchase 3,676,299
shares of the Company's class A common stock to eshare employees upon conversion
of existing options to purchase common shares of eshare.
In October 2001, the Company acquired 100% of the stock of Open Market,
Inc, a provider of enterprise content management and delivery application
software, in exchange for 44,454,515 shares of the Company's class A common
stock. In addition, the Company issued options to purchase 8,356,507 shares of
the Company's class A common stock, to Open Market employees, and warrants to
purchase 1,460,559 shares of the Company's class A common stock, in each case
upon conversion of existing options and warrants to purchase Open Market common
stock.
In October 2001, the Company acquired certain assets of Intira
Corporation, a high-end provider of outsourced information technology and
network infrastructure services. For these assets, the Company paid Intira
$1,000,000 in cash and provided a $6,800,000 debtor-in-possession credit
facility. The Company also assumed certain operating liabilities of Intira. The
assets acquired include certain fixed assets, accounts receivable,
infrastructure and technology, certain of Intira's data centers including
locations in Pleasanton, Calif., and St. Louis, the right to the assignment of
customer contracts and the right to offer employees positions with the Company.
In October 2001, the Company acquired 100% of the stock of Synchrony
Communications, Inc., a leading customer interaction management suite provider,
in exchange for promissory notes to the former stockholders of Synchrony in the
aggregate principal amount of $6,875,000. The notes were paid in December 2001
upon the issuance by the Company of 5,500,000 shares of its class A common
stock.
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DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, the Company issued warrants to purchase 44,756 shares of its class
A common stock and agreed to grant options to purchase 2,000,000 shares of the
Company's class A common stock to the continuing employees of Synchrony.
In October 2001, the Company acquired, through divine/Whitman-Hart, inc.,
one of its wholly owned subsidiaries, the assets of marchFIRST, Inc.'s HostOne
application hosting unit. The Company purchased these assets in exchange for
providing operating funds to HostOne from April 2001 to October 2001. In
addition, the Company issued to Microsoft Corporation a total of 8,196,722
shares of its class A common stock in exchange for the cancellation of debt owed
by marchFIRST to Microsoft.
In November 2001, the Company acquired RoweCom Inc., a leading global
provider of sophisticated tools and client services for purchasing and managing
the acquisition of magazines, newspapers, journals and e-journals, books and
other knowledge resources, in exchange for 10,158,420 shares of the Company's
class A common stock. The Company also issued warrants to purchase 3,752,602
shares of the Company's class A common stock upon conversion of existing options
and warrants to purchase RoweCom common stock. In addition, the Company has
agreed to grant options to purchase the Company's class A common stock to
RoweCom employees.
In November 2001, the Company acquired the 62.6% of Latin American
Econetworks N.V. (also known as Dolphin Interventures) that it did not already
own in exchange for 8,000,000 shares of the Company's class A common stock.
Prior to the closing of the acquisition, $7,400,000 was distributed to the
former owners of Dolphin Interventures.
In December 2001, the Company acquired 100% of the stock of Eprise
Corporation, a leading provider of content management solutions, for 54,017,705
shares of the Company's class A common stock. In addition, the Company issued
options to purchase 4,562,903 shares of the Company's class A common stock to
Eprise's employees and warrants to purchase 310,723 shares of the Company's
class A common stock, in each case upon conversion of existing options and
warrants to purchase Eprise common stock.
In December 2001, the Company acquired 100% of the stock of Softmetric,
Inc., a leader in providing business activity monitoring and performance
analysis solutions for the call center industry, for 4,801,368 shares of the
Company's class A common stock. In addition, the Company issued options to
purchase 350,000 shares of the Company's class A common stock.
Pro Forma Impact of Acquisitions
During the year ended December 31, 2001, the Company acquired 100% of
eshare communications, Inc., Eprise Corporation, RoweCom Inc., and Open Market,
Inc. ("the pro forma acquisitions"). The following unaudited pro forma financial
information for the years ended December 31, 2001 and 2000 presents the
consolidated operations of the Company as if the pro forma acquisitions had been
made on January 1, 2000, after giving effect to certain adjustments including
increased amortization of certain intangible assets related to the acquisitions.
Under the provisions of SFAS No. 142, goodwill acquired in transactions
completed after June 30, 2001 will not be amortized. As the pro forma
acquisitions occurred subsequent to that date, these pro forma results do not
reflect any goodwill amortization expense related to these acquisitions. The
Company's acquisition of certain assets from marchFIRST has been excluded from
the unaudited pro forma financial information because the operational results
related to these assets for periods prior to the acquisition are indeterminable.
Other acquisitions made during the year ended December 31, 2001 have also been
excluded because their effects would be immaterial. The unaudited pro forma
financial information is provided for informational purposes only and should not
be construed to be indicative of the
77
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's consolidated results of operations had the 2001 acquisitions been
consummated on these earlier dates, and do not project the Company's results of
operations for any future period:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
---- ----
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenues ....................................................................... $ 694,705 $ 605,777
Net loss applicable to common stockholders ..................................... (469,595) (697,151)
Basic and diluted net loss per share applicable to common stockholders ......... $ (1.42) $ (2.85)
(6) OWNERSHIP INTERESTS IN EQUITY METHOD AND COST METHOD ASSOCIATED COMPANIES
The following summarizes the Company's ownership interests in associated
companies accounted for under the equity method and cost method of accounting.
The ownership interests are classified according to applicable accounting
methods at December 31, 2001 and 2000. Cost basis represents the Company's
original acquisition cost. Associated companies that have ceased operations or
were sold in 2000 are not included at December 31, 2000. Associated companies
that have ceased operations or were sold in 2001 are not included at December
31, 2001.
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
CARRYING COST CARRYING COST
VALUE BASIS VALUE BASIS
----- ----- ----- -----
(IN THOUSANDS)
Equity method ...................... $ -- $ 82,130 $ 57,000 $ 209,144
Cost method ........................ -- 12,628 8,939 10,189
----- --------- --------- ---------
$ -- $ 94,758 $ 65,939 $ 219,333
===== ========= ========= =========
The Company recorded $5,771,000 in excess investment over its share of the
underlying equity in the net assets of companies accounted for under the equity
method of accounting during the year ended December 31, 2001. Amortization
expense of $6,287,000 is included in "equity in losses of associated companies"
in the accompanying consolidated statement of operations for the year ended
December 31, 2001. The Company also recorded $36,633,000 for other than
temporary declines in the carrying value of certain equity and cost method
associated companies for the year ended December 31, 2001. The Company recorded
$120,102,000 in excess investment over its share of the underlying equity in the
net assets of companies acquired during the year ended December 31, 2000,
accounted for under the equity method of accounting. The Company also recorded
$113,125,000 for other than temporary declines in the carrying value of certain
equity and cost method associated companies for the year ended December 31,
2000. Amortization expense of $36,995,000 is included in "equity in losses of
associated companies" in the accompanying consolidated statement of operations
for the year ended December 31, 2000.
The following summarized financial information for associated companies
accounted for under the equity method of accounting at December 31, 2001 and
2000, and for the years ended December 31, 2001 and 2000 has been compiled from
the financial statements of the respective associated companies. The results of
operations for associated companies that the Company has fully impaired are
included up to the month that the Company's carrying value in those associated
companies was reduced to $0. The balance sheets for those associated companies
written down to $0 as of December 31, 2001 or 2000 are not included in the
summarized balance sheets as of those dates.
78
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BALANCE SHEETS
DECEMBER 31,
------------
2001 2000
---- ----
(IN THOUSANDS)
Current assets ................................................................ $ -- $ 178,942
Noncurrent assets ............................................................. -- 31,637
---- -------
Total assets .............................................................. $ -- $ 210,579
==== =========
Current liabilities ........................................................... $ -- $ 24,154
Non-current liabilities ....................................................... -- 3,670
Redeemable preferred stock .................................................... -- 198,826
Stockholders' deficit ......................................................... -- (16,071)
---- -------
Total liabilities, redeemable preferred stock and stockholders' deficit ... $ -- $ 210,579
==== =========
RESULTS OF OPERATIONS
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
(IN THOUSANDS)
Revenues .................. $ 49,428 $ 46,734 $ 34
Gross profit .............. 13,920 28,884 24
Net loss .................. $ (37,019) $(140,641) $ (4,785)
(7) OWNERSHIP INTERESTS IN CONSOLIDATED COMPANIES
In April 2001, the Company acquired certain assets from marchFIRST,
including, but not limited to, its former Whittman-Hart operations, its SAP
software implementation practice, and its value-added reseller business. The
Company paid $12,500,000 in cash and the Company's wholly owned subsidiary,
divine/Whittman-Hart, issued $57,500,000 in promissory notes in exchange for
these assets.
In October 2001, the Company acquired 100% of eshare communications, a
leading provider of customer interaction management (CIM) solutions. The
purchase price, for the purpose of recording the purchase accounting for this
transaction, consisted of $3,426,000 of cash payments related to acquisition
costs, and 68,435,596 non-contingent shares of the Company's class A common
stock, with a fair value of $36,271,000. The purchase price was reduced by
$1,225,000 for the write-off of the Company's payables to eshare. Additionally,
the Company has granted stock options to purchase 3,676,299 shares of the
Company's class A common stock which are included as part of the purchase price
paid by the Company. The Black-Scholes fair value of these options was
$1,671,000.
In October 2001, the Company acquired 100% of Open Market, a provider of
enterprise content management and delivery application software. The purchase
price, for the purpose of recording the purchase accounting for this
transaction, consisted of $7,381,000 of cash payments related to acquisition
costs and interim financing, and 44,454,515 non-contingent shares of the
Company's class A common stock, with a fair value of $56,013,000. Additionally,
the Company has granted stock options and warrants to purchase 9,817,066 shares
of the Company's class A common stock which are included as part of the purchase
price paid by the Company. The Black-Scholes fair value of these options and
warrants was $6,991,000.
79
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 2001, the Company acquired 100% of RoweCom, a leading global
provider of sophisticated tools and client services for purchasing and managing
the acquisition of magazines, newspapers, journals and e-journals, books, and
other knowledge resources. The purchase price, for the purpose of recording the
purchase accounting for this transaction, consisted of $1,402,000 of cash
payments related to acquisition costs, and 10,158,420 non-contingent shares of
the Company's class A common stock, with a fair value of $14,628,000.
Additionally, the Company has granted warrants to purchase 3,752,602 shares of
the Company's class A common stock which are included as part of the purchase
price paid by the Company. The Black-Scholes fair value of these warrants was
$1,414,000.
In December 2001, the Company acquired 100% of Eprise, a leading provider
of content management solutions. The purchase price, for the purpose of purchase
accounting for this transaction, consisted of $1,193,000 of cash payments
related to acquisition costs, and 54,017,705 non-contingent shares of the
Company's class A common stock, with a fair value of $38,299,000. Additionally,
the Company has granted stock options and warrants to purchase 4,873,626 shares
of the Company's class A common stock which are included as part of the purchase
price paid for the Company. The Black-Scholes fair value of these options and
warrants was $2,859,000.
During the year ended December 31, 2001, the Company acquired 100% of
SageMaker, DataBites, Softmetric, and Synchrony, certain assets and liabilities
of marchFIRST GmbH, Fracta, marchFIRST's HostOne application hosting unit, and
Intira, the minority interests of Web Design Group, Westbound Consulting,
OpinionWare, LiveOnTheNet, mindwrap, Parlano, and the equity interests of Emicom
and Latin American Econetworks N.V. that it did not previously own. The purchase
price, for the purpose of recording the purchase accounting for these
transactions, consisted of $19,517,000 of cash payments (including acquisition
costs), 51,485,595 non-contingent shares of the Company's class A common stock,
with a fair value of $54,772,000, notes payable to former Synchrony and
marchFIRST GmbH shareholders totaling $11,633,000, and the forgiveness of a note
payable by Westbound Consulting to the Company in the amount of $525,000.
Additionally, in conjunction with the SageMaker, OpinionWare, DataBites, Fracta,
Emicom, Parlano, Synchrony, and Softmetric transactions, the Company has granted
or agreed to grant stock options and warrants to purchase 4,483,306 shares of
the Company's class A common stock which are included as part of the purchase
price paid by the Company for those companies. The Black-Scholes fair value of
these options and warrants was $4,505,000.
These companies are included in the Company's consolidated financial
statements from the dates of acquisition, or from the dates of the subsequent
investments by the Company that caused the Company's ownership interest to
exceed 50%.
The value of stock issued as consideration in these acquisitions was
determined based on the average closing market price of divine's common shares
on the measurement date and the three trading days before and after the
measurement date. The measurement date is generally the date on which the terms
of the acquisition are agreed to and announced, unless the number of shares or
the amount of other consideration is subsequently changed as a result of further
negotiations or a revised acquisition agreement, or if the number of shares or
the amount of other consideration to be issued could change pursuant to a
formula in the initial acquisition agreement. In these cases, the measurement
date is the first date on which the number of acquirer shares and the amount of
other consideration become fixed.
80
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents information (in thousands) concerning the
purchase price allocations for the acquisitions accounted for under the purchase
method during 2001.
FAIR FAIR VALUE ON ACQUISITION DATE
VALUE ---------------------------------------------------------------------------
OF TANGIBLE IN-PROCESS UNEARNED
COMPANY PURCHASE NET ASSETS CUSTOMER DEVELOPED WORKFORCE RESEARCH AND STOCK BASED
PRICE ACQUIRED LIST TECHNOLOGY IN PLACE DEVELOPMENT COMPENSATION
----- -------- ---- ---------- -------- ----------- ------------
marchFIRST ... $ 70,000 $ 55,367 $ -- $ -- $ -- $ -- $ --
Open Market .. 70,385 (2,385) -- 21,247 -- 6,256 --
eshare ....... 40,143 3,908 -- 23,784 -- 5,187 --
RoweCom ...... 17,444 (62,987) -- -- -- -- --
Eprise ....... 42,350 37,517 -- 3,923 -- 689 221
Others ....... 87,970 32,894 2,139 22,306 4,386 1,609 --
--------- --------- --------- --------- --------- --------- ---------
$ 328,292 $ 64,314 $ 2,139 $ 71,260 $ 4,386 $ 13,741 $ 221
========= ========= ========= ========= ========= ========= =========
COMPANY EXTRAORDINARY
GAIN GOODWILL
---- --------
marchFIRST ... $ -- $ 14,633
Open Market .. -- 45,267
eshare ....... -- 7,264
RoweCom ...... -- 80,431
Eprise ....... -- --
Others ....... (12,032) 36,668
--------- ---------
$ (12,032) $ 184,263
========= =========
The portion of the purchase price that was allocated to in-process
research and development assets were written off at the date of acquisition in
accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2
to Business Combinations Accounted for by the Purchase Method. Those write-offs
are included in acquired technology: in-process research and development.
Developed technology is amortized over the useful life of the technology, which
ranges from two to four years. The extraordinary gain represents the excess of
the fair value of the net current assets acquired over the fair value of the
Company's purchase price related to the Company's acquisitions of Emicom
($11,195,000 extraordinary gain) and Latin Capital ($837,000 extraordinary
gain).
The following table summarizes the estimated fair value (in thousands) of
the assets acquired and the liabilities assumed at the date of acquisition for
the 2001 acquisitions.
MARCHFIRST OPEN MARKET ESHARE ROWECOM EPRISE OTHERS
-------- -------- -------- -------- -------- --------
Current assets ................ $ 60,901 $ 14,383 $ 29,602 $172,885 $ 48,153 $ 51,925
Fixed assets .................. 9,464 3,343 1,473 5,916 1,529 7,266
Other non-current assets ...... 136 1,343 596 430 561 71
Intangible assets ............. 14,633 72,770 36,235 80,431 4,612 67,107
-------- -------- -------- -------- -------- --------
Total assets acquired ... 85,134 91,839 67,906 259,662 54,855 126,369
-------- -------- -------- -------- -------- --------
Current liabilities ........... 15,134 21,742 20,036 228,690 7,104 23,797
Non-current liabilities ....... -- (288) 7,727 13,528 5,401 2,570
-------- -------- -------- -------- -------- --------
Total liabilities assumed 15,134 21,454 27,763 242,218 12,505 26,367
-------- -------- -------- -------- -------- --------
Net assets acquired ..... $ 70,000 $ 70,385 $ 40,143 $ 17,444 $ 42,350 $100,002
======== ======== ======== ======== ======== ========
In April 2000, the Company acquired an additional interest in OpinionWare
which resulted in the Company owning over 50% of OpinionWare. OpinionWare is
included in the Company's consolidated financial statements since April 30,
2000. In August 2000, the Company acquired an additional interest in
iFulfillment which resulted in the Company owning over 50% of iFulfillment.
iFulfillment is included in the Company's consolidated financial statements
since August 1, 2000. In addition to the above two companies, nine of the
companies in which the Company acquired an interest during the year ended
December 31, 2000 and three of the companies in which the Company acquired an
interest during the period ended December 31, 1999 have been accounted for using
the consolidation method. The purchase prices have been allocated to the
identifiable net assets based upon their book values, which approximate fair
values, at the dates of acquisition. The portions of the purchase prices
allocated to
81
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
identifiable intangible assets and goodwill are being amortized on a
straight-line basis over one to three years. These companies are included in the
Company's consolidated financial statements from the dates of acquisition, or
from the dates of the subsequent investments by the Company that caused the
Company's ownership interest to exceed 50%. The purchase prices for the year
ended December 31, 2000 and for the period ended December 31, 1999 for these
acquisitions were allocated as follows:
YEAR ENDED PERIOD ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
(IN THOUSANDS)
Identifiable net assets $ 58,371 $ 2,213
Developed technology .. 16,371 3,894
Customer lists ........ 5,433 1,503
Workforce in place .... 1,537 573
Goodwill .............. 24,213 12,222
-------- --------
Purchase price ........ $105,925 $ 20,405
======== ========
(8) DEFERRED PUBLISHER COSTS AND DEFERRED REVENUE
Mainly through its acquisition of RoweCom, Inc., the Company enters into
service arrangements with customers whereby the Company sells magazines,
newspapers, and other knowledge resources of third-party publishers. Upon the
Company's placing a customer order with a third-party publisher, deferred
revenue and deferred cost is recorded. This deferred revenue and deferred cost
is recognized over the underlying subscription period, which is generally one
year. At December 31, 2001, the Company had $269,316,000 of deferred revenues
related to its service arrangements with customers, partially offset by
$238,522,000 of deferred publisher costs.
(9) NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
Notes payable and current portion of long-term debt consists of the
following at December 31:
2001 2000
---- ----
(IN THOUSANDS)
RoweCom line of credit ........................................................ $ 17,083 $ --
RoweCom notes payable ......................................................... 14,775 --
marchFIRST Germany ............................................................ 4,894 --
Current portion of long-term debt ............................................. 2,322 --
Other ......................................................................... 664 521
-------- -----
Total notes payable and current portion of long-term debt ................. $ 39,738 $ 521
======== =====
The weighted average interest rate of the Company's interest bearing notes
payable and current portion of long-term debt at December 31, 2001 was 5.94%.
ROWECOM LINE OF CREDIT
In December 2001, the Company signed a revolving loan agreement for
$20,000,000 with Fleet Capital Corporation. The loans under that agreement are
secured by the accounts receivable balances of the domestic operations of
RoweCom, and the loans are repaid from the net operating receipts of the
domestic operations of RoweCom. The expiration date of this revolving loan
agreement is April 15,
82
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2002. The line of credit carries an interest rate equal to the prime rate, which
was 4.75% at December 31, 2001.
ROWECOM NOTES PAYABLE
Through the acquisition of RoweCom Inc., the Company acquired several
notes payable with interest rates ranging from 6.0% to 7.7%. These notes are
secured by $10,000,000 of restricted cash of the Company, and a letter of credit
from LaSalle Bank N.A., as discussed below. In January 2002, the Company paid
$6,775,000 of this debt. The remainder is due in April 2002.
MARCHFIRST GERMANY NOTE PAYABLE
In conjunction with the September 2001 acquisition of certain assets of
marchFIRST GmbH, the Company issued a non-interest bearing note payable of
5,369,000 Euros (approximately $4,894,000 at December 31, 2001). This note is
secured by a letter of credit from LaSalle Bank N.A., as discussed below. The
note is payable in September 2002, and may by settled with cash or shares of the
Company's class A common stock.
LASALLE LINE OF CREDIT
In January 2001, the Company entered into a $25,000,000 line of credit
with LaSalle Bank N.A. This line of credit, which carries a variable interest
rate equal to the current LIBOR rate plus 25 basis points, is available for
working capital and general corporate business needs other than permanent
financing for the Company's acquisition of interests in associated companies.
The line of credit is collateralized by cash and cash equivalents of the Company
to the extent of any borrowings or letters of credit issued under the credit
agreement. The Company is currently negotiating to extend this line of credit to
January 2003.
(10) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2001 2000
---- ----
(IN THOUSANDS)
marchFIRST loan .......................................................... $ 57,500 $ --
RoweCom medium-term loan ................................................. 6,202 --
Synchrony loans .......................................................... 1,761 --
Other long-term debt ..................................................... 153 826
-------- ------
65,616 826
Less current maturities .................................................. 2,322 --
-------- ------
Total long-term debt .................................................. $ 63,294 $ 826
======== ======
Maturities of long-term debt for the next five years are as follows: 2002
- -- $2,322,000; 2003 -- $1,982,000; 2004 -- $1,311,000; 2005 -- $1,397,000; 2006
- -- $58,604,000.
MARCHFIRST LOAN
In April 2001, through its wholly owned subsidiary, divine/Whittman-Hart,
the Company acquired certain assets from marchFIRST, Inc. As part of the
consideration, divine/Whittman-Hart issued a promissory note to marchFIRST. The
$57.5 million balloon note is payable on April 12, 2006, but
83
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accelerated to the extent of 50% of free cash flow from divine/Whittman-Hart
operations. The note is secured by the assets of divine/Whittman-Hart. This note
bears interest at the prime rate as reported by The Wall Street Journal. At
December 31, 2001, the interest rate was 4.75%, and the weighted average
interest rate was 6.31% for 2001. The Company does not guarantee the promissory
note from divine/Whittman-Hart to marchFIRST, but the terms of the promissory
note restrict payments from divine/Whittman-Hart to the Company.
ROWECOM MEDIUM-TERM LOAN
Through the Company's acquisition of RoweCom Inc., the Company assumed a
five-year loan. The loan bears interest at the three-month Euribor rate plus
1.6%, and is payable in twenty quarterly payments, which began on September 30,
2001. At December 31, 2001 the interest rate on this loan was 4.89%. The final
installment is due in September 2006.
SYNCHRONY LOANS
Through the Company's acquisition of Synchrony Communications, Inc., the
Company assumed two equipment loans. The balances of these loans at the
acquisition date were $1,500,000 and $295,000, respectively. The loans require
combined monthly installments of $97,000, with final payments due in March 2003.
These notes bear interest at the three-year U.S. Treasury note rate as reported
in The Wall Street Journal, plus a margin of 7.59% and 3.13%, respectively. The
interest rates on these two loans at December 31, 2001 were 11.17% and 6.71%,
respectively.
(11) CAPITAL STOCK
Holders of class A common stock are entitled to one vote per share.
Holders of class C common stock are not entitled to vote.
The class A common stock has no conversion rights. A holder of class C
common stock is able to convert its class C common stock into class A common
stock, in whole or in part, at any time and from time to time on a
share-for-share basis.
In the case of any dividend paid in stock, holders of class A common stock
will be entitled to receive the same percentage dividend payable in shares of
class A common stock that the holders of class C common stock receive payable in
shares of class C common stock.
Except as described above, the relative powers, preferences and
participating, optional or other special rights, and the qualifications,
limitations or restrictions of the class A common stock and class C common stock
are identical in all respects.
Several of the Company's equity method associated companies owned a total
of 1,319,592 and 1,986,259 shares of the Company's class A common stock at
December 31, 2001 and 2000, respectively. The Company indirectly owned 521,676
and 741,676, respectively, of these shares, which are reflected as treasury
stock in the consolidated balance sheets and statements of stockholders' equity
at December 31, 2001 and 2000.
As of December 31, 2001, there were outstanding warrants to purchase
7,668,640 shares of the Company's class A common stock. Of these warrants,
6,568,640 were issued as consideration in acquisitions, and 1,100,000 were
issued in conjunction with the Company's stock repurchase agreement with Level
3. All outstanding warrants were issued in the third and fourth quarters of
2001. Exercise prices range from $0.44 to $17.07, with remaining lives ranging
from one to ten years.
84
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 2001, the Company's board of directors adopted a Stockholder
Rights Plan and declared a dividend of one Right on each outstanding share of
class A common stock. The dividend was payable to shareholders of record on
February 23, 2001.
Initially, no separate certificates were issued for the Rights; rather,
the Rights are evidenced by the certificates for class A common stock and trade
automatically with the class A common stock. The Rights are not exercisable
unless a person or group has acquired, or announces the intent to acquire, 15%
or more of the Company's outstanding common stock (or 20% or more if such a
person or group owned 10% or more of the Company's outstanding common stock at
the time of adoption of the Rights Plan). Thereafter, separate Rights
certificates will be distributed and each Right will entitle its holder to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock at $15.00 per Right. The Rights are redeemable by the Company's
board of directors, for $0.001 per Right, at any time prior to the
exercisability of the Rights.
In the event a person or group acquires 15% (20% in certain circumstances)
or more of the Company's class A common stock, each shareholder, other than the
acquiror, is entitled to purchase, for the exercise price of the Rights, the
number of shares of the Company's common stock having a market value of two
times the exercise price of the Rights. In addition, the Company's board of
directors may then exchange the Rights for class A common stock at a ratio of
one share of class A common stock per Right. Also, if the Rights have become
exercisable and the Company is acquired in a merger or other business
combination, or 50% or more of its assets, cash flow, or earning power are sold,
each Right will entitle the holder to purchase, at the exercise price of the
Right, that number of shares of common stock of the acquiring company that, at
the time of the transaction, will have a market value of two times the exercise
price of the Right.
The Rights will expire on January 31, 2011 unless extended by the
Company's board of directors.
(12) REVERSE STOCK SPLIT
On June 1, 2000, the Company's Board of Directors and stockholders
authorized a 1-for-6 reverse stock split for its common shares. The par value of
the common stock was maintained at the pre-split amount of $.001 per share. All
references to common shares and per share amounts in these consolidated
financial statements and notes to consolidated financial statements have been
restated to reflect this reverse stock split on a retroactive basis, exclusive
of fractional shares. All fractional common shares resulting from the Company's
reverse stock split were redeemed by the Company at a price per share of $9.00,
being the Company's initial public offering price for its class A common stock.
(13) INITIAL PUBLIC OFFERING AND PRIVATE EQUITY PLACEMENTS
The Company completed its initial public offering ("IPO") on July 18,
2000, selling 14,285,000 shares of its class A common stock at $9.00 per share,
raising $109.2 million in net cash proceeds to the Company, net of underwriters
fees of $9.0 million and other offering expenses of $10.3 million.
Concurrent with its IPO the Company sold an aggregate of 7,257,455 shares
of its class A common stock and 23,288,511 shares of its class C non-voting
convertible common stock (which converts to class A common stock on a 1-for-1
basis) to 360networks, inc., Aon Corporation, BancBoston Capital, Inc., CMGI,
Inc., Compaq Computer Corporation, Hewlett Packard Company, Level 3
Communications (Level 3), marchFIRST, Inc. and Microsoft Corporation. In
conjunction with these concurrent private placements, the Company raised an
additional $258,914,000, including $218,597,000
85
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in cash, a $25,000,000 credit toward the purchase of co-location and bandwidth
services from Level 3, and shares of common stock of CMGI valued at $15,317,000
at that time.
(14) REVENUES FROM MAJOR CUSTOMERS
The Company applies SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as it pertains to significant customers. No
customer accounted for more than 10% of the Company's total revenues in 2001 or
2000. PVP I and PVP II, for which the Company acts as general partner, and
Whiplash, Inc. accounted for $275,082 (27%) and $282,493 (27%), respectively, of
the Company's total revenues in 1999. No other customers accounted for more than
10% of the Company's total revenues in 1999.
(15) REVENUES FROM EQUITY METHOD INVESTEES
Consolidated revenues for the years ended December 31, 2001 and 2000, and
the period ended December 31, 1999 include $629,000, $8,605,000 and $293,000,
respectively, of revenues generated from transactions with the Company's
equity-method associated companies.
(16) IMPAIRMENT CHARGES
For the year ended December 31, 2001, the Company recorded impairment
charges of $37,864,000 for other than temporary declines in the carrying value
of intangible and other assets associated mainly with its investment in acquired
companies accounted for under the consolidation method of accounting. These
charges included, but were not limited to, the write-off of the Company's
intangible assets of $14,532,000, $1,911,000, and $16,118,000, respectively,
related to its acquisitions of SageMaker and DataBites, and its acquisition of
certain assets of marchFIRST, respectively. In calculating the fair value of
these assets, the Company considered the undiscounted cash flows of the
underlying businesses as well as other factors, such as the actual operating
performance of the underlying businesses compared to budgeted performance, and
layoffs and facilities impairment charges associated with the underlying
businesses. The impairment charges related to intangible and other assets also
included the write-off of $3,070,000 of notes receivable from employees for the
exercise of stock options and $3,000,000 of costs associated with an agreement
to shut down the operations of Emicom, as well as net impairment recoveries of
$767,000. The Company also recorded impairment charges of $36,633,000 for other
than temporary declines in the carrying value of certain equity and cost method
associated companies. As of December 31, 2001, the Company has written off all
of its investments in associated companies accounted for under the equity and
cost methods of accounting.
The Company recognized an impairment charge on prepaid co-location and
bandwidth services of $25,000,000 for the year ended December 31, 2001. This
prepaid asset was originally recorded when the Company entered into an agreement
concerning the purchase of a minimum of $100,000,000 of co-location and
bandwidth services from Level 3 Communications over a four-year period. Of this
amount, $25,000,000 would have been credited as payment by Level 3 for its
purchase of the Company's class C common shares, which have since been converted
to the Company's class A common shares, concurrent with the Company's IPO in
July 2000. In August 2001, the Company agreed to repurchase the 5,555,555
Company shares owned by Level 3 for $5,555,555 and warrants to purchase
2,200,000 shares of the Company's class A common stock at an exercise price of
$1.19 per share. Per the agreement, the Company paid $2,800,000 and issued
1,100,000 warrants in September 2001. The remaining $2,800,000 was paid in
December 2001 and the remaining 1,100,000 warrants were issued in January 2002.
A condition of the repurchase agreement was that the
86
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's commitment to purchase $100,000,000 of co-location and bandwidth
services was nullified and the Company's prepaid credit of $25,000,000 was
eliminated.
Additionally, the Company recorded impairment charges of $12,022,000
during 2001 related mainly to certain operating leases of divine/Whittman-Hart.
These charges consist of the value of future cash payments to honor operating
leases on facilities that the Company is no longer utilizing.
For the year ended December 31, 2000, the Company recorded impairment
charges of $57,626,000 for other than temporary declines in carrying value of
certain consolidated associated companies. These charges included, but were not
limited to, write-offs of the Company's investments in BeautyJungle, Brandango,
FiNetrics, and OfficePlanIt, each of which have ceased all meaningful
operations. Of the total impairment charges, $39,162,000 was related to goodwill
and other intangible assets recognized by the Company upon the acquisition of
consolidated associated companies, $15,413,000 was related to fixed assets of
consolidated associated companies, and $3,051,000 was related to other assets of
consolidated companies.
The Company also recorded impairment charges of $113,125,000 during 2000
for other than temporary declines in the carrying value of certain equity and
cost method associated companies. These charges included the write-down of the
Company's net investment in BidBuyBuild to $200,000, which was the value at
which it was sold in October 2000, and the write-down of the Company's net
investment in iSalvage to $72,000. iSalvage has since ceased all meaningful
operations and the Company received $238,000 in 2001 from the liquidation of its
assets. These impairment charges also included write-offs of the Company's
investments in CapacityWeb, Entrepower, PocketCard and Whiplash, each of which
have ceased all meaningful operations. In addition, certain other associated
companies' carrying values were written down to their estimated fair values.
Additionally, the Company recorded a facilities impairment charge during
2000 of $10,961,000, including declines in the carrying value of property owned
by the Company, improvements made to properties that the Company no longer
considered recoverable and charges related to certain of the Company's operating
leases. Of this amount, $5,263,000 represented a liability equal to the net
value of future cash payments to honor operating leases on facilities that the
Company was no longer utilizing.
(17) OTHER EXPENSE, NET
Other expense, net of $4,135,000 for the year ended December 31, 2001
consisted primarily of other than temporary declines of $14,711,000 and
$4,181,000 in the Company's available-for-sale investments in CMGI and
360networks, respectively, offset by the sale of the Company's investments in
Farms.com, Ltd. and Sequoia Software Corporation, which resulted in realized
gains of $7,225,000 and $6,611,000, respectively. Additionally, the Company
recorded a gain on disposal of assets of $367,000 and other net gains of
$554,000.
87
divine, inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) NET GAIN ON STOCK TRANSACTIONS OF ASSOCIATED COMPANIES
The Company has recorded gains (losses) from stock transactions of
associated companies in the consolidated statement of operations as follows:
Years Ended
Associated company December 31,
- ------------------ ------------------
2001 2000
------ -------
(in thousands)
Launchworks .......................................... $ -- $ 4,430
Mercantec ............................................ -- (1,011)
Closerlook ........................................... -- 847
Outtask .............................................. 199 --
Other associated companies ........................... 468 109
------- -------
Net gain on stock transactions of associated companies $ 667 $ 4,375
======= =======
The net gain (loss) represents the net increase (decrease) in the book
value of the Company's net equity in the associated company as a result of the
associated company's stock transactions. The Outtask gain resulted from the
sale, to outside investors, of 731,971 shares of its preferred stock for
$1,055,000. The Launchworks gain resulted from the sale, to outside investors,
of 3,169,846 shares of Launchworks stock for $15.2 million. The closerlook gain
resulted from the issuance, in conjunction with a business combination, of
451,124 shares of closerlook stock valued at $2.3 million on the date of the
business combination. The Mercantec loss resulted from Mercantec redeeming
1,432,434 shares of stock for $2.9 million.
88
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) INCOME TAXES
The reconciliation of income tax expense (benefit) computed using the
Federal statutory rate of 34% to the Company's income tax expense (benefit) is
as follows:
YEARS ENDED PERIOD
DECEMBER 31, ENDED
--------------------------- DECEMBER 31,
2001 2000 1999
---------- ---------- --------
(IN THOUSANDS)
Federal income tax benefit at the statutory rate $ (125,740) $ (159,908) $ (3,198)
State income tax benefit, net (7,891) (8,620) (329)
Foreign loss for which no benefit was realized 32,169 -- --
Equity in losses of associated companies 6,657 18,233 481
Minority interest (1,452) (6,178) (18)
Amortization of stock-based compensation 3,287 16,346 254
Nondeductible intangible asset amortization 8,273 19,748 202
Purchase accounting (12,178) -- --
Loss of net operating losses pursuant to IRC Section 382 57,142 -- --
Impairment of investment in subsidiaries 12,894 39,500 --
Impairment of intangibles 9,571 13,315 --
Nondeductible meals and entertainment 272 281 40
Other 413 51 --
Adjustment to beginning balances 14,633 -- --
Effect of change in valuation allowance 1,950 67,232 2,568
---------- ---------- --------
$ -- $ -- $ --
========== ========== ========
89
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------
2001 2000
--------- ----------
(IN THOUSANDS)
Deferred tax assets:
Depreciation .................................................. $ 2,112 $ 1,246
Allowance for doubtful accounts ............................... 1,141 2,334
State taxes ................................................... 5,389 1,783
Accrued expenses .............................................. 5,457 807
Capitalized research and development costs .................... 2,149 --
Capitalized start-up costs .................................... 1,614 --
Amortizable intangible assets ................................. 28,512 --
Charitable contributions ...................................... 212 256
Impairment on fixed assets and facilities ..................... 10,254 8,967
Net operating loss carryforward ............................... 45,453 59,456
--------- ----------
Total gross deferred tax assets ............................. 102,293 74,849
Less valuation allowance ...................................... (75,312) (73,362)
--------- ----------
Net deferred tax asset ...................................... 26,981 1,487
--------- ----------
Deferred tax liabilities:
Stock aquisitions ............................................. (25,267) --
Gain on stock transactions of associated companies ............ (1,714) (1,487)
--------- ----------
Total deferred tax liabilities .............................. (26,981) (1,487)
--------- ----------
Net deferred tax asset (liability) .......................... $ -- $ --
========= ==========
No provision for Federal or state income taxes has been recorded as the
Company incurred a net operating loss during the periods presented. The Company
has recorded a full valuation allowance against its net deferred tax assets
since management believes that it is more likely than not that these assets will
not be realized. No income tax benefit has been recorded for the periods
presented because of the valuation allowance. Because the 2000 financial results
of certain majority-owned subsidiaries that were acquired in 2001 were not
reflected in the Company's results of operations for the period ended December
31, 2000, these majority-owned subsidiaries' net operating loss carryforwards
were not included in the Company's deferred tax assets as of December 31, 2000.
Accordingly, the deferred tax asset as of December 31, 2001 has been adjusted to
include these net operating loss carryforwards.
At December 31, 2001 the Company had total net operating loss
carryforwards of $116,546,000, of which $27,608,000 may be utilized by the
Company to reduce future consolidated taxable income, if any. Of the total net
operating loss carryforwards, $43,235,000 are attributable to majority-owned
subsidiaries not includible in the Company's consolidated tax group. Although
each majority-owned subsidiary excluded from the Company's consolidated tax
group may utilize its net operating loss carryforwards to reduce separate future
income taxes, if any, such carryforwards may not offset the Company's
consolidated taxable income, if any. Of the total net operating loss
carryforwards, $45,703,000 relate to pre-acquisition net operating losses
attributable to acquired companies. Our ability to utilize such pre-acquisition
losses is substantially limited by current tax laws. In addition, the
utilization of the net operating loss carryforwards may be limited pursuant to
Internal Revenue Code
90
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Section 382 as a result of prior ownership changes. The net operating loss
carryforwards will expire from 2019 through 2021.
(20) OWNERSHIP INTEREST IN PLATINUM VENTURE PARTNERS I, L.P. AND PLATINUM
VENTURE PARTNERS II, L.P.
On August 4, 1999, the Company became the general partner of Platinum
Venture Partners I, L.P. (PVP I) and Platinum Venture Partners II, L.P. (PVP II)
pursuant to a vote by the limited partners of PVP I and PVP II, after Platinum
Venture Partners, Inc. withdrew as general partner. The Company provides
strategic and operations support to the portfolio companies of PVP I and PVP II.
These services are generally provided by divine, inc., the Company's employees,
members of its board of directors, and outside consultants. The costs related to
employees are paid by the Company and are reflected by the Company in cost of
revenues on the consolidated statements of operations.
The Company has made no contribution to, and has no interest in the
profits and losses of, PVP I and PVP II. As the general partner of PVP I, the
Company's only source of income is an annual management fee, payable in advance
in quarterly installments commencing on October 1, 1999, of 2 1/2% of the fair
market value of the partnership, adjusted annually, by the percentage increase
in the Consumer Price Index for All Urban Consumers, U.S. City Average during
the preceding calendar year. As the general partner of PVP II, the Company's
only source of income is an annual management fee, payable in advance in
quarterly installments commencing on October 1, 1999, of 2 1/2% of the aggregate
partner commitments, adjusted annually, by the percentage increase in the
Consumer Price Index for All Urban Consumers, U.S. City Average during the
preceding calendar year. Beginning on January 1, 2001, the Company's annual
management fee as general partner of PVP II began to be payable in advance in
quarterly installments of 2 1/2% of the fair market value of the partnership,
adjusted annually, by the percentage increase in the Consumer Price Index for
All Urban Consumers, U.S. City Average during the preceding calendar year.
Under the terms of the PVP I and PVP II Agreements of Limited
Partnership (the Agreements), the Company may be removed as the general partner
of PVP I and PVP II upon the written request of those limited partners which
have at least two-thirds of the total limited partner interests as defined in
the Agreements. The Company accounts for its general partnership interests in
PVP I and PVP II under the equity method of accounting because it has influence
over the operating and financial policies of the partnerships. For the years
ended December 31, 2001 and 2000 and the period ended December 31, 1999, the
Company received $588,000, $815,000, and $275,000, respectively, in management
fees from PVP I and PVP II.
(21) EMPLOYEE BENEFIT PLANS
Stock Options and Employee Stock Purchase Plan
The Company, under the 1999 Stock Incentive Plan (Plan), which was
adopted on October 1, 1999 and amended on January 29, 2000 and October 18, 2000,
reserved 10,833,333 shares of common stock for issuance. The maximum number of
shares available for delivery under the Plan automatically increases on January
1 of each year, beginning on January 1, 2001, by a number of shares of class A
common stock equal to the lesser of (1) 10% of the total number of shares of
class A common stock then outstanding, assuming for that purpose the conversion
into class A common stock of all then outstanding convertible securities, or (2)
50,000,000 shares. The Company, under the 2001 Stock Incentive Plan which was
approved by the Company's shareholders in May 2001, reserved 29,000,000 shares
of class A common stock for issuance.
91
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The stock is reserved for employees, directors, and consultants. The
Company applies APB 25 for employees and directors and SFAS No. 123 for all
consultants in accounting for the Plan.
For the year ended December 31, 2001, the Company granted stock options
to purchase shares of class A common stock to employees, directors and
consultants at a weighted average exercise price of $1.97. The Company recorded
unearned stock-based compensation of $221,000 in connection with the options
granted for the Eprise merger. This amount is amortized over the vesting period
of the applicable options. For the year ended December 31, 2001, the Company
amortized $9,535,000, net of recoveries of $665,000 of unearned stock-based
compensation related to stock options. In addition the Company also incurred a
one time charge of $132,000 related to the issuance of options to members of its
advisory committee. As a result of employee terminations, the Company recovered
$10,673,000 of unearned stock-based compensation for the year ended December 31,
2001.
For the year ended December 31, 2000, the Company granted stock options
to purchase shares of class A common stock to employees, directors and
consultants at a weighted average exercise price of $7.55. In January 2000, the
Company also sold 116,665 restricted shares of class A common stock to its
employees at a price of $4.50 per share. These restricted shares reduce the
otherwise available shares reserved for issuance under the Plan. For the year
ended December 31, 2000, the Company recorded unearned stock-based compensation
of $82,048,000 in connection with these options. This amount is amortized over
the vesting period of the applicable options, generally four years in the case
of options granted to employees and consultants and one year in the case of
options granted to non-employee directors. The Company amortized $20,635,000,
net of recoveries of $7,854,000, of unearned stock-based compensation related to
stock options during the year ended December 31, 2000. As a result of employee
terminations, the Company recovered $51,434,000 of unearned stock-based
compensation for the year ended December 31, 2000.
During September 2000, the Company reduced the exercise price of options
granted, and restricted stock purchased, under the Plan prior to its IPO to
$9.00, being the IPO price of the Company's class A common stock, if the
exercise price of such options or restricted shares was greater than the IPO
price and if the holder agreed to the change. Also during September 2000, the
Company repurchased 3,820,735 shares of restricted class A common stock, issued
upon exercise of options granted under the Plan, at prices ranging from $4.50 to
$9.00, which represented the lower of the respective exercise price or fair
market value on the date of repurchase. Any consideration in excess of the
exercise price, as adjusted, was refunded to these holders. As a result of these
repurchases, the Company recorded a one-time stock-based compensation charge of
$3,209,000. For the year ended December 31, 2000, the Company repurchased an
additional 613,774 shares of restricted class A common stock from terminated
employees.
During 1999, the Company granted stock options to purchase shares of
class A common stock to employees and directors at a weighted average exercise
price of $4.50, which were granted at less than the fair value of the common
stock at the date of grant. For the period from May 7, 1999 (inception) through
December 31, 1999, the Company recorded unearned stock-based compensation of
$27,408,000 in connection with these options. This amount is amortized over the
vesting period of the applicable options, generally four years in the case of
options granted to employees and one year in the case of options granted to
non-employee directors. The Company amortized $747,000 of unearned stock-based
compensation for the period ended December 31, 1999.
Had compensation costs for the Plan been determined consistent with SFAS
No. 123, the Company's net loss applicable to common stockholders and net loss
per share applicable to common
92
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
stockholders would have been the pro forma amounts indicated below for the years
ended December 31, 2001 and 2000 and the period ended December 31, 1999:
YEARS ENDED
DECEMBER 31, PERIOD ENDED
DECEMBER 31,
2001 2000 1999
--------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss applicable to common stockholders:
As reported ...................................... $ 369,824 $ 528,182 $ 12,927
Pro forma ........................................ 391,600 536,472 13,107
Net loss per share applicable to common stockholders:
As reported ...................................... (2.06) (7.84) (4.59)
Pro forma ........................................ $ (2.19) $ (7.96) $ (4.64)
Generally, options issued under the Plan have an exercise price equal to
the closing market price of the Company's stock on the date of grant, have a
legal life of ten years, and typically vest in equal annual installments over a
four-year period beginning one year from the date of grant. The characteristics
of options granted in conjunction with acquisitions are driven by the underlying
merger agreements. Prior to June 27, 2000, options under the Plan were
exercisable immediately, subject to repurchase rights held by the Company, which
lapse over the vesting period.
The fair value of the stock option grants is estimated using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions used for stock option grants in 2001, 2000, and 1999, respectively:
expected dividend yield of 0%; expected volatility of 167%, 123%, and 0%;
risk-free interest rate of 4.62%, 5.14%, and 6.42%; and an expected life of four
years.
A summary of the status of the Company's stock option plan and the
changes during the periods ended on those dates, is presented below:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, PERIOD ENDED
2001 2000 DECEMBER 31, 1999
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ -------- ---------- --------- ----------- --------
Outstanding at
beginning of
period ......... 6,559,649 $ 7.04 3,192,246 $ 4.50 -- $ --
Granted ......... 73,143,903 1.97 11,896,321 7.55 3,533,904 4.50
Exercised ....... (41,418) 0.75 (5,877,670) 5.90 (341,658) 4.50
Forfeited ....... (4,814,371) 4.01 (2,651,248) 8.81 -- --
----------- ---------- ----------
Outstanding at
end of period .. 74,847,763 2.28 6,559,649 7.04 3,192,246 4.50
----------- ---------- ----------
Options
exercisable at
end of period .. 16,465,590 933,996 3,192,246
----------- ---------- ----------
Weighted-average
fair value of
options granted
during the period $ 0.86 $ 6.10 $ 1.02
93
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -----------------------------------
WEIGHTED-AVG.
REMAINING
EXERCISE NUMBER OF CONTRACTUAL LIFE WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
PRICE SHARES (YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
- --------------- ---------- ---------------- -------------- ---------- --------------
$ 0.07 - $ 0.45 ............ 8,874,798 9.79 $ 0.31 5,837,535 $ 0.27
$ 0.46 - $ 0.51 ............ 9,559,402 9.81 $ 0.50 2,194,445 $ 0.51
$ 0.52 - $ 1.00 ............ 9,218,740 9.78 $ 0.71 1,535,565 $ 0.58
$ 1.06 - $ 1.25 ............ 7,532,767 9.39 $ 1.19 2,084,092 $ 1.08
$ 1.26 - $ 1.36 ............ 27,159,334 9.59 $ 1.36 1,137,306 $ 1.34
$ 1.43 - $13.81 ............ 10,874,391 9.22 $ 6.05 3,258,811 $ 5.16
$14.19 - $66.06 ............ 1,628,331 9.80 $27.66 417,836 $23.59
---------- ---- ------ ---------- ------
74,847,763 9.59 $ 2.28 16,465,590 $ 2.07
========== ==== ====== ========== ======
In January 2000, the Company adopted its 2000 Employee Stock Purchase
Plan (Purchase Plan), under which a total of 4,166,666 shares of class A common
stock were available for sale to its employees and employees of its
majority-owned associated companies. Through the Purchase Plan, eligible
employees can purchase class A common stock through payroll deductions and other
cash contributions. The purchase price of each share of class A common stock
under the Purchase Plan is equal to 85% of the lesser of (1) the fair market
value of the Company's class A common stock on the first day of the plan period
or (2) the fair market value on the date of purchase. Under the Purchase Plan,
the Company sold 1,327,715 and 425,712 shares to employees in 2001 and 2000,
respectively.
During January 2000, the Company's employees acquired an average of
22.0% ownership interest in 13 associated companies, that the Company
established in October and November 1999, for total consideration of $57,000.
The Company recorded unearned stock-based compensation of $24,225,000,
representing the excess of the fair value of the ownership interests over the
consideration given by the Company's employees. The Company amortized $5,896,000
in connection with this acquisition of ownership through September 21, 2000.
Effective September 22, 2000, the Company repurchased these minority interests.
These repurchases were made at the initial investment cost plus 8% for the
Company's executive officers and at two times the initial investment cost for
the other employees that owned these shares. The aggregate purchase price for
all of these interests was $93,000. As a result of these repurchases, the
Company accelerated its recognition of the remaining $18,329,000 of stock-based
compensation related to these shares.
At December 31, 2001, the Company had $16,654,000 of unearned
stock-based compensation. The Company expects to amortize this unearned
stock-based compensation as follows: 2002 -- $8,270,000; 2003 -- $8,002,000; and
2004 -- $382,000.
Incentive Program
The Company maintains an incentive program (the Pool), whereby certain
of the Company's employees are given bonuses in the event there is an
appreciation in value of the Company's interest in any of its associated
companies, when and if these associated companies experience a liquidity event.
The portion of the divine, inc. appreciation that is credited to the Pool is
adjusted as deemed necessary by the Company's management. For the year ended
December 31, 2000, the Company allocated to the Pool 126,497 of the Company's
2,462,267 shares of Sequoia Software Corporation (Sequoia). Sequoia,
94
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
which has been an associated company of the Company since November 1999, had an
initial public offering in 2000. The Sequoia shares in the Pool were distributed
to the Company's participating employees in February 2001.
Deferred Savings Plan
On January 1, 2000, the Company established a deferred savings plan
under Section 401(k) of the Internal Revenue Code. The plan enables employees to
reduce their taxable income by contributing up to 20% of their salary to the
plan. The Company made a 3% discretionary contribution to the plan on behalf of
each employee regardless of their contribution rate through December 31, 2001.
The Company's contributions are 100% vested immediately upon contribution. The
Company made discretionary contributions of $2,472,000 and $1,518,000 for the
years ended December 31, 2001 and 2000, respectively. Effective January 1, 2002,
the Company no longer makes contributions to the plan on behalf of its
employees. The Company may or may not make similar contributions in the future.
(22) RELATED-PARTY TRANSACTIONS
Robert Bernard, who served as one of the Company's directors in 2000,
was the Chairman and Chief Executive Officer of marchFIRST, Inc. while he served
on the Company's board of directors. The Company paid marchFIRST $1,383,000 for
consulting services in 2000. Additionally, marchFIRST purchased 1,666,666 shares
of the Company's class C convertible common stock for $15,000,000 in a private
placement concurrent with the Company's initial public offering in July 2000.
Tommy Bennett, one of the Company's directors is a Senior Vice President
of Computer Associates. In connection with the Company's acquisition of eshare,
the Company paid Computer Associates $1,000,000 to settle a pending dispute
between eshare and Computer Associates. The Company also entered into a software
licensing agreement with iCan SP, Inc., a wholly-owned subsidiary of Computer
Associates, pursuant to which the Company has agreed to pay an aggregate of
$1,500,000 over the term of the 5-year license agreement. In 2001, the Company
paid $100,000, representing the first installment due under the license
agreement.
Peter Bynoe, who served as one of the Company's directors in 2001 and
2000, was a partner in the law firm of Piper Marbury Rudnick & Wolfe (Piper
Marbury) while he served on the Company's board of directors. The Company paid
Piper Marbury $370,000 and $1,005,000 for legal services in 2001 and 2000,
respectively. Additionally partners of Piper Marbury purchased 700,000 shares of
the Company's series C preferred stock for $700,000 in December 1999. These
shares were converted to 116,666 shares of the Company's class A common stock
upon completion of the Company's initial public offering in July 2000.
Thomas Danis and Teresa Pahl served on the Company's board of directors
in 2001 and 2000. Thomas Danis was a Managing Director of Aon Risk Services
Mergers and Acquisitions group, and Teresa Pahl was an Executive Vice President
of Aon Corporation while they served on the Company's board of directors. The
Company paid Aon Corporation $3,325,000 and $241,000 as broker with respect to
the Company's directors and officers liability insurance in 2001 and 2000,
respectively. Additionally, Aon Corporation purchased 2,777,777 shares of the
Company's class C convertible common stock for $25,000,000 in a private
placement concurrent with the Company's initial public offering in July 2000.
Arthur Hahn, one of the Company's directors, is a partner in the law
firm of Katten Muchin Zavis (KMZ). The Company paid KMZ $2,189,000, $2,373,000,
and $2,400,000 in 2001, 2000 and 1999, respectively, for legal services. In
addition, the Company issued 400,000 shares of its series C preferred stock to
KMZ in December 1999 as payment for $400,000 of additional legal services. These
shares
95
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
converted into 66,666 shares of the Company's class A common stock upon
completion of the Company's initial public offering.
Michael Leitner, who served as one of the Company's directors in 2000,
was the Vice President, Corporate Development of 360networks, inc. while he
served on the Company's board of directors. 360networks purchased 4,000,000
shares of the Company's class C convertible common stock for a total purchase
price of $20,000,000, for cash in a private placement concurrent with the
Company's initial public offering in July 2000. In April 2000, the Company
purchased 374,181 shares of 360networks' subordinate voting shares for a total
purchase price of $4,181,000.
John Cooper, one of the Company's directors, served as a Managing
Director of Corporate Development of Microsoft Corporation from October 1999
through November 2001. Additionally, Michael Leitner served as a Senior Director
of Corporate Development of Microsoft while he served on the Company's board of
directors. The Company paid Microsoft $248,000 and $2,092,000 in 2001 and 2000,
respectively for computer software and various consulting services. In addition,
Microsoft purchased 25,000,000 shares of the Company's series D preferred stock
in January 2000 for $25,000,000. These shares were converted into 4,166,666
shares of the Company's class A common stock upon completion of the Company's
initial public offering in July 2000. Additionally, in conjunction with the
acquisition of HostOne in October 2001, the Company issued to Microsoft
Corporation a total of 8,196,722 shares of its common stock in exchange for the
cancellation of debt owed by marchFIRST to Microsoft.
Thomas J. Meredith, one of the Company's directors, served as Senior
Vice President, Dell Ventures of Dell Computer Corporation (Dell) and Dell USA
L.P. (Dell USA). Alex C. Smith, who served as one of the Company's directors in
2000, was Vice President of Dell and Dell USA. Mr. Meredith and Mr. Smith
retired from Dell and Dell USA in August 2001. J. Kevin Nater, one of the
Company's directors, currently serves as Vice President, Dell Ventures and
Treasurer of Dell and Dell USA. Dell USA is a subsidiary of Dell. The Company
paid Dell Computer Corporation $1,225,000, $6,359,000, and $1,200,000 in 2001,
2000, and 1999, respectively, for computers and servers. Additionally, Dell USA
purchased 100,000,000 shares of the Company's series D preferred stock in
January 2000 for $100,000,000. These shares were converted into 16,666,666
shares of the Company's class A common stock upon completion of the Company's
initial public offering in July 2000.
Aleksander Szlam, who served as one of the Company's directors in 2000,
was the Chairman and Chief Executive Officer of eshare communications, Inc.
(eshare) while he served on the Company's board of directors. Brandango, one of
the Company's associated companies, entered into a license agreement with eshare
to use eshare's software programs and receive related support and maintenance
services. Brandango acquired approximately $1,800,000 of software related to
this agreement in 2000, which was subsequently written off as Brandango ceased
operations in 2000. The Company acquired eshare in October 2001. In conjunction
with the acquisition of eshare, the Company entered into two separate stock
repurchase arrangements with Mr. Szlam, related to the shares of the Company
that Mr. Szlam received in the acquisition. These arrangements gave Mr. Szlam
the right to sell back a portion of his shares to the Company at an agreed upon
price (put option), while also giving the Company the right to buy back the same
number of shares from Mr. Szlam at the same price (call option). In December
2001, the first buyback period, which covers 5,428,800 shares, was extended to
be coterminous with the second buyback period.
The second buyback period is effective for the time period beginning six
months after the merger (April 23, 2002) and ending 18 months after the merger
(April 23, 2003), and relates to 5,959,200 shares of divine stock. The
agreed-upon purchase price for the related put and call options is $0.53 per
96
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
share. As such, for one year beginning on April 23, 2002, Mr. Szlam has the
right to sell to the Company, and the Company has a separate right to buy from
Mr. Szlam, up to 11,388,000 divine shares at $0.53 per share.
Additionally, Mr. Szlam is affiliated with Szlam Partners, L.P. and
Melita House, Inc., who own the properties on which eshare's U.S. and United
Kingdom headquarters, respectively, are located. In conjunction with the
Company's acquisition of eshare, the Company purchased real estate options from
both Szlam Partners and Melita House. Upon the closing of the eshare merger, the
Company paid Szlam Partners $3,702,978 for a ten-year option to purchase
eshare's property in the U.S. for $14,560,000 and paid Melita House $2,047,022
for a ten-year option to purchase eshare's property in the U.K. for L5,714,668
($8,295,000 at December 31, 2001). Under these real estate option agreements,
Szlam Partners and Melita House agreed not to raise the rental amounts due
under, or otherwise adversely modify, the leases for these properties so long as
the Company is not in default under the leases.
FleetBoston Robertson Stephens Inc. (Robertson Stephens) was an
underwriter of the Company's initial public offering. BancBoston Capital, Inc.,
an affiliate of Robertson Stephens, purchased 955,181 shares of the Company's
class C convertible common stock for $8,597,000 in a private placement
concurrent with the Company's initial public offering in July 2000.
The Company's Chief Executive Officer owns 33.3% of Blackhawk, LLC
(Blackhawk). In July 2000, the Company purchased from Blackhawk the real
property on which to construct a planned office facility in Chicago, Illinois.
During the year ended December 31, 2000, the Company paid Blackhawk $11,111,000,
which included the purchase price and reimbursed costs for that real property
and which also included $350,000 in payments for an option to lease or purchase
that property. During the period from July 1, 1999 through December 31, 1999,
the Company paid Blackhawk $300,000 for an option to lease or purchase that
property.
The Company's Chief Executive officer owns 33.3% of Habitat-Kahney, LLC
(Habitat). In January 2000, the Company entered into a ten-year facility lease
with Habitat. The Company's rent under this lease is $730,080 per year, with an
annual 2% increase.
During January 2000, a subsidiary of the Company paid $1,815,000 to
Platinum Entertainment, Inc. and paid $200,000 into an escrow account for
certain licensing rights of Platinum Entertainment, Inc. The Company's Chief
Executive Officer, its President and its Chief Financial Officer served as
directors of Platinum Entertainment, Inc. during 2000.
(23) SEGMENT INFORMATION
The Company has two operating segments: the software, services and
hosting segment and the divine interVentures segment. The software, services and
hosting segment encompasses the operations surrounding the Company's core
strategy of delivering extended enterprise solutions. The divine interVentures
segment encompasses the operations of the Company's remaining portfolio of
associated companies, focusing primarily on e-commerce and vertical markets. The
Company evaluates segment performance based on income from operations. The
Company does not allocate total assets to its segments; however, all of the
Company's goodwill and other intangible assets are held within the software,
services and hosting segment at December 31, 2001.
Segment information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
standard is based on a management approach, which
97
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
requires segmentation based upon the Company's internal organization and
disclosure of revenue and operating loss based upon internal accounting methods.
Segment results are as follows:
YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------
SOFTWARE/ DIVINE DIVINE, INC.
SERVICES/HOSTING INTERVENTURES CONSOLIDATED
---------------- ------------- ------------
(IN THOUSANDS)
External revenue .............................. $ 196,511 $ 2,623 $ 199,134
Intersegment revenue .......................... 877 -- 877
---------- --------- -----------
$ 197,388 $ 2,623 200,011
========== =========
Eliminations ................................ (413)
-----------
Total revenues .............................. $ 199,598
===========
Net loss applicable to common stockholders .... $ (338,715) $ (31,109) $ (369,824)
========== ========= ===========
Because the Company operated under only one segment during the year
ended December 31, 2000 and the period ended December 31, 1999, segment
information is not included for these periods.
(24) LEASE COMMITMENTS
The future minimum lease payments related to the Company's
non-cancelable operating and capital lease commitments as of December 31, 2001
are as follows:
OPERATING CAPITAL
LEASES LEASES
---------- --------
(IN THOUSANDS)
2002 .................................................... $ 29,473 $ 1,114
2003 .................................................... 26,378 804
2004 .................................................... 24,159 534
2005 .................................................... 20,899 --
2006 .................................................... 16,858 --
Thereafter .............................................. 54,161 --
--------- -------
Total minimum lease payments .......................... $ 171,928 2,452
=========
Less interest portion of payments ....................... (260)
-------
Present value of minimum lease payments ................. 2,192
Less current portion of minimum lease payments .......... (899)
-------
Long-term portion of minimum lease payments ........... $ 1,293
=======
The future minimum lease payments for operating leases include payments
for facilities that the Company is planning to sublease. The Company has
established a liability of $29,878,000 at December 31, 2001 related to
impairment of a portion of these future lease payments. Rental expense under
operating leases was $18,065,000, $9,830,000 and $200,000 for the years ended
December 31, 2001 and 2000 and the period ended December 31, 1999, respectively.
98
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(25) COMMITMENTS AND CONTINGENCIES
Commitments Related to Private Investors
In connection with purchases of our shares of class A and class C common
stock by private investors concurrent with our initial public offering in July
2000:
(1) we agreed under our Alliance Agreement with Microsoft to purchase
$9,600,000 of software products, $4,700,000 of consulting services and
$1,000,000 of product support services from Microsoft through January 2004, to
expend $4,000,000 over four years to promote Microsoft solutions, to open an
accelerator facility in Seattle, the cost for which will be determined as the
size and scope of the accelerator is finalized, and to dedicate up to
$50,000,000 in capital to projects and acquisitions in the Seattle area. As of
December 31, 2001, we had purchased a total of $4,084,000 of software products,
$738,000 of consulting services, and $366,000 of product support services from
Microsoft toward our obligations. In connection with our acquisition of HostOne
in October 2001, we agreed with Microsoft that we would use our best efforts to
amend the Alliance Agreement to provide, among other things: that we will commit
to be a Microsoft .NET partner and develop products and services that are
coordinated with Microsoft's products and its .NET strategy; that we will
identify other opportunities to promote Microsoft products; and that Microsoft
will promote our products and services.
(2) we entered into an agreement concerning the purchase of a minimum of
$100,000,000 of co-location and bandwidth services from Level 3 over a four-year
period, $25,000,000 of which would have been credited to us as consideration for
Level 3's purchase of shares from us. In August 2001, we agreed to repurchase
the 5,555,555 shares of our common stock owned by Level 3 for $5,555,555 and
warrants to purchase 2,200,000 shares of our common stock. We paid the cash in
two equal installments in August and December 2001, and issued the warrants in
two equal installments in August 2001 and January 2002. Additionally, we agreed
with Level 3 to cancel our commitment to purchase $100,000,000 of co-location
and bandwidth services and to eliminate our prepaid credit of $25,000,000.
(3) we have agreed to purchase a minimum of $5,000,000 of computer
equipment and software, storage solutions, and professional services from Compaq
over four years. As of December 31, 2001, we have purchased $1,890,000 of
products and services from Compaq toward our obligation.
SageMaker Earnout
The Company acquired SageMaker, Inc. on March 29, 2001 in exchange for
10,533,333 shares of its class A common stock. Of those shares, 1,333,333 shares
are being held in escrow pending the determination of SageMaker's performance
against certain cash collection thresholds in 2001. In addition, the Company
agreed to grant stock options to purchase up to a maximum of $2,000,000 of the
Company's class A common stock to the continuing employees of SageMaker to the
extent that SageMaker is determined to have exceeded certain additional cash
collection thresholds in 2001.
Northern Light Technology Earnout
In connection with the Northern Light Technology acquisition as
described in note 26, the Company agreed to issue additional shares of the
Company's class A common stock to Northern Light shareholders if revenues
related to the assets acquired in the acquisition exceed $10.8 million for the
period beginning on the closing date and ending on December 31, 2002. The
additional shares would have a value equal to thirty-three percent (33%) of the
excess revenues over the $10.8 million threshold.
99
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
RWT Corporation Earnout
In conjunction with the Company's acquisition of RWT Corporation as
described in note 26, the Company agreed to grant additional shares of the
Company's class A common stock to management members and note and warrant
holders up to a maximum value of $3,500,000 if certain revenue targets are met
by September 2003.
(26) SUBSEQUENT EVENTS
In January 2002, the Company acquired 100% of the stock of Data Return,
Inc., a provider of high-availability managed hosting services, in exchange for
74,437,043 shares of the Company's class A common stock. In addition, the
Company issued options to purchase 14,382,923 shares of the Company's class A
common stock to Data Return employees.
In January 2002, the Company acquired certain assets of Northern Light
Technology, LLC, a leading provider of search and content integration solutions
for enterprises, in exchange for 14,002,643 shares of the Company's class A
common stock. All of the Company's exchanged shares, as well as the stock of
Northern Light, are being held in an escrow account for a period of ninety-one
days subsequent to the closing date. If, on the ninety-first day, the seller has
not obtained all consents to assignment as identified in the merger agreement,
the Company, in its sole discretion, may exercise a put option on the Northern
Light stock, wherein the Company's class A common stock would be returned to the
Company, and the agreement would terminate.
In February 2002, the Company sold 51% of its interest in mindwrap, Inc.
to mindwrap LLC for nominal consideration. Additionally the Company entered into
a General Release and Operating Agreement wherein mindwrap paid the Company
$766,000, which constitutes payment in full for all amounts due and owing to the
Company from or arising out of the Company's ownership and control of mindwrap
prior to the closing date. In exchange, the Company releases mindwrap from any
current or future liability arising from any situation prior to the closing
date. The Company also entered into a Joint Ownership Conveyance Agreement with
mindwrap LLC wherein the Company will receive perpetual, royalty-free,
transferable joint ownership interest in certain mindwrap software and other
intellectual property.
In February 2002, the Company acquired the 66.7% of Perceptual Robotics,
Inc. that it did not already own in exchange for 4,427,697 shares of the
Company's class A common stock and $55,000 in cash.
In February 2002, the Company acquired the minority interest of Net
Unlimited, Inc. in exchange for 365,020 shares of the Company's class A common
stock.
In February 2002, the Company acquired 100% of RWT Corporation (d/b/a
RealWorld Technologies, Inc.), a leading provider of production management and
tracking software, in exchange for 769,231 shares of the Company's class A
common stock.
In March 2002, the Company signed a definitive agreement to acquire
Delano Technology Corporation, a Toronto-based marketing solutions company
offering state-of-the-art interaction-based e-business and CRM solutions. The
Company expects to issue approximately 51,550,000 shares of the Company's class
A common stock in connection with the acquisition. The transaction, which will
be structured as a plan of arrangement under Canadian law, will be subject to
customary regulatory and court approvals, as well as the approval of Delano's
shareholders.
100
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(27) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial information
for the years ended December 31, 2001 and 2000. The operating results for any
given quarter are not necessarily indicative of results for any future period.
2001 QUARTERS ENDED
-------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
--------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ............... $ 80,481 $ 48,079 $ 61,281 $ 9,757
Cost of revenues* ...... 62,429 53,713 56,091 7,620
Selling, general and
administrative expenses* 66,847 41,614 36,477 31,711
Research and
development expenses ... 23,484 7,530 2,857 3,133
Bad debt expense ....... 18,799 1,985 1,492 1,103
Amortization of
intangible assets ...... 3,362 3,999 7,546 1,184
Acquired technology:
in-process research and
development ............ 12,545 1,196 -- --
Impairment of
intangible and other
assets ................. 34,608 -- -- 3,256
Impairment of prepaid
co-location and
bandwidth services ..... -- 25,000 -- --
Impairment of facilities 12,254 -- (232) --
Amortization of
stock-based compensation 1,995 2,119 2,234 3,319
--------- --------- --------- ---------
Operating loss ......... (155,842) (89,077) (45,184) (41,569)
Interest income
(expense), net ......... (197) 872 1,345 3,231
Other income (expense),
net .................... (14,253) (3,447) 13,587 645
Minority interest ...... 1 394 1,055 2,820
Equity in losses of
associated companies ... (4,161) (3,000) (5,192) (7,251)
Impairment in
equity/cost method
associated companies ... (6,251) (2,763) (4,156) (23,463)
--------- --------- --------- ---------
Net loss before
extraordinary gain ..... (180,703) (97,021) (38,545) (65,587)
Extraordinary gain ..... 818 11,214 -- --
--------- --------- --------- ---------
Net loss applicable to
common stockholders .... $(179,885) $ (85,807) $ (38,545) $ (65,587)
========= ========= ========= =========
Basic and diluted net
loss per share before
extraordinary gain ..... $ (0.65) $ (0.61) $ (0.27) $ (0.49)
Extraordinary gain ..... -- 0.07 -- --
Basic and diluted net
loss per share
applicable to common
Stockholders ........... $ (0.65) $ (0.54) $ (0.27) $ (0.49)
Sales price of class A
common stock
High ................. 0.85 2.15 2.85 2.06
Low .................. $ 0.42 $ 0.55 $ 1.09 $ 1.00
- ----------
* Certain amounts for the second and third quarters of 2001 have been
reclassified to conform with the current financial statement
presentation.
101
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2000 QUARTERS ENDED
------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ............... $ 13,079 $ 13,693 $ 12,092 $ 5,215
Cost of revenues ....... 13,139 12,345 10,320 4,407
Selling, general and
administrative expenses
(including bad debt
expense and amortization
of intangible assets) .. 39,345 56,172 50,750 31,451
Research and development
expenses ............... 3,392 4,000 3,048 1,596
Impairment of intangible
and other assets ....... 50,487 7,139 -- --
Impairment of facilities 10,961 -- -- --
Amortization of
stock-based compensation 5,020 26,185 8,199 8,665
--------- ---------- --------- ---------
Operating loss ......... (109,265) (92,148) (60,225) (40,904)
Interest income
(expense), net ......... 4,624 4,198 1,492 3,412
Other income (expense),
net .................... (777) 1,920 2,933 (2)
Minority interest ...... 3,437 6,192 4,353 4,187
Equity in losses of
associated companies ... (30,240) (25,567) (23,936) (10,878)
Impairment in
equity/cost method
associated companies ... (106,997) (6,128) -- --
--------- --------- --------- ---------
Net loss ............... (239,218) (111,533) (75,383) (44,185)
Accretion of preferred
stock dividends ........ -- (1,045) (8,645) (7,417)
Deemed dividends ....... -- (14,942) -- (25,814)
--------- --------- --------- ---------
Net loss applicable to
common stockholders .... $(239,218) $(127,520) $ (84,028) $ (77,416)
========= ========= ========= =========
Basic and diluted net
loss per share
applicable to common
stockholders ........... $ (1.79) $ (1.13) $ (7.39) $ (7.79)
Proforma basic and
diluted net loss per
share applicable to
common stockholders .... (0.99)
Sales price of class A
common stock
High ................. 4.25 12.44
Low .................. $ 1.00 $ 3.62
102
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
103
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information appearing under the caption "Election of our Board of
Directors" in our Proxy Statement for the Annual Meeting of Stockholders to be
held May 21, 2002 (the "Proxy Statement") is incorporated herein by reference.
EXECUTIVE OFFICERS
Our executive officers, their ages at December 31, 2001, and their
positions with us are set forth below. Our executive officers are
elected by and serve at the discretion of our Board of Directors.
NAME AGE POSITION
- ---- --- --------
Andrew J. Filipowski 51 Chairman of the Board and Chief Executive Officer
Paul L. Humenansky 45 President, Chief Operating Officer, and Director
Michael P. Cullinane 52 Executive Vice President, Chief Financial Officer, Treasurer, and
Director
Jude M. Sullivan 37 General Counsel, Senior Vice President, and Secretary
Ed Szofer 42 President of Professional Services Division
Ken Mueller 49 Senior Vice President and Controller
Mr. Filipowski, one of our founders, has been Chairman of our Board of
Directors and our Chief Executive Officer since our inception and was our
President from our inception until October 1999. He is also Chairman and Chief
Executive Officer of Platinum Venture Partners, Inc., the previous general
partner of the Platinum Venture Partners limited partnerships. Mr. Filipowski
was a founder of PLATINUM technology International inc. and served as the
Chairman of its Board of Directors, Chief Executive Officer, and President from
its inception in 1987 until it was acquired by Computer Associates in June 1999.
Mr. Filipowski is currently a director of Neoforma.com, Inc. and Blue Rhino
Corporation.
Mr. Humenansky, one of our founders, was one of our Executive Vice
Presidents from August 1999 until October 2000, and has been our President and
Chief Operating Officer since October 2000. He is also a principal officer of
Platinum Venture Partners, Inc. Mr. Humenansky was a founder of PLATINUM and
served as its Executive Vice President -- Product Development from its inception
in 1987 until its acquisition in June 1999. Mr. Humenansky also served as Chief
Operations Officer of PLATINUM from January 1993 until its acquisition.
Mr. Cullinane, one of our founders, has been our Chief Financial
Officer and Treasurer since our inception and our Executive Vice President since
August 1999. He is also a principal officer of Platinum Venture Partners, Inc.
Mr. Cullinane served as Executive Vice President and Chief Financial Officer of
PLATINUM from its inception in 1987 until it was acquired in June 1999. Mr.
Cullinane is currently a director of Made2Manage Systems, Inc.
Mr. Sullivan has been our General Counsel, Senior Vice President, and
Secretary since October 2000, and before that was our Vice President and Senior
Acquisitions Counsel since he joined us in December 1999. Prior to joining
divine, Mr. Sullivan was a partner in the Corporate Department of Katten Muchin
Zavis, a law firm based in Chicago, Illinois from June 1997 to December 1999.
Prior thereto, Mr. Sullivan was a partner and an associate at the law firm of
Hopkins and Sutter, based in Chicago, Illinois. Mr. Sullivan earned a law degree
in 1990 from the University of Illinois.
Mr. Szofer has been the president of divine Professional Services
Division of divine since April 2001. Prior to joining divine, Mr. Szofer served
as chief development officer and director of
104
marchFIRST, Inc. where he directed and managed the firm's corporate development
activities since March 2000. Mr. Szofer joined Whittman-Hart in 1985 and served
in a variety of positions before becoming president in 1997. Prior to joining
Whittman-Hart, he held various consulting and application development positions
for Arthur Andersen and Co.
Mr. Mueller has been our Senior Vice President of Finance and Controller
since October 1999. Mr. Mueller was also Chief Executive Officer of FiNetrics,
Inc., a start-up on-line accounting software and services company, formerly an
associated company of divine. Prior to joining divine, Mr. Mueller served as the
Senior Vice President and Controller for PLATINUM from April 1996 until its
acquisition. Before joining PLATINUM, Mr. Mueller held numerous financial,
accounting, and planning positions at several global companies, including
Galileo International, Apple Computer Corporation, Digital Equipment
Corporation, and Mobil Corporation.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the captions "Principal Stockholders" and
"Equity Compensation Plan Information" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the
Proxy Statement is incorporated herein by reference.
105
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Reference is made to the information set forth in Part II, Item 8 of
this Report, which information is incorporated herein by reference.
(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are not
required under the related instructions, are not applicable, or the information
has been provided in the consolidated financial statements or the notes thereto.
(A)(3) EXHIBITS
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.1 divine, inc. 2001 Stock Incentive Plan.
10.2 Form of Option Agreement under the divine, inc. 2001 Stock Incentive
Plan.
10.3 divine, inc. 1999 Stock Incentive Plan, as amended as of May 22, 2001.
10.4 Form of Option Agreement under the divine, inc. 1999 Stock Incentive
Plan, as amended as of May 22, 2001.
10.7 Form of Indemnification Agreement for Directors and Executive Officers.
10.31 Executive Employment Agreement, effective as of April 16, 2001, between
divine, inc. and Andrew J. Filipowski.
10.32 Executive Employment Agreement, effective as of April 16, 2001, between
divine, inc. and Michael Cullinane.
10.33 Executive Employment Agreement, effective as of April 16, 2001, between
divine, inc. and Paul Humenansky.
(B) REPORTS ON FORM 8-K
We filed a Report on Form 8-K, dated October 22, 2001, announcing the
approval by the stockholders of divine of the acquisitions by divine of Open
Market, Inc. and eshare communications, Inc. and the approval of those
respective acquisitions by the stockholders of Open Market and eshare.
We filed a Report on Form 8-K, dated October 29, 2001, announcing that
we completed our acquisitions of Open Market and eshare.
We filed a Report on Form 8-K, dated November 6, 2001, announcing that
divine entered into an agreement and plan of merger with Data Return Corporation
pursuant to which Data Return would become one of our wholly owned subsidiaries.
We filed a Report on Form 8-K, dated November 21, 2001, announcing that
we completed our acquisition of RoweCom Inc.
106
We filed a Report on Form 8-K, dated December 11, 2001, announcing that
we completed our acquisition of Eprise Corporation.
(C) EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2.1 Asset Purchase Agreement, dated and consummated as of April 2, 2001, by
and among marchFIRST, Inc., marchFIRST Consulting, Inc., and WH
Acquisition Corp., and related documents (incorporated herein by
reference to Exhibit 2.1 of divine's Report on Form 8-K filed April 16,
2001 (the "marchFIRST 8-K")).
2.2 Asset Purchase Agreement, dated as of April 2, 2001, and consummated as
of April 12, 2001, by and among marchFIRST, Inc., marchFIRST
Consulting, Inc., and WH Acquisition Corp., and related documents
(incorporated herein by reference to Exhibit 2.2 of the marchFIRST
8-K).
2.3 Agreement and Plan of Merger, dated as of July 8, 2001, among divine,
inc., DES Acquisition Company and eshare communications, Inc.,
excluding exhibits and schedules thereto (incorporated herein by
reference to Exhibit 2.1 of divine's Report on Form 8-K filed July 12,
2001 (the "eshare 8-K")).
2.4 Agreement and Plan of Merger and Reorganization, dated as of July 6,
2001, among divine, inc., Knowledge Resources Acquisition Corp. and
RoweCom Inc., excluding exhibits and schedules thereto (incorporated
herein by reference to Exhibit 2.2 of the eshare 8-K).
2.5(a) Agreement and Plan of Merger, dated as of August 15, 2001, among
divine, inc., DI1 Acquisition Company, and Open Market, Inc.
(incorporated herein by reference to Exhibit 2.1 of the divine's Report
on Form 8-K, filed August 17, 2001).
2.5(b) Amendment, dated as of September 10, 2001, to Agreement and Plan of
Merger, dated August 15, 2001, among divine, inc., DI1 Acquisition
Company, and Open Market, Inc. (incorporated herein by reference to
Exhibit 2.2(b) of divine's Registration Statement on Form S-4,
Registration No. 333-66488).
2.6 Agreement and Plan of Merger, dated as of September 17, 2001, among
divine, inc., DI2 Acquisition Company, and Eprise Corporation
(incorporated herein by reference to Exhibit 2.1 of divine's Report on
Form 8-K, filed September 20, 2001).
2.7 Agreement and Plan of Merger, dated as of November 1, 2001, among
divine, inc., TD Acquisition Corp. and Data Return Corporation,
excluding exhibits and schedules thereto (incorporated herein by
reference to Exhibit 2.1 of divine's Registration Statement on Form
S-4, Registration No. 333-73826).
3.1 Third Amended and Restated Certificate of Incorporation of the Company,
as amended (incorporated herein by reference to Exhibit 2.2 of divine's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2001).
3.2 Amended and Restated By-Laws (incorporated herein by reference to
Exhibit 3.2 of divine's Registration Statement on Form S-1,
Registration No. 333-92851 (the "IPO Registration Statement")).
4.1 Specimen stock certificate representing class A common stock
(incorporated herein by reference to Exhibit 4.1 of the IPO
Registration Statement).
107
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.2 Rights Agreement, dated as of February 12, 2001, between divine
interVentures, inc. and Computershare Investor Services, LLC, as Rights
Agent, including the form of Certificate of Designation, Preferences,
and Rights of Series A Junior Participating Preferred Stock setting
forth the terms of the Series A Junior participating Preferred Stock,
par value $.001 per share, as Exhibit A, the form of Rights Certificate
as Exhibit B, and the Summary of Rights to Purchase Preferred Stock as
Exhibit C (incorporated herein by reference to Exhibit 1 of divine's
Registration Statement on Form 8-A, filed February 13, 2001).
4.3 Amendment No. 1 to Rights Agreement, dated as of July 8, 2001, between
divine and Computershare Investor Services, LLC, as Rights Agent
(incorporated herein by reference to Exhibit 2 of divine's Registration
Statement on Form 8-A/A, filed July 23, 2001).
4.4 Amendment No. 2 to Rights Agreement, dated as of August 15, 2001,
between divine and Computershare Investor Services, LLC, as Rights
Agent (incorporated herein by reference to Exhibit 3 of divine's
Registration Statement on Form 8-A/A, filed August 20, 2001).
10.1 divine, inc. 2001 Stock Incentive Plan (incorporated herein by
reference to Exhibit 4.4 of divine's Registration Statement on Form
S-8, Registration No. 333-62882 (the "divine S-8 Registration
Statement")).
10.2 Form of Option Agreement under the divine, inc. 2001 Stock Incentive
Plan (incorporated herein by reference to Exhibit 4.5 of the divine S-8
Registration Statement).
10.3 divine, inc. 1999 Stock Incentive Plan, as amended as of May 22, 2001
(incorporated herein by reference to Exhibit 4.6 of the divine S-8
Registration Statement).
10.4 Form of Option Agreement under the divine, inc. 1999 Stock Incentive
Plan, as amended as of May 22, 2001 (incorporated herein by reference
to Exhibit 4.7 of the divine S-8 Registration Statement).
10.5 eshare communications, Inc. (formerly Melita International Corporation)
("eshare") 1992 Discounted Stock Option Plan, effective June 4, 1992,
as amended March 1, 1997 (incorporated herein by reference to Exhibit
10.2 to eshare's Registration Statement on Form S-1, Registration No.
333-22855 (the "eshare S-1")).
10.6 eshare 1997 Stock Option Plan effective February 6, 1997, as amended
October 21, 1997 (incorporated by reference to Exhibit 10.3 to eshare's
1997 Annual Report on Form 10-K, File No. 0-22317).
10.7 Form of Indemnification Agreement for Directors and Executive Officers
(incorporated herein by reference to Exhibit 10.3 of the IPO
Registration Statement).
10.8 Agreement of Sublease between Budget Rent-A-Car Corporation and divine
interVentures, inc., dated as of August 25, 1999 (incorporated herein
by reference to Exhibit 10.4 of the IPO Registration Statement).
10.9 Letter Agreement, dated as of July 1, 1999, among divine interVentures,
inc., Blackhawk LLC, and Andrew J. Filipowski, as amended on February
28, 2000 (incorporated herein by reference to Exhibit 10.5 of the IPO
Registration Statement).
10.10 Series D Registration Rights Agreement, dated as of December 7, 1999,
among divine interVentures, inc. and the Purchasers (as defined
therein) (incorporated herein by reference to Exhibit 10.12 of the IPO
Registration Statement).
10.11 Consulting and Non-Compete Agreement, dated as of March 29, 1999,
between PLATINUM technology International, inc. and Andrew J.
Filipowski (incorporated herein by reference to Exhibit 10.13 of the
IPO Registration Statement).
108
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.12 Consulting and Non-Compete Agreement, dated as of March 29, 1999,
between PLATINUM technology International, inc. and Michael P.
Cullinane (incorporated herein by reference to Exhibit 10.14 of the IPO
Registration Statement).
10.13 Consulting and Non-Compete Agreement, dated as of March 29, 1999,
between PLATINUM technology International, inc. and Paul L. Humenansky
(incorporated herein by reference to Exhibit 10.15 of the IPO
Registration Statement).
10.14 Business Opportunities Agreement, dated as of December 7, 1999, by and
among divine interVentures, inc. and Dell USA L.P., Microsoft
Corporation, CBW/SK divine Investments, Frontenac VII Limited
Partnership, Frontenac Masters VII Limited Partnership, First Chicago
Investment Corporation, Cross Creek X, LLC, and Mesirow Capital
Partners VII (incorporated herein by reference to Exhibit 10.17 of the
IPO Registration Statement).
10.15(a) Alliance Agreement, dated as of January 28, 2000, between divine
interVentures, inc. and Microsoft Corporation (incorporated herein by
reference to Exhibit 10.21 of the IPO Registration Statement).
10.15(b) Amendment No. 1 to Alliance Agreement, dated as of March 29, 2000, by
and between Microsoft Corporation and divine interVentures, inc.
(incorporated herein by reference to Exhibit 10.25 of the IPO
Registration Statement).
10.15(c) Settlement and Purchase Agreement, dated as of September 7, 2001, by
and among Microsoft Corporation, MS Channel Initiatives Corp., divine,
inc., and divine/Whittman-Hart, inc., including exhibits thereto.
10.15(d) Amendment No. 1 to Settlement and Purchase Agreement, entered into as
of October 2, 2001, by and among Microsoft Corporation, MS Channel
Initiatives Corp., divine, inc., and divine/Whittman-Hart, inc.
10.15(e) Letter Agreement, dated as of November 13, 2001, by and among Microsoft
Corporation, MS Channel Initiatives Corp., divine, inc., and
divine/Whittman-Hart, inc.
10.16 Lease, dated as of January 7, 2000, by and between Habitat-Kahny, LLC
and dotspot, inc. (incorporated herein by reference to Exhibit 10.22 of
the IPO Registration Statement).
10.17 Lease, dated as of February 22, 2000, between NDNE 9/90 200 Crossing
Boulevard, LLC and Eprise Corporation (incorporated herein by reference
to Exhibit 10.1 of Eprise Corporation's Registration Statement on Form
S-1, Registration No. 333-94777).
10.18 Lease Agreement, dated August 1994, between eshare and 5051 Peachtree
Corners Circle, L.L.C. (incorporated herein by reference to Exhibit
10.1 to the eshare S-1).
10.19 Lease Agreement, dated August 15, 1999, between eshare Technologies
Limited (formerly Melita Europe Limited) and Melita House, Inc.
(incorporated herein by reference to Exhibit 10.2 of eshare's 1999
Annual Report on Form 10-K, File No. 0-22317).
10.20 Lease, dated as of March 11, 1997, between Open Market, Inc. and
Wayside Realty Trust. (incorporated herein by reference to Exhibit
10.23 of Open Market's 1996 Annual Report on Form 10-K, File No.
0-28439).
10.21 Office Lease, dated as of November 15, 1999, by and between 114
MILLENNIUM, LTD. and Data Return Corporation (incorporated herein by
reference to Exhibit 10.22 of Data Return Corporation's Registration
Statement on Form S-1, Registration No. 333-84011 (the "Data Return S-1
Registration Statement")).
109
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.22 First Amendment to Office Lease, dated as of February 15, 2000, by and
between 114 MILLENNIUM, LTD. and Data Return Corporation (incorporated
herein by reference to Exhibit 10.23 of the Data Return S-1
Registration Statement).
10.23 Second Amendment to Office Lease, dated as of May, 2000, by and between
114 MILLENNIUM, LTD. and Data Return Corporation (incorporated herein
by reference to Exhibit 10.24 of the Data Return S-1 Registration
Statement).
10.24 Consulting Agreement, dated as of March 9, 2000, by and between divine
interVentures, inc. and Michael J. Jordan (incorporated herein by
reference to Exhibit 10.23 of the IPO Registration Statement).
10.25 Agreement of Limited Partnership for Platinum Venture Partners I L.P.,
dated as of September 24, 1994, by and among Platinum Venture Partners,
Inc. and the Limited Partners (as defined therein), and amendment
thereto effective as of August 4, 1999 (incorporated herein by
reference to Exhibit 10.28 of the IPO Registration Statement).
10.26 Agreement of Limited Partnership for Platinum Venture Partners II L.P.,
dated as of September 24, 1994, by and among Platinum Venture Partners,
Inc. and the Limited Partners (as defined therein), and amendment
thereto effective as of August 4, 1999 (incorporated herein by
reference to Exhibit 10.29 of the IPO Registration Statement).
10.27 Letter Agreement, dated as of May 26, 2000, among divine interVentures,
inc., Blackhawk LLC, and Andrew J. Filipowski (incorporated herein by
reference to Exhibit 10.30 of the IPO Registration Statement).
10.28 Office Lease Agreement between Dugan/Office, L.L.C. and dotspot, inc.,
dated as of April 17, 2000 (incorporated herein by reference to Exhibit
10.26 of divine's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (the "2000 Annual 10-K")).
10.29 Lease Agreement between 1 North Dearborn Trust and dotspot, inc., dated
as of September 29, 2000 (incorporated herein by reference to Exhibit
10.28 of the 2000 Annual 10-K).
10.30 Stockholder Agreement, dated as of July 8, 2001, among divine, inc.,
Szlam Partners, L.P. and Aleksander Szlam., including exhibits thereto
(incorporated herein by reference to Exhibit 99.3 of the eshare 8-K).
10.31 Executive Employment Agreement, effective as of April 16, 2001, between
divine, inc. and Andrew J. Filipowski (incorporated herein by reference
to Exhibit 10.2 of the Third Quarter).
10.32 Executive Employment Agreement, effective as of April 16, 2001, between
divine, inc. and Michael Cullinane (incorporated herein by reference to
Exhibit 10.3 of the 2001 Third Quarter 10-Q.)
10.33 Executive Employment Agreement, effective as of April 16, 2001, between
divine, inc. and Paul Humenansky (incorporated herein by reference to
Exhibit 10.4 of the 2001 Third Quarter 10-Q).
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
110
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON APRIL 1, 2002.
divine, inc.
By: /s/ MICHAEL P. CULLINANE
---------------------------------
MICHAEL P. CULLINANE
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, AND TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON APRIL 1, 2002.
SIGNATURE TITLE
--------- -----
PRINCIPAL EXECUTIVE OFFICER:
/s/ ANDREW J. FILIPOWSKI Chairman of the Board and Chief Executive
- ------------------------------------------- Officer
ANDREW J. FILIPOWSKI
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ MICHAEL P. CULLINANE Executive Vice President, Chief Financial
- ------------------------------------------- Officer, Treasurer, and Director
MICHAEL P. CULLINANE
A MAJORITY OF THE DIRECTORS:
/s/ PAUL L. HUMENANSKY President, Chief Operating Officer, and
- ------------------------------------------- Director
PAUL L. HUMENANSKY
/s/ TOMMY BENNETT Director
- -------------------------------------------
TOMMY BENNETT
/s/ JOHN COOPER Director
- -------------------------------------------
JOHN COOPER
/s/ JAMES E. COWIE Director
- -------------------------------------------
JAMES E. COWIE
/s/ MICHAEL H. FORSTER Director
- -------------------------------------------
MICHAEL H. FORSTER
/s/ ARTHUR W. HAHN Director
- -------------------------------------------
ARTHUR W. HAHN
/s/ J. KEVIN NATER Director
- -------------------------------------------
J. KEVIN NATER
/s/ THOMAS J. MEREDITH Director
- -------------------------------------------
THOMAS J. MEREDITH
/s/ JOHN RAU Director
- -------------------------------------------
JOHN RAU
111
ANNEX J
DELANO FORM 10-K FOR THE YEAR ENDED MARCH 31, 2001 (U.S. GAAP)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended March 31, 2001; or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________.
COMMISSION FILE NO. 333-94505
DELANO TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA 98-0206122
(Province or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
------------------------------------
302 TOWN CENTRE BOULEVARD L3R 0E8
MARKHAM, ONTARIO, CANADA (Zip code)
(Address of Registrant's principal executive offices)
Registrant's telephone number, including area code 905-947-2222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) COMMON STOCK NO PAR VALUE
of the Act: (Title of Class)
------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on May 18,
2001 as reported on the Nasdaq National Market, was approximately $25.1 million.
Shares of Common Stock held by each officer and director and by certain persons
who owned 5% or more of the Registrant's outstanding Common Stock on that date
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of Friday, May 18, 2001 Registrant had outstanding 37,285,857 shares of
Common Stock.
1
DELANO TECHNOLOGY CORPORATION
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED MARCH 31, 2001
<Table>
<Caption>
PAGE
----
PART I
Item 1 Business.............................................................. 3
Item 2 Properties............................................................ 9
Item 3 Legal Proceedings..................................................... 9
Item 4 Submission Of Matters To A Vote Of Security Holders................... 10
PART II
Item 5 Market For Registrant's Common Equity And Related Stockholder
Matters............................................................... 10
Item 6 Selected Consolidated Financial Data.................................. 13
Item 7 Management's Discussion And Analysis Of Financial Condition
And Results Of Operations ............................................ 14
Item 7A Qualitative And Quantitative Market Risk.............................. 23
Item 8 Delano Technology Corporation Index To Consolidated
Financial Statements.................................................. 33
Item 9 Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.................................................. 52
PART III
Item 10 Directors And Executive Officers Of The Registrant.................... 53
Item 11 Executive Compensation................................................ 56
Item 12 Security Ownership Of Certain Beneficial Owners And Management........ 59
Item 13 Certain Relationships and Related Transactions........................ 60
PART IV
Item 14 Exhibits And Financial Statement Schedules............................ 62
Signatures ...................................................................... 63
</Table>
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form-10K contains so-called forward-looking statements
including statements about our expectations, beliefs, intentions or strategies
for the future, which we indicate by words or phrases such as "anticipate,"
"expect," "intend," "plan," "will," "we believe," and similar language. We base
all forward-looking statements on our current expectations and these statements
are subject to risks and uncertainties and to assumptions we have made.
Important factors that could cause our actual results to differ materially from
those expressed or implied by these forward-looking statements include those
listed under "Risk Factors" or described elsewhere in this Annual Report on Form
10-K.
PART I
ITEM 1: BUSINESS
OVERVIEW
Delano Technology Corporation, a corporation formed under the laws of Ontario,
Canada in May 1998, develops and markets Customer Relationship Management (CRM)
software that incorporates advanced analytics with interaction capabilities on a
flexible and scalable technology platform. This technology enables companies to
understand, personalize and manage interactions with customers across multiple
communication channels. These interactions consist of both inbound and outbound
communications through e-mail, company websites, and wireless devices. Companies
can use Delano software applications to gain in-depth customer knowledge by
creating a unified view of the customer across disparate data, and use the
customer insight to initiate marketing campaigns, and route, track, and respond
to customer service inquiries. We focus our sales efforts on businesses in the
following industries: financial services, retail, technology,
telecommunications, and transportation and logistics, as well as other
organizations engaged in, or focused on, business-to-business or
business-to-customer commercial opportunities using the internet. We are also
increasing our activity with channel partners to further our penetration of
target industries. Our professional services group can assist our client's
internal IT personnel to implement our products.
DESCRIPTION OF BUSINESS
Delano's CRM solution is comprised of operational and analytical applications
and technology platforms that seamlessly integrate to provide a unified view of
customer interactions across an enterprise. This includes applications for
marketing automation, analytics and segmentation, customer service and support,
and a technology platform that combines interaction capabilities with the
analytic intelligence. We believe that our solution offers the following
specific client benefits:
Stronger Customer Relationships. Our CRM solution provides a tool to assist an
organization to understand its customer needs, and market to and support them
accordingly. For example, our products enable organizations to analyze disparate
customer data across multiple touch points in the enterprise. The resulting
analysis enables marketers to build customer relationships by engaging in
targeted, timely and relevant marketing campaigns that help to convert prospects
to customers and retain high value customers.
Faster Corporate Decision Making. Our products also assist our clients to
respond to large volumes of inbound e-mail and web-based communications, and
route inquiries to the appropriate representatives for action. Additionally, as
Delano's solution utilizes a web-based interface, it makes it easier to define
and analyze customer information, which means that marketers can react, adapt,
and execute campaigns faster than traditional methods.
Scalability and Flexibility. We have designed our products to support large
numbers of simultaneous customer interactions. The open architecture (based on
industry standards) of our underlying technology platform delivers the
flexibility and extensibility to seamlessly integrate with and leverage
disparate technology systems and data, and the scalability to grow with an
organization's business needs.
Increased Revenue Opportunities. We believe our products help our clients
increase their revenues by driving profitable relationships across the customer
lifecycle, implementing customer interaction programs that build barriers to
switching and extend the customer relationship. For example, clients can
generate revenue through marketing campaigns and lead tracking and management,
thereby increasing their customer acquisition at a lower cost of execution. Our
service applications including electronic surveys, personalized newsletters,
in-bound e-mail support, live chat and web
3
collaboration and shared knowledge base functionality, can lead to increased
revenues by increasing customer loyalty and retention.
Reduced Operating Costs. We believe our products can help our clients lower
operating costs. Our solution assists clients to automate large volumes of
customer interactions automatically, increasing productivity, which results in
lower costs than can be achieved using traditional methods. Delano enables
clients to potentially increase productivity while ensuring consistency across
marketing campaigns, by creating custom campaigns for different customer
segments and saving the templates for future use. Delano's solution is based on
open standards, and as a result, is able to integrate with an organization's
existing technology investments--including disparate data and legacy systems--to
reduce the total cost of ownership.
RECENT BUSINESS ACQUISITIONS
On September 26, 2000 we acquired Continuity Solutions, Inc. pursuant to a
transaction where Continuity became our wholly owned subsidiary. Continuity is a
provider of integrated multi-channel eCRM solutions, consisting of licensed and
ASP offerings. Continuity is headquartered in San Francisco, California and had
15 employees as of the date of the acquisition.
In connection with the acquisition, we issued approximately 1.4 million shares
of Delano common stock, no par value, and assumed options and warrants to
acquire approximately 150,000 shares of Delano common stock. The transaction was
accounted for using the purchase method of accounting.
On October 13, 2000, we acquired Digital Archaeology Corporation ("DA") pursuant
to a transaction where DA became our wholly owned subsidiary. DA is a provider
of analytics for e-business. The company's solutions provide enterprises with a
view of customer and trading partner behavior and preferences across traditional
and e-commerce channels. DA was a privately held company based in Kansas City
and had 68 employees as of the date of the acquisition.
In connection with the acquisition, we issued approximately 4.6 million of the
Company's common stock, no par value, and paid $17.4 million in cash, in
exchange for all of the outstanding shares of capital stock of DA, and each
outstanding option or right to purchase DA common stock was assumed by the
Company and became a right to purchase 0.53 of the Company's common shares. The
transaction was accounted for using the purchase method of accounting.
PRODUCTS
Delano is a CRM software company that provides an enterprise with a flexible way
to build, understand and intelligently manage customer interactions. Our CRM
solution incorporates applications that fit within the operational and
analytical CRM categories, and are built on and leverage the inherent qualities
of our CRM infrastructure platform.
CRM INFRASTRUCTURE
Delano's CRM infrastructure solution is a technology platform made up of the
Delano Interaction Server, the Delano Analytics Server, the Delano Knowledge
Management Server, the Delano Rules Server, and component packs that increase
Delano's integration with third party systems and data. Delano's technology
platform provide the foundation for building diverse customer facing,
interaction-based and analytical applications.
DELANO INTERACTION SERVER
Delano's Interaction Server enables companies to develop and deploy
interaction-based applications. Delano's operational CRM applications leverage
the inherent qualities of this technology platform, providing the flexibility to
integrate with existing systems, ease of customization, reduced time to market,
and increased return on investment. This interaction platform consists of the
following:
- - The Delano Interaction Server is an application server designed to manage
thousands of diverse interaction-based applications simultaneously. The
Interaction Server runs on the Windows, Solaris, Unix, IBM AIX and HP-UX
operating systems. It includes an application repository to manage the storage
and version control of interaction-based applications. The Interaction Server
also manages and controls the quantity of applications or interactions covered
by the client's license. The Interaction Server communicates directly with
e-mail, web, database and directory servers. Multiple Interaction Servers can
operate effectively within a client's enterprise.
4
- - The Delano Interaction Builder is a graphical application builder environment,
designed to enable our clients to develop interaction-based applications simply
and quickly. The Builder uses a "drag-and-drop" style interface that allows our
clients to define and outline a business process by arranging application
components in a flowchart-style environment. The application components serve as
the building blocks of an application. The Interaction Builder enables a client
to develop interaction-based applications, that, among other things:
- - interface with existing corporate databases;
- - connect to corporate directories;
- - gather information from, and post information to a web server;
- - send and receive e-mail using popular e-mail protocols, such as Post Office
Protocol 3 (POP3), Internet Message Access Protocol 4 (IMAP4) and Simple Mail
Transfer Protocol (SMTP); and
- - parse and personalize various document types, including documents in text,
HyperText Markup Language or HTML, and eXtensible Markup Language or XML
formats.
- - The Delano Interaction Administrator is a program that enables our clients to
configure, administer and manage interaction-based applications created with the
Application Builder and executed on the Interaction Server. The Server
Administrator is available as a native or web application to enable remote
administration.
DELANO ANALYTICS SERVER
Delano's Analytics Server is an analytical platform for creating highly
customized analytical applications that instantly link and analyze disparate
data without predefining data structures or data types. Delano's analytical CRM
applications leverage the Analytics Server to maximize the flexibility,
scalability, and the degree to which a customer can customize its in-depth
customer analysis.
Delano Analytics Server consists of the following:
- - Delano Analytics Server is a storage repository that permits rapid data
integration and analysis. The Analytics server includes over 90 analytic
operators;
- - Digital Explorer is the desktop environment for building and customizing
analytic models, with easy-to-use drag and drop interfaces;
- - Net Discovery Explorer is a complete toolkit for building HTML interfaces for
Delano-based analytic solutions. Net Discovery is based on a series of plug-ins
that operate within industry standard environments such as Microsoft's Front
Page.
DELANO KNOWLEDGE MANAGEMENT SERVER
The Delano Knowledge Management Server assists artificial intelligence (AI)
assisted technology to provide flexible yet powerful English language and
language-independent search capabilities. It can be used to decipher free-form
text to deliver automated responses and perform intelligent routing to the
person most appropriate for managing a particular customer's requests.
The Delano Knowledge Management Server enables companies to capture, control and
disseminate information and knowledge across their extended enterprise. Through
this server, companies can cultivate a collaborative environment of knowledge
sharing and can automatically organize, categorize, cross-link and disseminate
large amounts of unstructured information. The Delano Knowledge Management
Server is incorporated into Delano's Velocity Service application.
DELANO RULES SERVER
The Delano Rules Server enables organizations to manage the business rules
associated with customer interactions. This enables agile adaptation to changing
business needs without having to customize an organization's existing systems
and applications. By empowering the `owners' of business processes to determine
the intelligence behind rules, the Delano Rules Server places control of an
organization's interactions in the hands of its experts.
DELANO COMPONENT PACKS
Delano component packs are designed as groupings of components to improve
integration between the Delano Interaction Server and our client's existing
infrastructures, including third party solutions, databases, and middleware
5
technology. The following are the component packs we currently have available
for our clients: Delano Component Pack for J2EE, Delano Component Pack for
Microsoft BackOffice, Delano Component Pack for Databases, Delano Enterprise
Connectivity, Delano Component Development Kit, Delano Component Pack for
Wireless Interactions, Delano Component Pack for XML, Delano Component Pack for
the Web, and Component Pack for IBM Connectivity.
OPERATIONAL CRM
Delano's operational CRM applications - Velocity Live, Velocity Expert and
Velocity Assistant, comprise an integrated suite of marketing and customer
service applications that are built on top of the Delano Interaction Server and
leverage its inherent benefits including its flexibility and scalability.
DELANO VELOCITY MARKETING
Velocity Marketing is a campaign management application that enables marketers
to create and enhance customer relationships with event-driven, one-to-one
marketing campaigns, interactive surveys, and personalized newsletters. It
enables organizations to launch event-driven marketing campaigns to acquire new
customers and create relationships through timely, relevant and personalized
up-sell and cross-sell offers.
Velocity Marketing provides a unified view of all campaign efforts across
multiple channels, enabling the user to change timelines, targets, offers, and
responses, on the fly. It also enables an organization to optimize campaign
execution by using in-depth analysis to measure key success metrics following a
campaign and use the insight to drive greater results in future campaigns.
Marketers can also increase their productivity while ensuring consistency across
campaigns, by creating custom campaigns for different segments and saving the
templates for future use.
Using Velocity Marketing, marketing campaigns can automatically be triggered by
any pre-determined event that occurs throughout the customer lifecycle, such as
the purchase of a new product or the end of a service contract. It enables
interactive surveys to be distributed as part of marketing campaigns, or used as
Web registration forms. Organizations can also use Velocity Marketing to design,
deliver, and analyze results of personalized surveys, contests, and quizzes,
using individual responses to automatically trigger additional campaign efforts.
It also enables organizations to create, manage and distribute newsletters,
completely automating and managing the workflow from author to editor to
publisher to customer.
DELANO VELOCITY SERVICE
Delano Velocity Service is a customer service application that provides fast,
relevant, and automated response management and routing of inbound
communications via e-mail, chat, or Web inquiries. By automating the routing and
response of inbound communications, Velocity Service increases customer loyalty
and retention while lowering the cost of an organization's service department.
Velocity Service helps to maximize ensures maximum customer service
productivity, response accuracy, and improved lead management. This is achieved
by enabling customer service professionals to quickly deliver accurate answers
to customer inquiries using established knowledge bases of corporate information
and send auto-acknowledgements and auto-responses based on sophisticated,
easy-to-create rules.
Powerful and flexible routing and escalation rules, content analysis,
consultation, and response allow the entire workflow of inbound communications
to be automated, thereby increasing response efficiency and effectiveness.
ANALYTICAL CRM
DISCOVERY MARKETING
Discovery Marketing is an analytical e-marketing application that enables an
enterprise to use disparate data to identify, finely segment, and better
understand their customers and add intelligence to their online marketing
campaigns. Discovery Marketing strengthens Delano's Velocity Marketing offering
by turning data from disparate sources across an enterprise into customer
knowledge. The customer knowledge enables marketers to increase their return on
investment by developing timely, relevant and targeted marketing campaigns that
help to convert prospects to customers, and retain high value customers.
6
In addition to providing in-depth segmentation of customer information which
helps to increase sales from new and existing customers, Discovery Marketing
also enables organizations to analyze customer segments against various
criteria--such as demographics--to identify cross-sell and up-sell
opportunities. Discovery Marketing enables an organization to use ad-hoc
analysis to segment customers based on the optimal criteria for a given
marketing campaign.
PROFESSIONAL SERVICES
If desired, our professional services group will work with clients to learn
about their specific requirements and implement integrated solutions based on
Delano's offerings. Generally, this process is based on a four-step methodology,
with key client checkpoints at the completion of each step:
- - Initial needs assessment. Our professional services group works with our
clients to define their requirements. Once a sale has been completed, the
professional services group works with the client to prioritize applications,
identify key data structures that are required and develop a detailed design
overview document;
- - Application building. The group will construct the required applications using
the Application Builder, develop web forms and e-mail messages and install and
configure the Interaction Server in the client's environment;
- - Testing and training. The applications are volume and user-tested. The group
also tests the interfaces between our applications and existing legacy systems.
The group will conduct training and develop technical documentation for the
specific applications;
- - Deployment. The applications are published and integrated with client's
systems. The group monitors production to ensure that the application is
functioning properly and that any modifications are documented.
We typically provide professional services on a time-and-materials basis, acting
either alone or with third-party distribution companies, consulting
organizations and software vendors. After our solution has been implemented, our
client services and support organization handles ongoing account management and
monitors client satisfaction.
PRODUCTS UNDER DEVELOPMENT
Due to our CRM focus, we continue to enhance our marketing and service
offerings, adding breadth and depth to the application suite through our
internal research and development efforts and partnerships with other technology
vendors. This strategy enables us to deliver products to cross- and up-sell to
our existing customers, simultaneously strengthening our overall product
offering for prospects. Our focus includes:
- - enhancing our current customer segmentation capabilities, to allow marketers
to deliver targeted campaigns to the right audience with the right message and
provide service professionals with the information needed to best service their
customers by leveraging the Delano analytics platform; and,
- - broadening our offering of customer value management, providing managers with
the ability to drive customer relationships based on individual customer value
by analyzing both the revenue and the costs associated with marketing and
service activities.
CLIENT SERVICE AND SUPPORT
Our technical services group provides maintenance and technical support to our
clients, including software upgrades and updates and emergency response. To
date, almost all our clients have entered into maintenance agreements that
entitle them to technical services. Annual maintenance fees are typically equal
to 18% of the product license fee. We provide support to our clients through our
support center located in Markham, Ontario.
SALES AND MARKETING
As of March 31, 2001, we had 182 sales, business development and marketing
professionals, including sales personnel, sales engineers, strategic account
representatives and marketing representatives. We maintain 3 direct sales
representatives in Ontario as well as a total of 31 sales representatives in the
United States, and 7 sales representatives in Europe, who oversee and process
all orders for our products and services in Europe and parts of Africa. As well,
we have a joint venture with eGlobal Technology Service Limited ("eGlobal") for
Asia Pacific. Our direct sales force is organized into regional teams, which
include both sales representatives and systems engineers.
Our direct sales force is complemented by telemarketing from our headquarters in
Markham, Ontario, which
7
generates, follows up and qualifies leads, and by third-party distribution
companies, consulting organizations and software vendors with whom we have
agreements, such as Nortel Networks, Braun Consulting, Deloitte Consulting,
Interactive Business Systems and Ironside Technologies. These third-parties
further expand the distribution channels for our products.
We also pursue original equipment manufacturer sales opportunities with vendors
of complementary technology, including developers of enterprise resource
planning systems, customer relationship management systems, messaging, internet
and e-commerce solutions such as Ironside Technologies, i2 Technologies, Nortel
Networks, and Protagona worldwide. These vendors may seek to enhance and extend
their solutions by integrating our products into theirs.
To support our sales efforts, we conduct seminars for prospective clients and
ongoing public relations campaigns, participate in conferences and trade shows
and distribute direct mailings, newsletters and website communications. We
typically market our products and services independently, but we also
selectively conduct joint marketing activities with third-party distribution
companies, consulting organizations and software vendors.
CLIENTS
We focus our sales efforts on organizations in five major market sectors:
financial services, retail, technology, telecommunications, and transportation
and logistics. We have also identified demand in marketing services
organizations and companies focused on business-to-business or
business-to-consumer commercial opportunities over the internet. Although we are
primarily targeting clients in these market sectors, we believe that increasing
use of the internet and the benefits offered by our products will provide
opportunities in other market sectors. The following is a representative list of
our clients by market segment:
- - Financial Services -- Charles Schwab Canada Co., Chase Manhattan Bank, Zurich
Insurance, Heller Financial, Worldinsure.com;
- - Technology -- Nortel Networks; i2 Technologies, Compaq, ATI Technologies,
Ironside Technologies, Protagona;
- - Telecommunications -- Ericsson Inc., Sprint, HickoryTech Information
Solutions;
- - Transportation and Logistics -- Mark VII, Inc., Rental Services Corp., and
Cardinal Logistics;
- - Retail -- Mary Kay, The Sharper Image, Ann Taylor, Target;
- - Marketing Services -- Ogilvy Worldwide, Grey Worldwide, Middleberg 1.2.1,
Association of National Advertisers, and The Computing Group, a division of
Omnicom;
- - E-commerce (business-to-consumer) -- GroceryGateway.com, Tickets.com,
Webhelp.com, Borderfree, e-centives inc., Harborfreight.com, a web service
operated by Central Purchasing Inc. and Marketrend Communications Inc.; and,
- - E-commerce (business-to-business) -- LendingTree.com, and eBreviate, a
division of AT Kearney.
In the year ended March 31, 2001, no customer accounted for 10% of our total
revenues. We expect a substantial portion of our license and service revenues in
any given quarter to be generated from a limited number of clients. However, we
do not believe that we will be dependent on any ongoing commitments from any
particular client.
COMPETITION
The market for our products and services is highly competitive. The market is
evolving rapidly from both a commercial and a technological perspective. We
believe that the principal competitive factors affecting our market include the
technology infrastructure, breadth of the offered solution, the speed of
deployment, distribution breadth, product quality and reliability, customer and
professional services quality, a significant base of high-profile customers and
industry influencers, and demonstrable value for the customer. Although we
believe that our products compare very favorably with respect to these factors
our market is relatively new and is developing rapidly.
We currently, and will for the foreseeable future, face competition from many
sources, including operational and analytical CRM vendors (who compete directly
with our products), and systems designed in-house and by third-party development
efforts. For example, our competitors include CRM vendors such as e.Piphany,
Broadbase/Kana, and Xchange Applications.
RESEARCH AND DEVELOPMENT
8
We believe that our future success depends in large part on our ability to
maintain and enhance our technology, to develop a large library of software
products, and to enhance our market positioning through the deployment of
emerging technologies. For the year ended March 31, 2001, we invested $17.4
million in product development, compared to $3.6 million and $797,000 for the
year ended March 31, 2000, and the period from May 7, 1998 to March 31, 1999
respectively.
In order to maintain our focus on developing new products and enhancements, it
is important that we recruit highly skilled, experienced engineers and software
developers. Our senior managers are generally experienced in enterprise
application development. We have designed a process for product development
which defines and addresses the activities required to successfully bring
product concepts and development projects to market, ensures that feedback from
our sales, marketing, and business development efforts is appropriately
integrated into the development cycle, and ensures that products and programs
are available within appropriate timeframes.
As of March 31, 2001, we had 179 personnel engaged in research and development
activities.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions and other similar measures to
protect our proprietary information and technology. We currently have two U.S.
patent applications pending. Our pending applications, if allowed, will cover a
material portion of our products and services. In addition, we have one U.S.
trademark.
As part of our confidentiality procedures, we generally require our employees,
clients and potential business partners to enter into confidentiality and
non-disclosure agreements before we will disclose any sensitive aspects of our
products, technology or business plans. In addition, we generally require
employees to agree to surrender to us any proprietary information, inventions or
other intellectual property they generate or come to possess while employed by
us. These efforts afford only limited protection.
EMPLOYEES
As of March 31, 2001, we had 490 full-time employees, including 179 in research
and development, 76 in professional services, 182 in sales, business development
and marketing and 53 in general and administrative. We had a net addition of 209
employees between April 1, 2000 and March 31, 2001. None of our employees are
covered by collective bargaining agreements and we have never experienced a
strike or work stoppage. We believe our relations with our employees are good.
ITEM 2: PROPERTIES
Our corporate headquarters are located in Markham, Ontario. In November 1999, we
entered into a 10-year lease for approximately 58,000 square feet for new
corporate headquarters. This new lease took effect on May 1, 2000. We believe
that our facilities are adequate to meet our requirements for the foreseeable
future. We also lease office space in California, Colorado, Kansas, Illinois,
Minnesota, Texas, New York and New Jersey, London, U.K. and Hong Kong. We do not
own any real property.
We are proceeding to sub-lease portions of our offices in Markham, Illinois,
California and London.
ITEM 3: LEGAL PROCEEDINGS
On February 22, 2001, We Media, Inc. filed a lawsuit against the Company in the
Supreme Court for the State of New York, County of New York. The Complaint
asserts claims for breach of contract, unjust enrichment, misrepresentation, and
tortuous interference with prospective economic advantage. WeMedia claims
damages in the amount of $5,000,000 together with treble punitive damages,
interest and costs. The Company has removed the action to the United States
District Court for the Southern District of New York, and filed its Answer and a
Counterclaim. The Company believes that it has numerous meritorious defenses to
the action and intends to defend it vigorously.
9
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION AND RECENT SALES OF UNREGISTERED SECURITIES
Delano's common stock is listed on the NASDAQ Stock Market under the symbol
"DTEC" and commenced trading on Feb 9, 2000. The Company's common stock is also
listed on the Toronto Stock Exchange under the symbol "DLN" and commenced
trading on May 3, 2001.
The following table sets forth the range of high and low closing sales prices
for each period indicated, adjusted for the 3 for 2 stock split effective
January 2000:
<Table>
<Caption>
HIGH LOW
---- ---
FISCAL 2000
Fourth Quarter (from February 9, to March 31, 2000)...... $ 51.50 $ 22.44
FISCAL 2001
First Quarter ........................................... $ 24.94 $ 9.75
Second Quarter .......................................... $ 18.19 $ 9.50
Third Quarter .......................................... $ 17.12 $ 5.12
Fourth Quarter .......................................... $ 5.37 $ 1.37
</Table>
The reported last sale price of Delano's common stock on the NASDAQ Stock Market
on May 18, 2001 was: $0.81. The approximate number of holders of record of the
shares of the Company's common stock was 635 as of May 18, 2001. This number
does not include stockholders whose shares are held in trust by other entities.
The actual number of stockholders is greater than this number of holders of
record. The Company estimates that the number of beneficial stockholders of the
shares of the Company's common stock as of May 18, 2001 was approximately 6,000.
Delano has authorized common stock, with no par value and Preferred Stock.
Delano has not issued any Preferred Stock.
Delano has not paid any cash dividends on its capital stock. Delano currently
intends to retain its earnings to fund the development and growth of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
10
Our financial statements are reported in United States dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States.
We express all dollar amounts in this Annual Report on Form 10-K in United
States dollars, except where otherwise indicated. References to "$" are to
United States dollars and references to "Cdn$" are to Canadian dollars. This
Annual Report on Form 10-K contains a translation of some Canadian dollar
amounts into U.S. dollars at specified exchange rates solely for your
convenience. Unless otherwise indicated, these Canadian dollar amounts were
translated into U.S. dollars based on Cdn$1.00 per US$0.6344, which was the
inverse of the noon buying rate in The City of New York for cable transfers in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York on March 31, 2001. See "Exchange Rate Information."
11
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the high and low
exchange rates for Canadian dollars expressed in U.S. dollars, the average of
such exchange rates on the last day of each month during such period, and the
exchange rate at the end of such period, based on the inverse of the noon buying
rate.
<Table>
<Caption>
YEAR ENDED YEAR ENDED
MARCH 31,2000 MARCH 31, 2001
------------- --------------
High...................................... $ 0.6969 $ 0.6796
Low....................................... 0.6607 0.6344
End....................................... 0.6879 0.6344
Average................................... 0.6795 0.6636
</Table>
On May 18, 2001, the inverse of the noon buying rate was Cdn$1.00 per $0.6523.
12
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The selected
consolidated financial data are derived from our consolidated financial
statements that have been audited by KPMG LLP, independent auditors, and are
included elsewhere in this Annual Report on Form 10-K.
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998
(INCEPTION) TO YEAR ENDED YEAR ENDED
MARCH 31,1999 MARCH 31, 2000 MARCH 31,2001
------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Licenses......................................................... -- $ 8,799 $ 25,636
Services......................................................... -- 690 4,739
---------- ------------ ------------
Total revenues................................................ -- 9,489 30,375
---------- ------------ ------------
Cost of revenues:
Licenses......................................................... -- 59 332
Services......................................................... -- 1,239 5,038
---------- ------------ ------------
Total cost of revenues........................................ -- 1,298 5,370
---------- ------------ ------------
Gross profit....................................................... -- 8,191 25,005
---------- ------------ ------------
Operating expenses:
Sales and marketing............................................. $ 554 11,732 49,275
Research and development........................................ 797 3,649 17,385
General and administrative...................................... 180 1,515 4,671
Amortization of deferred stock-based compensation............... 171 1,671 3,416
Amortization of goodwill and identifiable intangibles........... -- -- 11,025
In-process research and development............................. -- -- 429
Impairment of goodwill and identifiable intangibles............. -- -- 96,980
---------- ------------ ------------
Total operating expenses........................................ 1,702 18,567 183,181
---------- ------------ ------------
Loss from operations............................................... (1,702) (10,376) (158,176)
Interest income, net............................................ 13 1,099 4,393
Equity in loss of associated company............................ -- -- (278)
Asset impairment................................................ -- -- (694)
Restructuring charges........................................... -- -- (6,263)
---------- ------------ ------------
Loss before provision for income taxes............................. (1,689) (9,277) (161,018)
Provision for income taxes...................................... -- -- --
---------- ------------ ------------
Loss for the period................................................ (1,689) (9,277) (161,018)
Less: accretion of dividends on redeemable convertible special
shares.......................................................... (101) (313) --
---------- ------------ ------------
Loss applicable to common shares................................... $ (1,790) $ (9,590) $ (161,018)
========== ============ ============
Basic and diluted loss per common share............................ $ (2.40) $ (1.50) $ (4.84)
========== ============ ============
Shares used in computing basic and diluted loss per common share... 746 6,381 33,283
========== ============ ============
</Table>
<Table>
<Caption>
MARCH 31, 2000 MARCH 31, 2001
-------------- --------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................. $ 82,370 $ 34,209
Short-term investments.................................... 29,154 1,155
Working capital........................................... 110,410 32,488
Total assets.............................................. 119,907 64,639
Long-term obligations, net of current portion............. 222 49
Redeemable convertible special shares..................... -- --
Shareholders' equity ..................................... 112,561 49,941
</Table>
13
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Financial Condition and Results of Operations
contains forward-looking statements within the meaning of Section 21e of the
Securities Exchange Act of 1934. Our actual results and timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors," elsewhere in this report and in our other public
filings.
The following discussion should be read in conjunction with our consolidated
financial statements and the related notes appearing elsewhere in this Annual
Report on Form 10-K.
OVERVIEW
From the date of our incorporation on May 7, 1998 until April 1999 we were a
development stage company and had no revenues. Our operating activities during
this period consisted primarily of conducting research and developing our
initial products. In May 1999, we released and sold the first commercially
available version of the Delano e-Business Interaction Suite.
On September 26, 2000 we acquired Continuity Solutions, Inc. pursuant to a
transaction where Continuity became our wholly owned subsidiary. Continuity is a
provider of integrated multi-channel eCRM solutions, consisting of licensed and
ASP offerings. Continuity is headquartered in San Francisco, California and had
15 employees as of the date of the acquisition.
In connection with the acquisition, we issued approximately 1.4 million shares
of Delano common stock, no par value, and assumed options and warrants to
acquire approximately 150,000 shares of Delano common stock. The transaction was
accounted for using the purchase method of accounting.
On October 13, 2000, we acquired Digital Archaeology Corporation ("DA") pursuant
to a transaction where DA became our wholly owned subsidiary. DA is a provider
of analytics for e-business. The company's solutions provide enterprises with a
view of customer and trading partner behavior and preferences across traditional
and e-commerce channels. DA was a privately held company based in Kansas City
and had 68 employees as of the date of the acquisition.
In connection with the acquisition, we issued approximately 4.6 million of the
Company's common stock, no par value, and paid $17.4 million in cash, in
exchange for all of the outstanding shares of capital stock of DA, and each
outstanding option or right to purchase DA common stock was assumed by the
Company and became a right to purchase 0.53 of the Company's common shares. The
transaction was accounted for using the purchase method of accounting.
To date, we have derived substantially all of our revenues from the sale of
software product licenses and from the provision of professional services,
including implementation, training and maintenance services. Our products have
been sold primarily through our direct sales force.
Our products are offered on a licensed basis. We license our products based on:
- - a fee for each client, which depends on the specific and individual needs of
the client;
- - an additional fee, which covers installation, configuration, training and
professional services; and
- - a variable component, which depends on, among other things, the number of
servers and the number of optional applications and add-ons, servers and
component packs purchased.
We recognize our software license revenues in accordance with the American
Institute of Certified Public Accountants, or ("AICPA"), Statement of Position
("SOP") 97-2, "Software Revenue Recognition," and related amendments and
interpretations contained in the AICPA's SOP 98-9. We generally recognize
revenues allocated to software licenses upon delivery of the software products,
when all of the following conditions have been met:
- - persuasive evidence of an arrangement exists;
- - the license fee is fixed or determinable; and
- - the license fee is collectible.
14
Because substantially all of our software license agreements include related
maintenance services, these agreements are multiple-element arrangements. We
allocate the fees in multiple-element arrangements based on the respective value
for each element, with maintenance being allocated typically at 18% of license
revenue in all sales. Delivery of the software generally is deemed to occur upon
shipment of the software unless customers are provided the opportunity to return
the products. Revenues are recognized only when all refund obligations have
expired. In situations where we provide online offerings, delivery of the
software occurs upon initiation of the online offerings. Revenues from
maintenance and support services and online offerings are recognized ratably
over the related contractual period.
Our cost of revenues includes the cost of product documentation, the cost of
compact disks used to deliver our products, personnel-related expenses, travel
costs, equipment costs and overhead costs.
Our operating expenses are classified into four categories: sales and marketing,
research and development, general and administrative, and amortization of
deferred stock-based compensation.
- - Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel and promotional expenditures, including
public relations, advertising, trade shows and marketing materials;
- - Research and development expenses consist primarily of compensation and
related costs for research and development employees and contractors and in
connection with the enhancement of existing products and quality assurance
activities;
- - General and administrative expenses consist primarily of compensation and
related costs for administrative personnel, legal, accounting and other general
corporate expenses;
- - Amortization of deferred stock-based compensation includes the amortization,
over the vesting period of a stock option, of the difference between the
exercise price of options granted to employees and the deemed fair market value
of the options for financial reporting purposes. In addition, deferred
stock-based compensation includes compensation expense arising on the issuance
of options and a warrant to employees and a consultant, calculated as the
difference between the exercise price of the options and warrant and the fair
market value at the date of issuance. Also included in amortization of deferred
stock-based compensation is compensation expense relating to an option to
acquire shares of the Company issued in connection with a professional services
agreement between the Company and a related corporation. The compensation
expense is calculated as the difference between the exercise price of the option
and the fair market value at the time the option was issued or earned. Also
included in amortization of deferred stock-based compensation is compensation
expense relating to the unvested options assumed in the acquisitions of
Continuity and DA.
We allocate common costs based on relative headcount or other relevant measures.
These allocated costs include rent and other facility-related costs for the
corporate head office, communication expenses and depreciation expenses for
furniture and equipment.
In connection with the granting of stock options and the issuance of a warrant
to our employees and a consultant, we recorded deferred stock-based compensation
totaling $13.7 million through March 31, 2001. This amount represents the total
difference between the exercise prices of stock options and the warrant and the
deemed fair value of the underlying common stock for accounting purposes on the
date these stock options were granted and the warrant issued. This amount is
included as a component of stockholders' equity and is being amortized by
charges to operations over the vesting period of the options, consistent with
the method described in Financial Accounting Standards Board, or ("FASB"),
Interpretation No. 28. We recorded $171,000 of stock-based compensation
amortization expense during the period from May 7, 1998 to March 31, 1999, $1.7
million of stock-based compensation amortization expense during the year ended
March 31, 2000 and $3.4 million of stock-based compensation amortization expense
during the year ended March 31, 2001. As of March 31, 2001, we had a total of
$8.5 million of deferred stock-based compensation that had not been amortized.
The amortization of the remaining deferred stock-based compensation will result
in additional charges to operations through December 2003 of approximately
$845,000 per quarter. The amortization of deferred stock-based compensation is
classified as a separate component of operation expenses in our consolidated
statement of operations.
In our development of new products and enhancements of existing products, the
technological feasibility of the software is not established until substantially
all product development is complete. Historically, our software development
costs eligible for capitalization have been insignificant and all costs related
to internal product development have been expensed as incurred.
15
Special charges for the year ended March 31, 2001 included a $694,000 asset
impairment charge, a $6.3 million restructuring charge and a $97.0 million
goodwill and identifiable intangibles impairment.
(a) Asset Impairment Charge. During the three months ended March 31, 2001, the
Company restructured its operations to reduce operating expenses. During the
restructuring, it was determined that $694,000 of software and other capital
assets, as well as a long-term investment, had no future value to the Company.
(b) Restructuring Charge. During the three months ended March 31, 2001, the
Company incurred a restructuring charge of $6.3 million as part of a plan to
improve its operating results by reducing employees, by closing duplicative
Company facilities in the USA and Canada, and by implementing other measures.
This charge is part of a plan to streamline the Company's efforts to focus on
achieving profitability. The restructuring charge was comprised of $3.2 million
for headcount reductions, $2.2 million for facilities related costs including
penalties associated with the reduction of lease commitments and future lease
payments and $900,000 related to eliminating the Company's ASP sales model. As
of March 31, 2001, $2.7 million had been paid out on the restructuring charge.
The Company determined its restructuring charge in accordance with Emerging
Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No.
100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company commit to an
exit plan before it accrues employee termination costs and exit costs. On
January 4, 2001, the Company's senior management prepared a detailed exit plan
that included the termination of 136 employees, closure of certain facilities
and the elimination of the ASP sales model.
In connection with the restructuring actions, the Company terminated the
employment of 102 employees, consisting primarily of applications development
employees, sales and marketing employees, technical and other support employees,
and administrative employees in all locations. In addition, the Company did not
replace approximately 34 employees who resigned voluntarily during the three
months ended March 31, 2001. At March 31, 2001, the Company had terminated all
employees associated with these restructuring actions. At March 31, 2001, the
Company had exited a portion of its facilities in Toronto and most of its
offices in the USA. The Company has entered into sublease arrangements for some
of its office space.
In April 2001, the Company announced further restructuring plans to reduce its
headcount by 31 percent and close additional offices in the USA and Canada. The
Company expects some of the employees in these offices to consider opportunities
to work in its other remaining offices. There was no impact on the financial
statements for the year ended March 31, 2001 relating to these actions. The
Company expects to recognize a restructuring charge in the first quarter of
fiscal year 2002 relating to the April 2001 restructuring of approximately $5.5
million.
(c) Impairment of goodwill and identifiable intangibles. We performed an
impairment assessment of the goodwill and identifiable intangibles recorded in
connection with the acquisition of Continuity and DA. The assessment was
performed primarily due to the significant sustained decline in our stock price
since the valuation date of the shares issued in the Continuity and DA
acquisitions resulting in our net book value of our assets prior to the
impairment charge significantly exceeding our market capitalization, the overall
decline in the industry growth rates, and our lower fourth quarter of 2001
actual and projected operating results. As a result of our review, we recorded a
$97.0 million impairment charge to reduce goodwill and identifiable intangibles.
The charge was determined based upon our estimated discounted cash flows over
the remaining estimated useful life of the goodwill and identifiable intangibles
using a discount rate of 24.8%. The assumptions supporting the cash flows
including the discount rate were determined using our best estimates as of such
date. The remaining goodwill balance of approximately $5.2 million will be
amortized over its remaining useful life. We will continue to assess the
recoverability of the remaining goodwill and identifiable intangibles
periodically in accordance with our policy.
We believe that period-to-period comparisons of our historical operating results
are not necessarily meaningful and should not be relied upon as being a good
indication of our future performance. Our prospects must be considered in light
of the risks, expenses and difficulties frequently experienced by companies in
early stages of development, particularly companies in new and rapidly evolving
markets like ours. Although we have experienced significant revenue growth
recently, this trend may not be sustainable. Furthermore, we may not achieve or
maintain profitability in the future.
16
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000.
Revenues. Total revenues for the year ended March 31, 2001 were $30.4 million
compared to $9.5 million for the year ended March 31, 2000. In the year ended
March 31, 2001 license revenues accounted for $25.6 million or 84.4% of total
revenues. In the year ended March 31, 2000, license revenues accounted for $8.8
million, or 92.7% of total revenues. Services revenues, including maintenance
and services fees, accounted for $4.7 million, or 15.6% of revenues for the year
ended March 31, 2001, compared to $690,000 or 7.3% of total revenues for the
year ended March 31, 2000. Approximately 66.0% of our total revenues were
generated in the United States, 19.9% were generated in Canada and 14.1% were
generated elsewhere in the year ended March 31, 2001, compared to 69.3%, 25.9%
and 4.8% respectively for the year ended March 31, 2000.
Cost of revenues. Cost of license revenues was $332,000 or 1.1% of total
revenues for the year ended March 31, 2001 compared to $59,000 for the year
ended March 31, 2000 or 0.6% of total revenues. Cost of services revenues was
$5.0 million, or 16.6% of total revenues for the year ended March 31, 2001,
compared to $1.2 million for the year ended March 31, 2001, or 13.1% of total
revenues. We anticipate that cost of service revenues will decrease in absolute
dollars as we do not anticipate hiring additional services personnel. We
anticipate that the cost of license revenues will stay proportionate with
license revenues.
Sales and marketing. Sales and marketing expenses increased from $11.7 million
or 123.6% of revenues for the year ended March 31, 2000 to $49.3 million or
162.2% of revenues for the year ended March 31, 2001. This increase was
attributable primarily to the addition of 51 sales and marketing personnel and
higher marketing costs due to expanded promotional activities. We anticipate
that sales and marketing expenses will decrease in absolute dollars as we have
reduced the number of sales and marketing personnel and reduced discretionary
marketing programs.
Research and development. Research and development expenses increased from $3.6
million or 38.5% of revenues for the year ended March 31, 2000 to $17.4 million
or 57.2% of revenues for the year ended March 31, 2001. This increase was
attributable primarily to the addition of 85 product development and related
services personnel and to increased consulting and recruiting costs. The
expenses were reduced by investment tax credits of $285,000 for the year ended
March 31, 2000. We anticipate that research and development expenses will
decrease in absolute dollars, and will reduce as a percentage of total revenues
from period to period as we have reduced research and development personnel.
As a Canadian Controlled Private Corporation or ("CCPC"), we qualified for
certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.3 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of the amount of the credit. We will earn
investment tax credits at a rate of 20% of eligible current and capital research
and development expenditures made after our initial public offering. While a
portion of investment tax credits earned as a CCPC are refundable, investment
tax credits earned after our initial public offering may only be used to offset
income taxes otherwise payable.
General and administrative. General and administrative expenses increased from
$1.5 million or 16.0% of revenues for the year ended March 31, 2000 to $4.7
million or 15.4% of revenues for the year ended March 31, 2001, due primarily to
the addition of 29 administrative personnel, increased consulting costs and to
higher facilities-related expenses necessary to support our growth. We expect
that general and administrative expenses will decrease in absolute dollars as we
have reduced personnel and related costs to facilitate the growth of our
business.
Amortization of goodwill and identifiable intangibles. On September 26, 2000,
the Company completed its acquisition of Continuity. As a result of the
acquisition, $19.4 million was allocated to goodwill, and identifiable
intangibles. This amount is being amortized on a straight-line basis over a
period of three years for identifiable intangibles, and five years for goodwill
from October 1, 2000. On October 16, 2000, the Company completed its acquisition
of Digital Archaeology. As a result of the acquisition, $94.2 million was
allocated to goodwill and identifiable intangibles. This
17
amount is being amortized from October 16, 2000 on a straight-line basis over a
period of three years for identifiable intangibles and five years for goodwill.
For the year ended March 31, 2001, $11.0 million (2000 - nil) of goodwill
amortization was recorded.
If events or changes in circumstances indicate that these long lived assets will
not be recoverable, as determined based on the undiscounted cash flows of the
acquired businesses or if determined that the amounts paid for them would have
changed materially based on underlying changes in the financial markets and
therefore fundamental changes in the value of technology companies, over the
remaining amortization period, the carrying value is reduced to net realizable
value. For the year ended March 31, 2001, goodwill and identifiable intangibles
was reduced by approximately $97.0 million.
Amortization of deferred stock-based compensation. We incurred a charge of $1.7
million or 17.6% of revenues in the year ended March 31, 2000 and a charge of
$3.4 million or 11.2% of revenues for the year ended March 31, 2001 related to
the issuance of stock options with exercise prices less than the deemed fair
market value for financial reporting purposes on the date of grant.
Interest income, net. Interest income, net for the period ended March 31, 2000
was $1.1 million. Interest income, net for the year ended March 31, 2001 was
$4.4 million, reflecting the interest earned on the cash and cash equivalents
balance arising from our special warrant offering in June 1999 and our initial
public offering in February 2000.
In-process research and development. In connection with the acquisition of
Continuity and Digital Archaeology, net intangibles of $429,000 were allocated
to in-process research and development. The fair value allocation to in-process
research and development was determined by identifying the research projects for
which technical feasibility has not been achieved and which have no alternative
future use at the acquisition date, assessing the stage and expected date of
completion of the research and development effort at the acquisition date, and
calculating the net present value of the cash flows expected to result from the
successful deployment of the new technology resulting from the in-process
research and development effort.
Provision for income taxes. A deferred tax asset of $44.1 million existed as of
March 31, 2001 compared to $4.8 million at March 31, 2000. A valuation allowance
is recorded against a deferred tax asset if it is more likely than not that the
asset will not be realized. A valuation allowance taken against substantially
all of the deferred tax asset reflects the lack of profitability in the past,
the significant risk that taxable income would not be generated in the future
and the non-transferable nature of the deferred tax asset under certain
conditions.
YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999.
Revenues. For the period from our inception to March 31, 1999, we were a
development stage company and had no revenues. Total revenues for the year ended
March 31, 2000 were $9.5 million. License revenues accounted for $8.8 million,
or 92.7% of total revenues. Services revenues, including maintenance and
services fees, accounted for the remaining $690,000 or 7.3% of total revenues.
Approximately 69.3% of our total revenues were generated in the United States,
25.9% were generated in Canada and 4.8% were generated elsewhere in the year
ended March 31, 2000.
Cost of revenues. Cost of license revenues was $59,000 for the year ended March
31, 2000 or 0.6% of total revenues. Cost of services revenues was $1.2 million
for the year ended March 31, 2000, or 13.1% of total revenues. We anticipate
that cost of service revenues will increase in absolute dollars as we continue
to hire additional services personnel. We anticipate that the cost of product
revenues will increase proportionately with increases in license revenues.
Sales and marketing. Sales and marketing expenses increased from $554,000 for
the period ended March 31, 1999 to $11.7 million for the year ended March 31,
2000. This increase was attributable primarily to the addition of 110 sales and
marketing personnel and higher marketing costs due to expanded promotional
activities. We anticipate that sales and marketing expenses will increase in
absolute dollars as we continue to hire additional sales and marketing personnel
and expand discretionary marketing programs.
Research and development. Research and development expenses increased from
$797,000 for the period ended March 31, 1999 to $3.6 million for the year ended
March 31, 2000. This increase was attributable primarily to the addition of 74
product development and related services personnel and to increased consulting
and recruiting costs. The expenses were reduced by investment tax credits of
$285,000 for the year ended March 31, 2000. We anticipate that research and
development expenses will increase in absolute dollars, but will vary as a
percentage of total revenues from period to period as we continue to hire
additional research and development personnel.
18
As a Canadian Controlled Private Corporation or ("CCPC"), we qualified for
certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.4 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of the amount of the credit. We will earn
investment tax credits at a rate of 20% of eligible current and capital research
and development expenditures made after our initial public offering. While a
portion of investment tax credits earned as a CCPC are refundable, investment
tax credits earned after our initial public offering may only be used to offset
income taxes otherwise payable.
General and administrative. General and administrative expenses increased from
$180,000 for the period ended March 31, 1999 to $1.5 million for the year ended
March 31, 2000, due primarily to the addition of 18 administrative personnel,
increased consulting costs and to higher facilities- related expenses necessary
to support our growth. We expect that general and administrative expenses will
increase in absolute dollars as we add personnel and incur related costs to
facilitate the growth of our business.
Amortization of deferred stock-based compensation. We incurred a charge of
$171,000 in the year ended March 31, 1999 and a charge of $1.7 million for the
year ended March 31, 2000 related to the issuance of stock options with exercise
prices less than the deemed fair market value for financial reporting purposes
on the date of grant.
Interest income, net. Interest income, net for the period ended March 31, 1999
was $13,000. Interest income, net for the year ended March 31, 2000 was $1.1
million, reflecting the interest earned on the cash and cash equivalents balance
arising from our special warrant offering in June 1999 and our initial public
offering in February 2000.
Provision for income taxes. A deferred tax asset of $4.8 million existed as of
March 31, 2000. A valuation allowance is recorded against a deferred tax asset
if it is more likely than not that the asset will not be realized. A valuation
allowance taken against substantially all of the deferred tax asset reflects the
lack of profitability in the past, the significant risk that taxable income
would not be generated in the future and the non-transferable nature of the
deferred tax asset under certain conditions.
PERIOD FROM MAY 7, 1998 (INCEPTION) TO MARCH 31, 1999
Sales and marketing. Sales and marketing expenses were $554,000 for the eleven
months included in the period from our inception to March 31, 1999. These
expenses consisted primarily of compensation and related costs for sales and
marketing personnel and promotional expenditures, including public relations,
advertising, trade shows and marketing materials.
Research and development. Research and development expenses were $797,000 for
the eleven months ended March 31, 1999. These expenses consisted primarily of
compensation and related costs for research and development employees and
contractors. The expenses were reduced by investment tax credits of $201,000.
General and administrative. General and administrative expenses were $180,000
for the eleven months ended March 31, 1999. These expenses consisted primarily
of compensation and related costs for administrative personnel, legal,
accounting and other general corporate expenses.
Amortization of deferred stock-based compensation. We incurred a charge of
$171,000 for the eleven months ended March 31, 1999 related to the issuance of
stock options with exercise prices less than the deemed fair market value for
financial reporting purposes on the date of grant.
Interest income, net. Interest income, net consisted of $13,000 earned on cash
and cash equivalents for the eleven months ended March 31, 1999.
QUARTERLY RESULTS OF OPERATIONS
19
The following table sets forth certain unaudited consolidated statements of
operations data for our eight quarters of operation. In our management's
opinion, this unaudited information has been prepared on the same basis as our
annual consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K and includes all adjustments necessary to fairly present the
unaudited quarterly results. These adjustments consist only of normal recurring
adjustments. This information should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
Annual Report on Form 10-K. The operating results for any quarter are not
necessarily indicative of results for any future period.
20
<Table>
<Caption>
QUARTER ENDED
-------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- -------- -------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
License............................ $ 752 $ 1,561 $ 2,748 $ 3,738 $ 5,361 $ 7,009 $ 8,040 $ 5,226
Services........................... 59 54 183 394 657 1,025 1,230 1,827
------- ------- -------- ------- -------- -------- -------- ---------
Total revenues................... 811 1,615 2,931 4,132 6,018 8,034 9,270 7,053
------- ------- -------- ------- -------- -------- -------- ---------
Cost of revenues
License............................ -- 6 14 39 59 122 89 62
Services........................... 149 231 321 538 801 1,169 1,440 1,628
------- ------- -------- ------- -------- -------- -------- ---------
Total cost of revenues........... 149 237 335 577 860 1,291 1,529 1,690
------- ------- -------- ------- -------- -------- -------- ---------
Gross profit.......................... 662 1,378 2,596 3,555 5,158 6,743 7,741 5,363
------- ------- -------- ------- -------- -------- -------- ---------
Operating expenses:
Sales and marketing................ 818 1,198 3,440 6,276 10,388 11,116 13,641 14,130
Research and development........... 389 801 1,054 1,405 2,320 3,856 6,128 5,081
General and administrative......... 157 255 355 748 998 1,142 1,397 1,134
Amortization of deferred
stock-based compensation......... 107 211 451 902 1,624 856 1,003 (67)
Amortization of goodwill and
identifiable intangibles ........ -- -- -- -- -- -- 5,107 5,918
In-process research and
development...................... -- -- -- -- -- 360 69 --
Impairment of goodwill and
identifiable intangibles......... -- -- -- -- -- -- -- 96,980
------- ------- -------- -------- -------- -------- -------- ---------
Total operating expenses.............. 1,471 2,465 5,300 9,331 15,330 17,330 27,345 123,176
------- ------- -------- -------- -------- -------- -------- ---------
Loss from operations.................. (809) (1,087) (2,704) (5,776) (10,172) (10,587) (19,604) (117,813)
Interest income, net............... 11 165 178 745 1,542 1,384 926 541
Equity in loss of associated
company ........................ -- -- -- -- -- -- -- (278)
Asset impairment................... -- -- -- -- -- -- -- (694)
Restructuring charges.............. -- -- -- -- -- -- -- (6,263)
------- ------- -------- -------- -------- -------- -------- ---------
Loss before provision for
income taxes....................... (798) (922) (2,526) (5,031) (8,630) (9,203) (18,678) (124,507)
Provision for income
taxes.............................. -- -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- ---------
Loss for the period................... $ (798) $ (922) $ (2,526) $ (5,031) $ (8,630) $ (9,203) $(18,678) $(124,507)
======= ======= ======== ======== ======== ======== ======== =========
</Table>
Our quarterly operating results have varied widely in the past, and we expect
that they will continue to fluctuate in the future as a result of a number of
factors, many of which are outside our control. Our limited operating history
and the undeveloped nature of the market for interaction-based e-business
communications products make predicting future revenues difficult. Our expense
levels are based, in part, on expectations regarding future revenue increases,
and to a large extent, such expenses are fixed, particularly in the short term.
There can be no assurance that our expectations regarding future revenues are
accurate. Moreover, we may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to our expectations would likely cause
significant increases in our net losses for that period.
Due to the foregoing factors, our operating results are difficult to forecast.
We believe that period-to-period comparisons of our operating results are not
meaningful, and you should not rely on them as indicative of our future
performance. You should also evaluate our prospects in light of the risks,
expenses and difficulties commonly encountered by comparable early-stage
companies in new and rapidly emerging markets. We cannot assure you that we will
successfully address the risks and challenges that face us. In addition,
although we have experienced significant revenue growth recently, we cannot
assure you that our revenues will continue to grow or that we will become or
remain profitable in the future.
21
LIQUIDITY AND CAPITAL RESOURCES
Since the date of incorporation, we have raised an aggregate of $3.4 million
through private placements of special shares. We have raised $14.4 million, net
of the agents' commission and offering expenses, through a private placement of
special warrants in June 1999. We have also raised $103.4 million, net of
agents' commissions and offering expenses through our initial public offering in
February 2000.
Our operating activities used cash of $6.8 million for the year ended March 31,
2000 and cash of $45.7 million for the year ended March 31, 2001. Our negative
operating cash flow resulted principally from the net losses that we incurred
during these periods as we invested in the development of our products, expanded
our sales force and expanded our infrastructure to support our growth.
Our financing activities generated $118 million in the year ended March 31, 2000
and $254,000 in year ended March 31, 2001. In the year ended March 31, 2000 the
issuance of special warrants generated net proceeds of $14.4 million and the
issuance of common shares as part of our initial public offering generated net
proceeds of $103.4 million.
Our investing activities, consisting of the purchase of computer equipment,
software, furniture and equipment to support our growing number of employees, as
well as the purchase of short-term investments used cash of $31.0 million during
the year ended March 31, 2000, and $2.9 million during the year ended March 31,
2001.
In March 1999, we obtained a lease line of credit from a Canadian chartered bank
to purchase equipment and furniture. Approximately $431,000 was outstanding as
of March 31, 2001. The ceiling on the lease line of credit is Cdn$1,000,000
(approximately $634,000). The lease line of credit is not collateralized with
cash for the amount of the line that is used for leasing equipment.
Our capital requirements depend on a number of factors. We expect to devote
substantial resources to continue our research and development efforts, expand
our sales, support, marketing and product development organizations, establish
additional facilities worldwide and build the infrastructure necessary to
support our growth. Our expenditures have increased substantially since the date
of incorporation, but we anticipate that capital expenditures will decrease in
absolute dollars in the foreseeable future.
At March 31, 2001, we had cash and cash equivalents aggregating $34.2 million.
At March 31, 2001, we also had a short-term investment of $1.2 million. We
believe that our current cash and cash equivalents are sufficient to fund our
operations for at least the next 12 months. If cash generated from operations is
insufficient to meet our long-term liquidity needs, we may need to raise
additional funds or seek other financing arrangements. Additional funding may
not be available on favorable terms or at all. In addition, although there are
no present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, we may, from time to
time, evaluate potential acquisitions of other businesses, products and
technologies. In order to consummate potential acquisitions, we may issue
additional securities or need additional equity or debt financing and any such
financing may be dilutive to existing investors.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" or SFAS No. 133. In June 2000, the FASB
issued Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Hedging Activities" (SFAS No. 138), which amended SFAS No. 133. SFAS 138
must be adopted concurrently with the adoption of SFAS No. 133. The Company will
be required to adopt these statements for the year ending March 31, 2002. SFAS
No. 133 and SFAS No. 138 establish methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. Because the Company currently holds no
derivative financial instruments and the Company does not currently engage in
hedging activities, the adoption of SFAS No. 133 and SFAS No. 138 is not
expected to have a material impact on the Company's financial condition or
results of operations.
22
ITEM 7A: QUALITATIVE AND QUANTITATIVE MARKET RISK
We develop products in Canada and sell these products in North America, Europe
and Asia Pacific. Generally, our sales are made in local currency, which to date
has been mostly United States dollars. As a result, our financial results could
be affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. We do not currently use derivative
instruments to hedge our foreign exchange risk. Our interest income is sensitive
to changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure.
RISK FACTORS
Investing in our common shares will subject you to risks inherent in our
business. You should carefully consider the following factors as well as other
information contained in this Annual Report on Form 10-K before deciding to
invest in our common shares. If any of the risks described below occurs, our
business, results of operations and financial condition could be adversely
affected. In such cases, the price of our common shares could decline, and you
may lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
FORECAST OUR FUTURE OPERATING RESULTS.
We were incorporated on May 7, 1998, and we first recorded revenues in the
quarter ended June 30, 1999. We are still in the early stages of our development
and have a limited operating history, making it difficult to evaluate our
business and prospects. As a result of our limited operating history, it is
difficult or impossible for us to predict future operating results. For example,
we cannot forecast operating expenses based on our historical results because
our historical results are limited and we, to some extent, forecast expenses
based on future revenue projections. Moreover, due to our limited operating
history, any evaluation of our business and prospects must be made in light of
the risks and uncertainties often encountered by early-stage companies in
internet-related markets. Many of these risks are discussed in the sub-headings
below, and include our ability to execute our product development activities,
implement our sales and marketing initiatives, both domestically and
internationally, and attract more clients. We may not successfully address any
of these risks.
FACTORS RELATING TO OUR BUSINESS MAKE OUR FUTURE OPERATING RESULTS UNCERTAIN,
AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO PERIOD.
Our quarterly revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter, particularly because our
products and services are relatively new and our prospects are uncertain. If our
quarterly revenues or operating results fall below the expectations of
investors, the price of our common shares could decline substantially. Factors
that might cause quarterly fluctuations in our operating results include the
risk factors described in the sub-headings below as well as the following:
- - the timing of new releases of our products;
- - changes in our pricing policies or those of our competitors, including the
extent to which we may need to offer discounts to match competitors' pricing;
- - the mix of sales channels through which our products and services are sold;
- - the mix of our domestic and international sales;
- - costs related to the customization of our products;
- - our ability to expand our operations, and the amount and timing of
expenditures related to this expansion;
- - any costs or expenses related to our move to new corporate offices; and,
- - our operating results may also be affected by the following factors over which
we have little or no control:
- - the evolving and varying demand for interaction-based software products and
services for e-businesses, particularly our products and services;
- - the discretionary nature of our client's purchasing and budgetary cycles;
- - the timing of execution of large contracts that materially affect our
operating results; and
23
- - global economic conditions, as well as those specific to large enterprises
with high e-mail volume.
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, WHICH WOULD CAUSE OUR OPERATING
RESULTS TO VARY FROM PERIOD TO PERIOD.
Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if total revenues for
a particular quarter are below our expectations, we cannot proportionately
reduce operating expenses for that quarter. Therefore, this revenue shortfall
would have a disproportionate effect on our operating results for that quarter.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE BECAUSE OF OUR PLAN TO INCREASE OPERATING EXPENSES.
Since we began operations in May 1998, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, as of
March 31, 2001, we had an accumulated deficit of $172.4 million. For the year
ended March 31, 2001, we had a net loss of $161.0 million, or 530.1% of total
revenues for that period. Our growth in recent periods has been from a limited
base of clients, and we may not be able to sustain our growth rate. We expect to
continue to increase our operating expenses. As a result, we expect to continue
to experience losses and negative cash flow, even if sale of our products and
services continues to grow, and we may not generate sufficient revenues to
achieve profitability in the future.
In addition, as a result of our rapid growth, we expect that our losses may
increase even more because of additional costs and expenses related to an
increase in:
- - the number of our employees;
- - research and development activities; and
- - sales and marketing activities.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF CLIENTS, AND A LOSS OF ANY OF THESE
CLIENTS OR A REDUCTION, DELAY OR CANCELLATION IN ORDERS FROM THESE CLIENTS COULD
HARM OUR BUSINESS.
To date, a significant portion of the total revenues has been derived from sales
to a small number of clients. In the year ended March 31, 2001, no customer
accounted for 10% of our total revenues. We expect that we will continue to be
dependent upon a limited number of clients for a significant portion of our
revenue in future periods. There can be no assurance that our existing clients
or any future clients will continue to use our products. A reduction, delay or
cancellation in orders from our clients, including reductions or delays due to
market, economic or competitive conditions, could have a materially adverse
effect on our business, operating results and financial condition.
DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS COULD HARM OUR BUSINESS.
Our success depends upon the ability of our staff and our clients to implement
our products. This implementation typically involves working with sophisticated
software, computing and communications systems. If we experience implementation
difficulties or do not meet project milestones in a timely manner, we could be
obligated to devote more customer support, engineering and other resources to a
particular project than anticipated. Some clients may also require us to develop
customized features or capabilities. If new or existing clients require more
time to deploy our products than is originally anticipated, or require
significant amounts of our professional services support or customized features,
our revenue recognition could be further delayed and our costs could increase,
causing increased variability in our operating results.
OUR PRODUCTS AND SERVICES MAY NOT BE ACCEPTED BY THE MARKETPLACE.
Of our total revenues of $30.4 million for the year ended March 31, 2001, $25.6
million were derived from licenses of our products and $4.7 million was from
related services. We are not certain that our target clients will widely adopt
and deploy our products and services. Our future financial performance will
depend on the successful development, introduction and client acceptance of new
and enhanced versions of our products. In the future, we may not be successful
in marketing our products and services or any new or enhanced products.
WE EXPECT TO DEPEND ON SALES OF OUR DELANO INTERACTION SERVER, CRM AND ANALYTICS
APPLICATIONS FOR A SUBSTANTIAL MAJORITY OF OUR REVENUES FOR THE FORESEEABLE
FUTURE.
24
In the year ended March 31, 2001, we derived most of our revenues from licenses
of our Delano Interaction Server and Customer Velocity. Although we have added
new product offerings and expect to add new product offerings, we expect to
continue to derive a substantial majority of our revenues from sales of the
Delano Interaction Server and Customer Velocity for the foreseeable future.
Implementation of our strategy depends on our products being able to solve the
communication needs of businesses engaging in commercial transactions over the
internet or having an internet presence. If current or future clients are not
satisfied with our products, our business and operating results could be
seriously harmed.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CLIENTS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
Future versions of hardware and software platforms embodying new technologies
and the emergence of new industry standards could render our products obsolete.
The market for e-business communications software is characterized by:
- - rapid technological change;
- - frequent new product introductions;
- - changes in customer requirements; and
- - evolving industry standards.
Our products are designed to work on, or interoperate with, a variety of
operating systems used by our clients. However, our software may not operate
correctly on evolving versions of operating systems, or the hardware upon which,
or with which, they are intended to run or interoperate, programming languages,
databases and other systems that our clients use. For example, because the
server component of the current versions of our products run only on the Windows
NT operating system from Microsoft, we must develop products and services that
are compatible with UNIX and other operating systems to meet the demands of our
clients. If we cannot successfully develop these products in response to client
demands or improve our existing products to keep pace with technological
changes, our business could suffer.
We must continually improve the performance, features and reliability of our
products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing software and to develop
new services, functionality and technologies that address the increasingly
sophisticated and varied needs of our prospective clients. If we do not properly
identify the feature preferences of prospective clients, or if we fail to
deliver features that meet the requirements of these clients on a timely basis,
our ability to market our products successfully and to increase our revenues
will be impaired.
DELAYS IN INTRODUCING NEW AND ENHANCED PRODUCTS COULD HARM OUR BUSINESS.
The development of proprietary technologies and necessary service enhancements
entail significant technical and business risks and requires substantial
expenditures and lead time. If we experience product delays in the future we may
face:
- - customer dissatisfaction;
- - cancellation of orders and license agreements;
- - negative publicity;
- - loss of revenues;
- - slower market acceptance; and
- - legal action by clients against us.
In the future, our efforts to remedy product delays may not be successful and we
may lose clients as a result. Delays in bringing to market new products or
product enhancements could be exploited by our competitors. If we were to lose
market share as a result of lapses in our product development, our business
would suffer.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE.
The market for our products and services is intensely competitive, evolving and
subject to rapid technological change. We expect the intensity of competition to
increase in the future. Increased competition may result in price reductions,
25
reduced gross margins and loss of market share. The market for e-business
communications software is new and intensely competitive. There are no
substantial barriers to entry in this emerging market segment, and we expect
established or new entities to enter this market segment in the near future.
We currently face competition for our products principally from systems designed
by in-house and third-party development efforts. In addition, some of our
competitors who currently offer licensed software products are now beginning to
offer online offerings, which involve providing software on a rental basis
hosted on the hardware of an application service provider, or ASP. We currently
do not offer online offerings in any material way.
Our competitors include companies providing software that is focused on
operational and analytical CRM, such as Kana/Broadbase, e.Piphany, and Xchange
Applications. We believe competition will increase as our current competitors
increase the sophistication of their offerings and as new participants enter the
market.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than we do. In addition,
many of our competitors have well-established relationships with our current and
potential clients and have extensive knowledge of our industry. We may lose
potential clients to competitors for various reasons, including the ability or
willingness of our competitors to offer lower prices and other incentives that
we cannot match. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. We
also expect that competition may increase as a result of industry
consolidations. We may not be able to compete successfully against current and
future competitors, and competitive pressures may seriously harm our business.
THE DELANO INTERACTION SERVER ENABLES THIRD PARTIES TO DEVELOP APPLICATIONS THAT
COMPETE WITH OUR APPLICATIONS.
Third parties have the ability to develop their own applications on top of the
Delano Interaction Server. The applications of these third parties could compete
with products developed by us or services which we offer now or will offer in
the future. If our target clients do not widely adopt and purchase our products,
or if third parties compete with applications developed by us, our business
would suffer.
FAILURE TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD ADVERSELY
AFFECT OUR BUSINESS.
Competition for these individuals is intense in our industry, particularly in
the Toronto area where we are headquartered, and there are a limited number of
experienced people available with the necessary technical skills. Our ability to
increase revenues in the future depends considerably upon our success in
retaining and in some cases recruiting additional direct sales personnel and the
success of the direct sales force. Our business will be harmed if we fail to
hire or retain qualified sales personnel, or if newly hired salespeople fail to
develop the necessary sales skills or develop these skills more slowly than we
anticipate. We also are substantially dependent upon our ability to develop new
products and enhance existing products, and we may not be able to retain highly
qualified research and development personnel. Similarly, our failure to attract
and retain the highly trained personnel that are integral to our professional
services group, which is responsible for the implementation and customization
of, and technical support for, our products and services, may limit the rate at
which we can develop and install new products or product enhancements, which
would harm our business.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS COULD ADVERSELY AFFECT OUR BUSINESS.
Our future success depends to a significant degree on the skills, experience and
efforts of our executive officers. In particular, we depend upon the continued
services of John Foresi, Chief Executive Officer, David Frankland, President and
Bahman Koohestani, our Executive Vice-President, Products and Chief Technology
Officer and a founder of Delano.
We have not entered into employment agreements with our executive officers which
would require them to work solely for us on a long-term basis. If any of our
executive officers left or was seriously injured and unable to work and we were
unable to find a qualified replacement, our business could be harmed.
FAILURE TO INTEGRATE OUR EXECUTIVE TEAM MAY INTERFERE WITH OPERATIONS.
Our executive team has largely been hired in the past two years. To integrate
into our company, these individuals must spend a significant amount of time
developing interpersonal relationships and learning our business model and
management system, in addition to performing their regular duties. Accordingly,
the integration of new personnel has resulted, and may continue to result, in
some disruption of our ongoing operations.
26
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO DEVELOP
ADDITIONAL DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
We believe that our success in penetrating our target markets depends in part on
our ability to enter into agreements with established third-party distribution
companies, consulting organizations and software vendors relating to the
distribution of our products. We have entered into non-exclusive distribution
agreements with various parties, including Nortel Networks, Deloitte Consulting
and PricewaterhouseCoopers. Since these agreements are non-exclusive and
normally terminable without penalty on short notice, some third parties may
choose to discontinue working with us or may decide to work with our
competitors. We derive revenues from these agreements through the sale of
licenses. We may not be able to derive significant revenues in the future from
these agreements.
WE HAVE COMPLETED TWO ACQUISITIONS, AND THOSE ACQUISITIONS MAY RESULT IN
DISRUPTIONS TO OUR BUSINESS AND MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING
PERSONNEL AND OPERATIONS.
We may not realize the benefits from the acquisitions we have completed. In
September 2000, we acquired Continuity, and in October 2000, we acquired Digital
Archaeology. We may not be able to successfully assimilate the remaining
personnel, operations, acquired technology and products into our business. In
particular, we will need to assimilate and retain key professional services,
engineering and marketing personnel. This is particularly difficult since
Continuity's operations are located in San Francisco and Digital Archaeology is
located in Kansas while we are headquartered in Markham, Canada. Key personnel
from the acquired companies may in the future decide that they do not want to
work for us. In addition, products of these companies will have to be integrated
into our products, and it is uncertain whether we may accomplish this easily or
at all. These difficulties could disrupt our ongoing business, distract
management and employees or increase expenses. Acquisitions are inherently risky
and we may also face unexpected costs, which may adversely affect operating
results in any quarter.
THE ACQUISITIONS OF CONTINUITY AND DIGITAL ARCHAEOLOGY INTO OUR COMPANY COULD
ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS.
If the benefits of the acquisitions of Continuity and DA into our company do not
exceed the costs associated with these acquisitions, including any dilution to
our stockholders resulting from the issuance of shares in connection with the
acquisitions, our financial results, including earnings per share, could be
adversely affected.
IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES, WE MAY FACE RISKS
SIMILAR TO THOSE FACED IN OUR OTHER ACQUISITIONS.
If we are presented with appropriate opportunities, we may make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
acquire another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to our other acquisitions.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which could be
dilutive to our company or our existing stockholders. In addition, our
profitability may suffer because of acquisition-related costs or amortization
costs for acquired goodwill and other intangible assets.
WE MAY SEEK TO GROW BY MAKING ACQUISITIONS AND WE MAY NOT BE ABLE TO
SUCCESSFULLY COMPLETE ANY ACQUISITIONS WE UNDERTAKE OR INTEGRATE ANY ACQUIRED
BUSINESS WITH OUR OWN.
We may consider other investments in complementary companies, products or
technologies. If we undertake such an acquisition or investment, we may not
realize the anticipated benefits. If we buy a company, we may not be able to
successfully assimilate the acquired personnel, operations, technology and
products into our business. In particular, we will need to assimilate and retain
key technical, professional services, sales and marketing personnel. In
addition, acquired products or technology will have to be integrated into our
products and technology, and it is uncertain whether we may accomplish this.
These difficulties could disrupt our ongoing business, distract our management
and employees or increase our expenses. In connection with a merger, or
acquisition for shares, the issuance of these securities may be dilutive to our
existing shareholders or affect profitability. Furthermore, we may have to issue
equity or incur debt to pay for future acquisitions or investments, the issuance
of which could be dilutive to us or our existing shareholders or affect our
profitability. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
acquired intangible assets.
27
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO GROW OUR BUSINESS, WHICH WE MAY NOT
BE ABLE TO DO.
Our future liquidity and capital requirements are difficult to predict because
they depend on numerous factors, including the success of our existing and new
service offerings as well as competing technological and market developments. As
a result, we may not be able to generate sufficient cash from our operations to
meet additional working capital requirements, support additional capital
expenditures or take advantage of acquisition opportunities. Accordingly, we may
need to raise additional capital in the future. Our ability to obtain additional
financing will be subject to a number of factors, including market conditions
and our operating performance. These factors may make the timing, amount, terms
and conditions of additional financing unattractive for us. If we raise
additional funds by selling equity securities, the relative equity ownership of
our existing investors could be diluted or the new investors could obtain terms
more favorable than previous investors. If we raise additional funds through
debt financing, we could incur significant borrowing costs. If we are unable to
raise additional funds when needed, our ability to operate and grow our business
could be impeded.
TECHNICAL PROBLEMS WITH INTERNAL OR OUTSOURCED COMPUTER AND COMMUNICATIONS
SYSTEMS COULD RESULT IN REDUCED REVENUES AND HARM TO OUR REPUTATION.
The success of our online support services depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses and similar adverse events. Our
operations depend on our ability to protect our systems against damage or
interruption. We cannot guarantee that our internet access will be
uninterrupted, error-free or secure. We have no formal disaster recovery plan in
the event of damage or interruption, and our insurance policies may not
adequately compensate us for losses that we may incur. Any system failure that
causes an interruption in our service or a decrease in responsiveness could harm
our relationships with our clients and result in reduced revenues.
FAILURE TO SELL ONLINE SERVICES MAY IMPAIR OUR FUTURE REVENUE GROWTH.
We currently focus primarily on software sales rather than online offerings. Our
competitors may move to a heavier emphasis on online offerings, and our failure
to focus on it at an early stage may make it difficult to compete if online
offerings become a dominant means of generating revenues within the industry. In
addition, although our sales force sells both our software products and online
offerings, the skills necessary to market and sell online offerings are
different than those relating to our software products. As a result, our sales
and marketing groups may not be able to maintain or increase the level of sales
of our online offerings.
A DECLINE IN OUR LICENSE REVENUES COULD CAUSE A DECLINE IN OUR SERVICE REVENUES.
Our products are designed to enable customers to rapidly develop and deploy
e-business communication applications. Where desirable, our professional
services group can assist our clients' internal IT personnel to implement our
products. Because the revenues associated with these services are largely
correlated with the licensing of our products, a decline in license revenues
could also cause a decline in our service revenues.
CONFLICTS BETWEEN OUR PRODUCTS AND OTHER VENDORS' PRODUCTS COULD HARM OUR
BUSINESS AND REPUTATION.
Our clients generally use our products together with products from other
companies. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. Even when these problems are not caused
by our products, they may cause us to incur significant warranty and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
We rely on contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our proprietary rights. None of our
trademarks is registered, nor do we have any trademark applications pending. We
currently have no patent applications pending relating to our software. Despite
any precautions that we take to protect our intellectual property:
- - laws and contractual restrictions may be insufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies;
28
- - current laws that prohibit software copying provide only limited protection
from software "pirates", and effective trademark, copyright and trade secret
protection may be unavailable or limited in foreign countries;
- - other companies may claim common law trademark rights based upon state,
provincial or foreign laws that precede any registrations we may receive for our
trademarks; and
- - policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the extent of
this unauthorized use.
It is possible that our intellectual property rights could be successfully
challenged by one or more third parties, which could result in our inability to
exploit, or our loss of the right to prevent others from exploiting, certain
intellectual property. We are aware that certain of our competitors have filed
patent applications.
Also, the laws of other countries in which we market our products may offer
little or no effective protection of our technology. Reverse engineering,
unauthorized copying or other misappropriation of our technology could enable
third parties to benefit from our technology without paying us for it, which
would significantly harm our business.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR PRODUCTS.
We use and in the future will use certain software technologies and other
information that we license or otherwise acquire from third parties, usually on
a non-exclusive basis, including software that is integrated with our internally
developed software and used in our products to perform what may be important
functions. If we are not able to continue to use the third-party software and
technologies, or if they fail to adequately update and support their products,
we could suffer delays or reductions in shipments of our products until
alternative software and technologies could be identified, which could adversely
affect our business and financial condition.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
Substantial litigation over intellectual property rights exists in our industry.
We expect that software in our industry may be increasingly subject to
third-party infringement claims as the numbers of competitors grow and the
functionality of products in different industry segments overlap. Third parties
may currently have, or may eventually be issued patents that our products or
technology infringe.
Any of these third parties might make a claim of infringement against us. Many
of our software license agreements require us to indemnify our clients and
suppliers from any claim or finding of intellectual property infringement. Any
litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement might
cause negative publicity, have an impact on prospective clients, cause product
shipment delays, require us to develop non-infringing technology or require us
to enter into royalty or license agreements, which might not be available on
acceptable terms, or at all. If a successful claim of infringement were made
against us and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
business could be significantly harmed.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS.
Our products are integrated into our client's networks. The sale and support of
our products results in the risk of product liability or warranty claims based
on damage to these networks. In addition, the failure of our products to perform
to client expectations could give rise to warranty claims. Although we carry
general liability insurance, our insurance would likely not cover potential
claims of this type or may not be adequate to protect us from all liability that
may be imposed.
OUR PRODUCTS COULD CONTAIN UNDETECTED DEFECTS OR ERRORS.
We face the possibility of higher costs as a result of the complexity of our
products and the potential for undetected errors. Due to the mission-critical
nature of our products and services, undetected errors are of particular
concern. We have only a limited number of clients that test new features and the
functionality of our software before we make these features and functionalities
generally available. If our software contains undetected errors or we fail to
meet our client's expectations in a timely manner, we could experience:
- - loss of, or delay in revenues expected from the new product and an immediate
and significant loss of market share;
- - loss of existing clients that upgrade to the new product and of new clients;
29
- - failure to achieve market acceptance;
- - diversion of development resources;
- - injury to our reputation;
- - increased service and warranty costs;
- - legal actions by clients against us; and
- - increased insurance costs.
A product liability claim could harm our business by increasing our costs,
damaging our reputation and distracting our management.
OUR INTERNATIONAL EXPANSION EFFORTS MAY NOT BE SUCCESSFUL.
Our operations outside the United States and Canada are located in the United
Kingdom and Asia and, to date, have been limited. We may expand our existing
international operations and establish additional facilities in other parts of
Asia via our joint venture, specifically Australia, Singapore, Hong Kong,
Taiwan, Malaysia, Korea, Indonesia, China, New Zealand and Thailand. We intend
to increase our penetration of these markets by intensifying global activities,
and allying ourselves with selected international third-party distribution
companies, consulting organizations and software vendors.
The expansion of our existing international operations and entry into additional
international markets are key parts of our growth strategy and may require
significant management attention and financial resources. In addition, to expand
our international sales operations, we will need to, among other things:
- - expand our international sales channel management and support organizations;
- - develop relationships with international service providers and additional
distributors and systems integrators; and
- - customize our products for local markets.
Our investments in facilities in other countries may not produce desired levels
of revenues. Even if we are able to expand our international operations
successfully, we may not be able to maintain or increase international market
demand for our products.
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES
ASSOCIATED WITH OPERATING INTERNATIONALLY.
Expanding our operations outside the United States and Canada subjects us to
numerous inherent potential risks associated with international operations.
These risks include greater difficulty in accounts receivable collection, the
burden of complying with multiple and conflicting regulatory requirements,
foreign exchange controls, longer payment cycles, import and export restrictions
and tariffs, potentially adverse tax consequences, and political and economic
instability, any of which could impair our sales and results of operations. In
addition, our ability to expand our business in certain countries will require
modification of our products, particularly domestic language support.
Our international operations will increase our exposure to international laws
and regulations. If we cannot comply with foreign laws and regulations, which
are often complex and subject to variation and unexpected changes, we could
incur unexpected costs and potential litigation. For example, the governments of
foreign countries might attempt to regulate our products and services or levy
sales or other taxes relating to our activities. In addition, foreign countries
may impose tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers, any of which could make it more difficult to
conduct our business. The European Union, in which we have a sales office,
recently enacted its own privacy regulations that may result in limits on the
collection and use of certain user information, which, if applied to the sale of
our products and services, could negatively impact our results of operations.
FLUCTUATIONS IN EXCHANGE RATES MAY AFFECT OUR OPERATING RESULTS.
A substantial portion of our revenues are now, and are expected to continue to
be, realized in currencies other than Canadian dollars. Our operating expenses
are primarily paid in Canadian dollars. Fluctuations in the exchange rate
between the Canadian dollar and these other currencies may have a material
effect on our results of operations. In particular, we may be adversely affected
by a significant strengthening of the Canadian dollar against the U.S. dollar.
We do not currently engage in currency hedging activities. We have not yet, but
may in the future, experience significant foreign exchange rate losses,
especially to the extent that we do not engage in hedging.
30
IF WE ARE OR BECOME A PASSIVE FOREIGN INVESTMENT COMPANY WE MAY NOT BE ABLE TO
SATISFY RECORD-KEEPING REQUIREMENTS, WHICH COULD HAVE ADVERSE U.S. TAX
CONSEQUENCES TO YOU.
The rules governing passive foreign investment companies can have significant
effects on U.S. investors. We could be classified as a passive foreign
investment company if, for any taxable year, either:
- - 75% or more of our gross income is passive income, which includes interest,
dividends and some types of rents and royalties; or
- - the average percentage, by fair market value, or, in some cases, by adjusted
tax basis, of our assets that produce or are held for the production of passive
income is 50% or more.
Distributions which constitute "excess distributions," as defined in
Section 1291 of the Internal Revenue Code, from a passive foreign investment
company and dispositions of shares of a passive foreign investment company are
subject to the highest rate of tax on ordinary income in effect and to an
interest charge based on the value of the tax deferred during the period during
which the shares are owned. However, these rules generally will not apply if the
U.S. investor elects to treat the passive foreign investment company as a
qualified electing fund under Section 1295 of the Internal Revenue Code.
If we are or become a passive foreign investment company we may not be able to
satisfy record-keeping requirements that would permit you to make a qualified
electing fund election.
RISKS RELATED TO OUR INDUSTRY
OUR FUTURE REVENUES AND PROFITS DEPEND ON THE CONTINUED GROWTH IN USE AND
EFFICIENT OPERATION OF THE INTERNET AND E-MAIL.
We sell our products and services primarily to organizations that receive large
volumes of e-mail and communications over the web. Consequently, our future
revenues and profits, if any, substantially depend upon the continued acceptance
and use of the web and e-mail, which are evolving as communications media. Rapid
growth in the use of e-mail is a recent phenomenon and may not continue. As a
result, a broad base of enterprises that use e-mail as a primary means of
communication may not develop or be maintained. Moreover, companies that have
already invested significant resources in other methods of communications with
customers, such as call centers, may be reluctant to adopt a new strategy that
may limit or compete with their existing investments. If businesses do not
continue to accept the web and e-mail as communications media, our business
would suffer.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
DISCOURAGE COMMUNICATION BY E-MAIL OR OTHER INTERNET-BASED COMMUNICATIONS
FACILITATED BY OUR PRODUCTS.
Due to the increasing popularity and use of the internet, it is possible that
Canadian and U.S. federal, Canadian provincial, U.S. state, and other foreign
regulators could adopt laws and regulations that impose additional burdens on
those companies that conduct business online. These laws and regulations could
discourage communication by e-mail or other internet-based communications
facilitated by our products, which could reduce demand for our products and
services.
The growth and development of the market for online services may prompt calls
for more stringent consumer protection laws or laws that may inhibit the use of
internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may slow the
growth of the internet. A decline in the growth of the internet, particularly as
it relates to online communication, could decrease demand for our products and
services and increase our cost of doing business, or otherwise harm our
business.
BECAUSE WE ARE A CANADIAN COMPANY, IT MAY BE DIFFICULT FOR YOU TO ENFORCE
AGAINST US LIABILITIES BASED SOLELY UPON THE FEDERAL SECURITIES LAWS OF THE
UNITED STATES.
We have been incorporated under the laws of the Province of Ontario, and our
executive offices are located in Ontario. Many of our directors, controlling
persons and officers, and representatives of the experts named in this Annual
Report on Form 10-K, are residents of Canada and a substantial portion of their
assets and a majority of our assets are located outside the United States.
Consequently, it may be difficult for you to enforce against us or any of our
directors, controlling persons, officers or experts who are not resident in the
United States, liabilities based solely upon the federal securities laws of the
United States.
31
OUR BOARD OF DIRECTORS MAY ISSUE, WITHOUT SHAREHOLDER APPROVAL, PREFERENCE
SHARES THAT HAVE RIGHTS AND PREFERENCES SUPERIOR TO THOSE OF COMMON SHARES AND
THAT MAY DELAY OR PREVENT A CHANGE OF CONTROL.
Our articles of incorporation allow the issuance an unlimited number of
preference shares in one or more series. After the offering, there will be no
preference shares outstanding. However, our board of directors may set the
rights and preferences of any class of preference shares in its sole discretion
without the approval of the holders of common shares. The rights and preferences
of these preference shares may be superior to those of the common shares.
Accordingly, the issuance of preference shares may adversely affect the rights
of holders of common shares. The issuance of preference shares also could have
the effect of delaying or preventing a change of control of our company.
WE DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON SHARES.
We have not paid any cash dividends on our shares and we currently do not have
any plans to pay dividends on our shares. In addition, our lease line of credit
specifically prohibits the payment of dividends on our shares.
32
ITEM 8: DELANO TECHNOLOGY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<Table>
<Caption>
PAGE
Independent Auditors Report.............................................. 34
Consolidated Balance Sheets.............................................. 35
Consolidated Statements of Operations.................................... 36
Consolidated Statements of Shareholders' Equity (Deficiency)............. 37
Consolidated Statements of Cash Flows.................................... 38
Notes to Consolidated Financial Statements............................... 39
Schedule II - Valuation and Qualifying Accounts.......................... 52
</Table>
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Delano Technology Corporation.
We have audited the consolidated financial statements of Delano Technology
Corporation as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards 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 mis-statement. 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 Delano
Technology Corporation as of March 31, 2000 and March 31, 2001, and the results
of its operations and its cash flows for the period from May 7, 1998 (date of
inception) to March 31, 1999 and the years ended March 31, 2000 and March 31,
2001, in conformity with generally accepted accounting principles in the United
States. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
On April 30, 2001, we reported separately to the shareholders of Delano
Technology Corporation on the consolidated financial statements for the same
period, prepared in accordance with Canadian generally accepted accounting
principles.
Chartered Accountants
/s/ KPMG LLP
Toronto, Canada
April 30, 2001
34
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
MARCH 31, MARCH 31,
2000 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 82,370 $ 34,209
Short-term investments.......................................................... 29,154 1,155
Accounts receivable trade, net of allowance for doubtful accounts of $200
at March 31, 2000, and $1,859 at March 31, 2001............................... 3,910 8,099
Prepaid expenses and other...................................................... 2,100 3,674
------------- -------------
Total current assets.......................................................... 117,534 47,137
Property and equipment............................................................. 2,373 11,300
Investments, at cost .............................................................. -- 120
Goodwill and identifiable intangibles, net ........................................ -- 5,217
Other assets ...................................................................... -- 865
------------- -------------
Total assets....................................................................... $ 119,907 $ 64,639
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................................ $ 5,954 $ 12,492
Deferred revenue................................................................ 961 1,975
Current portion of obligations under capital leases............................. 209 182
------------- -------------
Total current liabilities..................................................... 7,124 14,649
Long-term liabilities:
Obligations under capital leases................................................ 222 49
------------- -------------
Total liabilities.................................................................. 7,346 14,698
Shareholders' equity:
Capital stock:
Preference shares:
Authorized: Unlimited
Issued and outstanding: Nil at March 31, 2000 and 2001
Common shares:
Authorized: Unlimited
Issued and outstanding: 29,929,833 shares at March 31, 2000 and 37,240,858
shares at March 31, 2001.................................................. 133,006 230,647
Warrant......................................................................... 126 496
Deferred stock-based compensation............................................... (8,851) (8,464)
Accumulated other comprehensive losses.......................................... (340) (340)
Deficit......................................................................... (11,380) (172,398)
------------- -------------
Total shareholders' equity.................................................... 112,561 49,941
------------- -------------
Total liabilities and shareholders' equity......................................... $ 119,907 $ 64,639
============= =============
</Table>
See accompanying notes to consolidated financial statements.
35
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998
(INCEPTION) YEAR ENDED YEAR ENDED
TO MARCH MARCH 31, MARCH 31,
31, 1999 2000 2001
----------- ---------- ----------
Revenues:
Licenses.................................................................... -- $ 8,799 $ 25,636
Services.................................................................... -- 690 4,739
----------- ---------- ----------
Total revenues............................................................ -- 9,489 30,375
----------- ---------- ----------
Cost of revenues:
Licenses.................................................................... -- 59 332
Services (excluding stock-based compensation of $0, $206 and $73
respectively)............................................................. -- 1,239 5,038
----------- ---------- ----------
Total cost of revenues.................................................... -- 1,298 5,370
----------- ---------- ----------
Gross profit................................................................... -- 8,191 25,005
----------- ---------- ----------
Operating expenses:
Sales and marketing (excluding stock-based compensation of $29, $1,186
and $2,645 respectively).................................................. $ 554 11,732 49,275
Research and development (excluding stock-based compensation of $1, $118
and $373 respectively).................................................... 797 3,649 17,385
General and administrative (excluding stock-based compensation of $141,
$161 and $325 respectively)............................................... 180 1,515 4,671
Amortization of deferred stock-based compensation........................... 171 1,671 3,416
Amortization of goodwill and identifiable intangibles ...................... -- -- 11,025
In-process research and development ........................................ -- -- 429
Impairment of goodwill and identifiable intangibles......................... -- -- 96,980
----------- ---------- ----------
Total operating expenses.................................................. 1,702 18,567 183,181
----------- ---------- ----------
Loss from operations........................................................... (1,702) (10,376) (158,176)
Interest income, net........................................................ 13 1,099 4,393
Equity in loss of associated company........................................ -- -- (278)
Asset impairment ........................................................... -- -- (694)
Restructuring charges....................................................... -- -- (6,263)
----------- ---------- ----------
Loss before provision for income taxes......................................... (1,689) (9,277) (161,018)
Provision for income taxes..................................................... -- -- --
----------- ---------- ----------
Loss for the period............................................................ (1,689) (9,277) (161,018)
Less: accretion of dividends on redeemable convertible
special shares.............................................................. (101) (313) --
----------- ---------- ----------
Loss applicable to common shares............................................ $ (1,790) $ (9,590) $(161,018)
=========== ========== ==========
Basic and diluted loss per common share........................................ $ (2.40) $ (1.50) $ (4.84)
=========== ========== ==========
Shares used in computing basic and diluted loss per
common share (in thousands).................................................... 746 6,381 33,283
=========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
36
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
ACCUMULATED TOTAL
COMMON SHARES DEFERRED OTHER SHAREHOLDERS'
-------------------- STOCK-BASED COMPREHENSIVE EQUITY
NUMBER AMOUNT WARRANT COMPENSATION LOSSES DEFICIT (DEFICIENCY)
---------- -------- ------- ------------ ------------- ---------- ------------
Balances, May 7, 1998......... -- -- -- -- -- -- --
Issuance of common shares..... 6,000,000 $ 2 -- -- -- -- $ 2
Deferred stock-based
compensation................ -- 431 $ 126 $ (557) -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 171 -- -- 171
Accretion of dividends on
redeemable convertible
special shares.............. -- -- -- -- -- $ (101) (101)
Other comprehensive losses.... -- -- -- -- $ (5) -- (5)
Loss for the period........... -- -- -- -- -- (1,689) (1,689)
---------- -------- ------- ------------ ------------- ---------- ------------
Balances, March 31, 1999...... 6,000,000 433 126 (386) (5) (1,790) (1,622)
Issuance of common shares..... 6,250,000 103,855 -- -- -- -- 103,855
Issuance of common shares on
conversion of Class A special
shares...................... 6,000,000 1,158 -- -- -- -- 1,158
Issuance of common shares on
conversion of Class B special
shares...................... 5,684,198 2,693 -- -- -- -- 2,693
Issuance of common shares on
conversion of special
warrants ................... 6,490,385 14,703 -- -- -- -- 14,703
Deferred stock-based
compensation................ -- 10,136 -- (10,136) -- -- --
Repurchase of common shares... (750,000) -- -- -- -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 1,671 -- -- 1,671
Accretion of dividends on
redeemable convertible
special shares.............. -- -- -- -- -- (313) (313)
Exercise of stock options..... 255,250 28 -- -- -- -- 28
Other comprehensive losses.... -- -- -- -- (335) -- (335)
Loss for the period........... -- -- -- -- -- (9,277) (9,277)
---------- -------- ------- ------------ ------------- ---------- ------------
Balances, March 31, 2000...... 29,929,833 133,006 126 (8,851) (340) (11,380) 112,561
Issuance of common shares..... 110,189 261 -- (261) -- -- --
Issuance of common shares on
Employee Share Purchase
Program..................... 461,823 2,128 -- -- -- -- 2,128
Issuance of common shares and
warrants on Continuity
Solutions Inc. acquisition.. 1,412,959 16,439 380 -- -- -- 16,819
Issuance of common shares on
Digital Archaeology
Corporation acquisition..... 4,630,462 75,616 -- -- -- -- 75,616
Deferred stock-based
compensation................ -- 2,768 -- (2,768) -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 3,416 -- -- 3,416
Exercise of stock options..... 694,592 412 -- -- -- -- 412
Exercise of warrants.......... 1,000 17 (10) -- -- -- 7
Loss for the period........... -- -- -- -- -- (161,018) (161,018)
---------- -------- ------- ------------ ------------- ---------- ------------
Balances, March 31, 2001...... 37,240,858 $230,647 $ 496 $ (8,464) $ (340) $ (172,398) $ 49,941
========== ======== ======= ============ ============= ========== ============
</Table>
See accompanying notes to consolidated financial statements.
37
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998
(INCEPTION) YEAR ENDED YEAR ENDED
TO MARCH MARCH 31, MARCH 31,
31, 1999 2000 2001
----------- ---------- ----------
Cash provided by (used in):
Operating activities:
Net loss.................................................................... $ (1,689) $ (9,277) $ (161,018)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................................ 33 299 13,990
Equity in loss of associated company...................................... -- -- 278
Amortization of deferred stock-based compensation......................... 171 1,671 3,416
In-process research and development....................................... -- -- 429
Impairment of goodwill and identifiable intangibles ...................... -- -- 96,980
Restructuring charges and asset impairment................................ -- -- 3,602
Changes in non-cash operating working capital, net of effects from purchase
of Continuity and Digital Archaeology:
Accounts receivable trade................................................. (200) (3,852) (4,042)
Prepaid expenses and other................................................ (65) (1,797) (1,944)
Accounts payable and accrued liabilities.................................. 516 5,335 1,717
Deferred revenue.......................................................... 99 844 874
----------- ---------- ----------
Net cash used in operating activities....................................... (1,135) (6,777) (45,718)
Financing activities:
Issuance of redeemable convertible special shares........................... 3,375 -- --
Issuance of common shares and warrants...................................... 2 103,398 2,547
Issuance of special warrants................................................ -- 14,436 --
Payments on notes payable................................................... -- -- (1,995)
Proceeds from bank loan..................................................... -- 156 --
Repayment of bank loan...................................................... -- (156) --
Repayment of obligations under capital leases............................... (2) (126) (298)
----------- ---------- ----------
Net cash provided by financing activities................................... 3,375 117,708 254
Investing activities:
Sale (purchase) of short-term investments .................................. -- (29,154) 27,999
Additions to property and equipment......................................... (251) (1,859) (12,247)
Purchase of long-term investments........................................... -- -- (398)
Cash used in acquisition, net of cash acquired of $2,295 ................... -- -- (18,233)
----------- ---------- ----------
Net cash used in investing activities....................................... (251) (31,013) (2,879)
Effect of currency translation of cash balances................................ -- 463 182
----------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................... 1,989 80,381 (48,161)
Cash and cash equivalents, beginning of period................................. -- 1,989 82,370
----------- ---------- ----------
Cash and cash equivalents, end of period....................................... $ 1,989 $ 82,370 $ 34,209
=========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
38
DELANO TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY
Delano Technology Corporation (the "Company") was incorporated on May 7, 1998
and commenced commercial operations during the quarter ended June 30, 1999. The
Company develops and markets Customer Relationship Management ("CRM") software
that incorporates advanced analytics with interactive capabilities on a flexible
and scalable technology platform.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are stated in U.S. dollars, except where otherwise
noted. They have been prepared in accordance with accounting principles
generally accepted in the United States.
These consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and a 50% joint venture. An investment in a 19.9%
owned affiliate is accounted for by the equity method of accounting, whereby the
investment is carried at cost of acquisition, plus the Company's equity in
undistributed earnings or losses since acquisition.
All material intercompany transactions and balances have been eliminated.
a. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
b. Cash and Cash Equivalents
All highly liquid investments, with an original maturity of three months or less
at the date of acquisition, are classified as cash equivalents.
c. Short-term investments
The Company's short-term investments include highly liquid instruments with an
original maturity of 90 days or more and are carried at cost, which approximates
their fair value.
d. Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization, and are amortized over their estimated useful lives. Expenditures
for maintenance and repairs have been charged to the statement of operations as
incurred. Depreciation and amortization are computed using the straight-line
method as follows:
<Table>
Furniture and office equipment................. 33%
Computer hardware.............................. 33%
Computer software.............................. 50%
</Table>
The Company regularly reviews the carrying values of its property and equipment
by comparing the carrying amount of the asset to the expected future cash flows
to be generated by the asset. If the carrying value exceeds the amount
recoverable a write down is charged to the statement of operations.
e. Revenue Recognition
The Company recognizes revenue in accordance with the provisions of the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position
("SOP") No. 97-2, "Software Revenue Recognition" ("SOP No. 97-2") and
39
related provisions as amended by SOP 98-9. The Company's revenues are derived
from product elements, comprised primarily of license fees and service elements,
which include post-contract customer support ("PCS"), installation, training,
consulting and other services. Fees for services are generally billed separately
from licenses of the Company's products. In cases where the Company sells a
multi-element arrangement, the fees are allocated to the elements based on
Company-specific objective evidence of each element's fair value.
Revenue from product elements, consisting primarily of license fees, is
recognized pursuant to a contract or purchase order, when each element is
delivered to the customer and collection of the related receivable is deemed
probable by management. Reserves for product returns and sales allowances are
estimated and provided for at the time of sale. Such reserves are based upon
management's evaluation of historical experience and current industry trends.
Revenue from service elements includes PCS which is recognized ratably over the
term of the agreement, which is typically twelve months. Revenues from
installation, training, consulting and other services are recognized when the
services are performed. Losses on professional services contracts, if any, are
recognized at the time such losses are identified.
Product and service elements that have been prepaid but do not yet qualify for
recognition as revenue under the Company's revenue recognition policy are
reflected as deferred revenue on the Company's balance sheet.
f. Currency Translation
Effective April 1, 2000, the U.S. dollar became the functional currency of the
Company and of its subsidiaries as all of their revenues and a portion of their
expenditures are denominated in U.S. dollars. This change resulted from the
increased significance of U.S. dollar denominated revenue and expenditures in
relation to Canadian dollar denominated transactions. In addition, the Company's
financing is entirely denominated in U.S. dollars. Exchange gains and losses
resulting from transactions denominated in currencies other than U.S. dollars
are included in the results of operations for the period.
Prior to April 1, 2000, the functional currency of the Company and of its
subsidiaries was the Canadian dollar. Accordingly, monetary assets and
liabilities of the Company and of its subsidiaries that were denominated in
foreign currencies were translated into Canadian dollars at the exchange rate
prevailing at the balance sheet date. Transactions included in operations were
translated at the average rate for the period. Exchange gains and losses
resulting from the translation of these amounts were reflected in the
consolidated statement of operations in the period in which they occurred. As
the Company's reporting currency was the U.S. dollar, the Company translated
consolidated assets and liabilities denominated in Canadian dollars into U.S.
dollars at the exchange rate prevailing at the balance sheet date, and the
consolidated results of operations at the average rate for the period.
Cumulative net translation adjustments were included as a separate component of
shareholders' equity.
g. Research and Development Expenses
Costs related to research, design and development of products are charged to
research and development expense as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. To date, completing a working model of the Company's products and
general release has substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
h. Investment Tax Credits
The Company is entitled to Canadian federal and provincial investment tax
credits that are earned as a percentage of eligible current and capital research
and development expenditures incurred in each taxation year. Certain investment
tax credits are fully refundable to the Company prior to going public in
February 2000. All other investment tax credits are available to be applied
against future income tax liabilities, subject to a 10-year carry forward
period. Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related asset
cost for items of a long-term nature, provided that the Company has reasonable
assurance that the tax credits will be realized.
i. Income Taxes
Under the asset and liability method of Statement of Accounting Standards No.
109, "Accounting for Income Taxes"
40
("SFAS 109"), deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the consolidated statement
of operations in the period that includes the enactment date.
j. Stock-based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees" and related
interpretations, in accounting for its employee stock options because the
alternative fair value accounting provided for under Financial Accounting
Standards Board, Statement No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, deferred stock-based
compensation is recorded at the option grant date in an amount equal to the
difference between the fair market value of a common share and the exercise
price of the option. Deferred stock-based compensation for options which are
contingently issuable based upon the achievement of performance criteria is
recorded based upon the current fair market value of the shares at the end of
each period. Deferred stock-based compensation resulting from employee option
grants is amortized over the vesting period of the individual options, generally
three or four years, in accordance with Financial Accounting Standards Board
Interpretation No. 28.
k. Loss Per Common Share
Loss per common share has been calculated on the basis of earnings applicable to
common shares divided by the weighted average number of common shares
outstanding during each period. The calculation of weighted average number of
shares outstanding during each period excludes common shares held in escrow.
Diluted loss per common share has been calculated assuming that the common
shares held in escrow pursuant to escrow arrangements with certain
employee/shareholders prior to the date of the completion of the Company's IPO,
redeemable convertible special shares, special warrants, warrant and stock
options outstanding at the end of the period had been issued, converted or
exercised at the later of the beginning of the period or their date of issuance,
where such conversion or exercise would not be anti-dilutive.
l. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
accounts receivable trade. Cash equivalents and short-term investments consist
of deposits with, or guaranteed by, major commercial banks. With respect to
accounts receivable trade, the Company performs periodic credit evaluations of
the financial condition of its customers and typically does not require
collateral from them. Management assesses the need for allowances for potential
credit losses by considering the credit risk of specific customers, historical
trends and other information.
m. Fair Values of Financial Assets and Financial Liabilities
The carrying values of cash and cash equivalents, short-term investments,
accounts receivable trade, accounts payable and accrued liabilities approximate
their fair values due to the relatively short periods to maturity of the
instruments. In addition, the carrying values of obligations under capital
leases and loans receivable approximate their fair values. The following methods
and assumptions were used to estimate the fair value of the following financial
instruments:
(i) Obligations under capital leases -- at the present value of the contractual
future payments of principal and interest, discounted at the current market
rates of interest available to the Company for the same or similar debt
instrument.
(ii) Loans receivable -- discounted cash flows at the current market rates of
interest available to the Company for the same or similar asset.
n. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and presentation of comprehensive income. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
shareholder transactions.
41
Comprehensive loss for the year ended March 31, 2000 and March 31, 2001, was not
materially different from net loss for the periods.
o. Goodwill and identifiable intangibles
Goodwill arising from acquisitions (Note 3) is recorded as the excess of the
purchase price over the fair value of assets acquired and amortized over its
estimated useful life of five years. Purchased identifiable intangible assets
are recorded at the appraised value of technology, workforce and customer lists
acquired and amortized using a straight-line method over estimated useful lives
of three years. Accumulated amortization of goodwill and identifiable
intangibles was $11.0 million at March 31, 2001. If events or changes in
circumstances indicate that these long-lived assets will not be recoverable, as
determined based on the undiscounted cash flows of the acquired businesses over
the remaining amortization period, the carrying value is reduced to net
realizable value. For the year ended March 31, 2001, goodwill and identifiable
intangibles was reduced by approximately $97.0 million. See also Note 12,
Special Charges.
p. Other assets
Other assets include patent & trademark costs, shareholder loans and other
long-term loans receivable.
q. Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" or SFAS No. 133. In June 2000, the FASB
issued Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Hedging Activities" (SFAS No. 138), which amended SFAS No. 133. SFAS 138
must be adopted concurrently with the adoption of SFAS No. 133. The Company will
be required to adopt these statements for the year ending March 31, 2002. SFAS
No. 133 and SFAS No. 138 establish methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. Because the Company currently holds no
derivative financial instruments and the Company does not currently engage in
hedging activities, the adoption of SFAS No. 133 and SFAS No. 138 is not
expected to have a material impact on the Company's financial condition or
results of operations.
3. ACQUISITIONS
On October 16, 2000, the Company acquired Digital Archaeology Corporation, a
Kansas corporation ("DA"), pursuant to an Agreement and Plan of Merger, dated as
of October 13, 2000. At the effective time of the acquisition, the Company
issued approximately 4.6 million of the Company's common shares and paid
approximately $17.4 million in cash, in exchange for all of the outstanding
shares of capital stock of DA, and each outstanding option or right to purchase
DA common stock was assumed by the Company and became a right to purchase 0.53
of the Company's common shares.
In connection with the acquisition, 694,569 of the Company's common shares
issued to the former DA shareholders are being held in escrow until October 2001
to cover any reimbursable claims under the Merger Agreement and related
agreements.
The Company has accounted for the acquisition using the purchase method of
accounting. As a result, Delano recorded on its balance sheet the fair market
value of DA's assets and liabilities, acquisition-related costs of $1.6 million
and goodwill and identifiable intangibles of approximately $94.2 million.
Goodwill and intangible assets acquired in connection with the acquisition will
be amortized over three years for identifiable intangibles and five years for
goodwill, resulting in an approximate $19.5 million charge per year. The
allocation of the purchase price to assets acquired and liabilities assumed is
presented in the table that follows (in thousands).
On September 26, 2000, the Company finalized the acquisition of Continuity
Solutions, Inc. ("Continuity"). In connection with the acquisition, each share
of Continuity common stock outstanding immediately prior to the consummation of
the acquisition was converted into 0.10 shares of Delano common stock (the
"Exchange Ratio") and Delano assumed Continuity's outstanding stock options and
warrants based on the Exchange Ratio, issuing approximately 1.4 million shares
of Delano common stock and assuming options and warrants to acquire
approximately 150,000 of Delano common stock.
42
In connection with the acquisition, 282,592 of the Company's common shares
issued to the former Continuity shareholders are being held in escrow to cover
any reimbursable claims under the Merger Agreement and related agreements.
The Company has accounted for the acquisition using the purchase method of
accounting. As a result, Delano recorded on its balance sheet the fair market
value of Continuity's assets and liabilities, acquisition-related costs of $1.5
million and goodwill and identifiable intangibles of approximately $19.4
million. Goodwill and intangible assets acquired in connection with the
acquisition will be amortized over a three-year period, resulting in an
approximate $6.3 million charge per year. The allocation of the purchase price
to assets acquired and liabilities assumed is presented in the table that
follows (in thousands).
<Table>
<Caption>
DIGITAL
ARCHAEOLOGY CONTINUITY
----------- ----------
Net tangible assets acquired .............. $ 349 $ 135
Identifiable intangibles acquired:
In-process research and development ....... 69 360
Existing technology ....................... 2,920 2,580
In-place workforce ........................ 1,933 280
Goodwill .................................. 89,302 16,207
Liabilities assumed........................ -- (450)
Notes payable paid ........................ -- (745)
--------- ----------
Net assets acquired .................... $ 94,573 $ 18,367
========= ==========
</Table>
The purchase price for the DA acquisition was approximately $94.6 million,
measured as the average fair market value of Delano's outstanding common stock
from October 9 to 23, 2000, five trading days before and after the Merger
Agreement was announced plus the Black-Scholes calculated value of the vested
options of DA assumed by Delano in the acquisition, and other costs directly
related to the acquisition presented in the table that follows (in thousands).
The purchase price for the Continuity acquisition was approximately $18.4
million, measured as the average fair market value of Delano's outstanding
common stock from August 30 to September 14, 2000, five trading days before and
after the Merger Agreement was announced plus the Black-Scholes calculated value
of the vested options and warrants of Continuity assumed by Delano in the
acquisition, and other costs directly related to the acquisition presented in
the table that follows (in thousands):
<Table>
<Caption>
DIGITAL
ARCHAEOLOGY CONTINUITY
----------- ----------
Fair market value of Delano's common stock.. $ 62,276 $ 15,395
Fair market value of options assumed ....... 13,340 679
Cash paid................................... 17,364 --
Debt assumed................................ -- 745
Acquisition-related costs .................. 1,593 1,548
---------- ----------
Total ...................................... $ 94,573 $ 18,367
========== ==========
</Table>
The following unaudited pro forma net revenues, net loss and loss per share data
for the year ended March 31, 2001 and 2000 (year ended December 31, 2000 and
1999 for DA and Continuity) are based on the respective historical financial
statements of the Company, DA and Continuity. The pro forma data reflects the
consolidated results of operations as if the acquisition with DA and Continuity
occurred at the beginning of the period indicated and includes the amortization
of the resulting goodwill and other intangible assets. The pro forma financial
data presented are not necessarily indicative of the Company's results of
operations that might have occurred had the transaction been completed at the
beginning of the period specified, and do not purport to represent what the
Company's consolidated results of operations might be for any future period.
43
UNAUDITED PRO FORMA FINANCIAL INFORMATION (IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 2001
-------------- --------------
Net revenue .................................................................. $ 10,346 $ 31,168
Net loss ..................................................................... $ (39,047) $ (180,881)
Basic and diluted loss per share ............................................. $ (3.55) $ (4.96)
Shares used in computing basic and diluted loss per share .................... 11,011 36,464
</Table>
4. JOINT VENTURES AND INVESTMENT IN AFFILIATE
In June 2000, the Company formed Delano Minerva Holdings Inc. ("Minerva"), and
has a controlling position with a 50% ownership and a majority of the seats of
the Board of Directors. During fiscal 2001, the Company's proportionate share of
Minerva's losses exceeded its investment and therefore the Company consolidated
Minerva's results of operations, which were included within the Company's fiscal
2001 revenue, cost and expense categories.
In December 2000, the Company invested in eGlobal joint venture as a minority
interest party by acquiring 19.9% of the common shares. The investment in this
joint venture has been made in the form of a $398,000 capital contribution, as
well as a long-term non-interest bearing loan receivable of $602,000. This
investment is accounted for using the equity method of accounting and during
fiscal 2001, the Company recognized $278,000 of losses, which represent the
Company's proportionate share of eGlobal's losses, net of the intercompany
elimination.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2000 2001
--------- ---------
Furniture and office equipment................................................ $ 407 $ 4,201
Computer hardware............................................................. 1,426 5,369
Computer software............................................................. 321 3,050
Leasehold improvements........................................................ -- 1,839
Assets under capital leases................................................... 557 439
--------- ---------
2,711 14,898
Less accumulated depreciation and amortization................................ 338 3,598
--------- ---------
$ 2,373 $ 11,300
========= =========
</Table>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are as follows (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2000 2001
--------- ---------
Accounts payable............................................................. $ 2,408 $ 4,164
Accrued compensation......................................................... 1,474 3,080
Accrued financing............................................................ 466 --
Accrued restructuring........................................................ -- 3,532
Other accrued liabilities.................................................... 1,606 1,716
--------- ---------
$ 5,954 $ 12,492
========= =========
</Table>
7. BANK LOAN
The Company has a lease line of credit available to a maximum of $679,000
(Cdn$1,000,000). Refer to note 8 for details as to the amounts utilized under
this line of credit as at March 31, 2001. The Company has three Letters of
Guarantee outstanding at March 31, 2001 for approximately $1.2 million on
various facilities with maturity dates ranging between February 2002 and June
2005.
44
8. OBLIGATIONS UNDER CAPITAL LEASES
The following is an analysis by year of the future minimum lease payments for
capital leases (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2000 2001
--------- ---------
March 31, 2002................................................................ $ 209 $ --
March 31, 2002................................................................ 205 205
March 31, 2003................................................................ 59 59
--------- ---------
473 264
Less amount representing interest (at rates ranging from
7.7% to 8.5%)................................................................. 42 33
--------- ---------
Balance of obligation......................................................... 431 231
Less current portion.......................................................... 209 182
--------- ---------
$ 222 $ 49
========= =========
</Table>
9. REDEEMABLE CONVERTIBLE SPECIAL SHARES AND SPECIAL WARRANTS
REDEEMABLE CONVERTIBLE SPECIAL SHARES
The Company is authorized to issue an unlimited number of Class A, Class B and
Class C special shares. In July 1998, the Company issued 4,000,000 Class A
special shares for proceeds of $992,129. During January 1999, the Company issued
3,789,476 Class B special shares for proceeds of $2,382,528. To date, no Class C
special shares have been issued.
The Class A and Class B special shares automatically converted to common shares
on a 3 for 2 basis when the Company completed its initial public offering
("IPO").
SPECIAL WARRANTS
On June 24, 1999, the Company closed a private placement of 4,326,924 special
warrants at a price of $3.55 per special warrant for proceeds of $14,486,978,
net of issue costs of $873,602.
The special warrants were converted into common shares at a ratio of 3 common
shares for each 2 special warrants.
10. SHAREHOLDERS' EQUITY
STOCK OPTION PLAN
The Company's stock option plan (the "Plan") was established for the benefit of
the employees, officers, directors and certain consultants of the Company. The
maximum number of common shares which may be set aside for issuance under the
Plan is 9,335,382 shares, provided that the Board of Directors of the Company
has the right, from time to time, to increase such number subject to the
approval of the shareholders of the Company when required by law or regulatory
authority. Generally, options issued subsequent to March 4, 1999 under the Plan
vest over a four-year period. Options issued prior to March 5, 1999 vest
annually over a three-year period.
Details of stock option transactions are as follows:
45
<Table>
<Caption>
WEIGHTED
OPTIONS AVAILABLE AVERAGE
FOR NUMBER EXERCISE PRICE
GRANT OF OPTIONS PER SHARE
------------------ ---------- ---------------
Balances, March 31, 1999....................................... 1,221,000 1,779,000 $ 0.13
Additional options authorized............................ 2,500,000
Options granted.......................................... (2,692,725) 2,692,725 $ 3.85
Options exercised........................................ (255,250) $ 0.11
Options cancelled........................................ 202,875 (202,875) $ 1.08
--------- ---------
Balances, March 31, 2000....................................... 1,231,150 4,013,600 $ 2.51
Additional options authorized............................ 3,835,382
Options granted.......................................... (6,466,956) 6,466,956 $ 7.24
Options exercised........................................ (694,592) $ 0.59
Options cancelled........................................ 1,677,928 (1,677,928) $ 7.28
--------- ---------
Balances, March 31, 2001....................................... 277,504 8,108,036 $ 4.90
========= =========
Options exercisable at March 31, 2001.......................... 2,123,690 $ 1.86
=========
</Table>
The stock options expire at various dates between May 2003 and September 2010.
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998 YEAR ENDED YEAR ENDED
(INCEPTION) TO MARCH 31, MARCH 31,
MARCH 31, 1999 2000 2001
-------------- ---------- ----------
Weighted average fair value of options granted during
the period with exercise prices equal to fair value at
date of grant .......................................... $ 0.02 -- $ 11.96
Weighted average fair value of options granted during
the period with exercise prices less than fair value at
date of grant .......................................... $ 0.29 $ 5.83 $ 6.54
Weighted average fair value of options granted during
the period with exercise prices greater than fair value
at date of grant ....................................... -- -- --
</Table>
As of March 31, 2001, the range of exercise prices and weighted average
remaining contractual life of outstanding options were as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PER SHARE EXERCISABLE PER SHARE
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
$ 0.11......................... 1,246,850 2.56 $ 0.11 660,100 $ 0.11
0.44-1.38.................... 534,013 3.82 0.47 185,562 $ 0.48
1.45-2.19.................... 1,165,874 7.57 1.50 889,016 $ 1.45
2.38......................... 1,653,400 4.77 2.38 -- n/a
2.39-9.50.................... 1,255,874 3.93 5.77 286,021 $ 4.99
9.56-10.94................... 863,525 4.13 10.36 102,991 $10.40
11.00-12.25.................. 958,950 4.48 12.09 -- n/a
12.38-17.00.................. 429,550 4.34 13.65 -- n/a
</Table>
The Company recorded deferred stock-based compensation amounting to $10.1
million for the year ended March 31, 2000 and $3.0 million for the year ended
March 31, 2001. Amortization of deferred stock-based compensation amounted to
$171,000 for the period from May 7, 1998 (inception) to March 31, 1999, $1.7
million for the year ended March 31, 2000 and $3.4 million for the year ended
March 31, 2001.
For the year ended March 31, 2000, compensation amounting to $39,660 arising on
the issuance of 32,000 stock options to consultants was recorded. The
compensation was determined based on the fair value at the grant date of the
stock options consistent with the method under SFAS 123 "Accounting for
Stock-based Compensation". To determine the fair value of each option, the
following assumptions were used: dividend yield of 0.0%, 100% volatility, a
weighted
46
average risk free interest rate of 5.5% and a weighted average expected life of
options of 3.5 years.
The amortization of deferred stock-based compensation relates to the following
cost of service revenues and operating expense categories (in thousands):
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998 YEAR ENDED YEAR ENDED
(INCEPTION) TO MARCH 31, MARCH 31,
MARCH 31, 1999 2000 2001
-------------- ---------- ----------
Cost of service revenues...................................... $ -- $ 206 $ 73
Sales and marketing........................................... 29 1,186 2,645
Research and development ..................................... 1 118 373
General and administrative.................................... 141 161 325
---------- --------- ---------
$ 171 $ 1,671 $ 3,416
========== ========= =========
</Table>
Had compensation expense for the Company's stock option plans been determined
based on the fair value at the grant dates for the awards under the plan
consistent with the method under SFAS 123 "Accounting for Stock-Based
Compensation", the Company's loss and loss per common share would have been
reported as the pro forma amounts indicated in the table below. To determine the
fair value of each option on the grant date the following assumptions were used:
<Table>
<Caption>
PRE-IPO TO POST-IPO TO YEAR ENDED
FEBRUARY 8, 2000 MARCH 31, 2000 MARCH 31, 2001
---------------- -------------- --------------
Dividend Yield ................................................ 0.0% 0.0% 0.0%
Volatility .................................................... 0.0% 180.0% 146.0%
Weighted average risk free interest rate ...................... 5.5% 5.5% 4.6%
Weighted average expected life of options ..................... 3.5 years 3.5 years 3.5 years
</Table>
Pro forma information for the period indicated is as follows (in thousands,
except per share amounts):
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998 YEAR ENDED YEAR ENDED
(INCEPTION) TO MARCH 31, MARCH 31,
MARCH 31, 1999 2000 2001
-------------- ---------- ----------
Loss-- as reported......................................... $ (1,689) $ (9,277) $ (161,018)
Loss-- pro forma........................................... (1,678) (9,807) (166,928)
Loss per common share-- as reported........................ (2.40) (1.50) (4.84)
Loss per common share-- pro forma.......................... (2.25) (1.54) (5.01)
Weighted average grant date fair value of options granted
during the period....................................... 0.24 5.39 5.41
</Table>
WARRANT
During January 1999, the Company issued a warrant for no consideration to an
executive of the Company to purchase 394,737 common shares at a price of $0.44
per share. The warrant expires when the executive ceases to be employed by the
Company or January 5, 2002 whichever is earlier.
ESCROW SHARES
At March 31, 2001, 140,625 common shares of the Company are held in escrow
pursuant to escrow arrangements entered into with certain employee/shareholders.
Under the terms of the arrangements the remaining number of common shares will
be released from escrow on June 30, 2001.
EMPLOYEE STOCK PURCHASE PLAN
The Company has established an employee stock purchase plan under which
employees may authorize payroll deductions of up to 15% of their compensation
(as defined in the plan) to purchase common shares at a price equal to 85% of
the lower of the fair market values as of the beginning or the end of the
offering period. As at March 31, 2001, 1.0 million shares of common stock were
reserved for issuance. In July 2000, 123,334 shares of common stock were
purchased
47
under the plan at $8.50 per share, and 338,489 shares of common stock were
purchased under the plan in January 2001 at $3.19 per share.
11. INCOME TAXES
The provision for income taxes differs from the amount computed by applying the
combined federal and provincial income tax rate of 43.6% (1999: 44.6%) to the
loss before provision for income taxes as a result of the following (in
thousands):
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998 YEAR ENDED YEAR ENDED
(INCEPTION) TO MARCH 31, MARCH 31,
MARCH 31, 1999 2000 2001
-------------- ------------- -----------
Loss for the period ................................................... $ 1,689 $ 9,277 $ 159,299
============== ============= ===========
Computed expected tax recovery ........................................ $ 753 $ 4,045 $ 69,454
Increase (reduction) in income tax recovery resulting from:
Permanent differences - impairment of goodwill ..................... -- -- (42,423)
Permanent differences - other....................................... (79) (154) (1,185)
Change in beginning of the year balance of the valuation allowance
allocated to income tax expense .................................... (718) (3,905) (14,397)
Reduction in tax rate for foreign subsidiary ....................... -- (48) (11,475)
Additional loss carry forward due to Ontario
superallowance ..................................................... 44 62 26
-------------- ------------- -----------
$ -- $ -- $ --
============== ============= ===========
</Table>
The tax effects of temporary differences that give rise to significant portions
of the future tax assets and future tax liabilities at March 31, 2000 and March
31, 2001 are presented below (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2000 2001
---------------- ----------------
Future tax assets:
Non-capital loss carried forward............................... $ 4,125 $ 19,348
Research and development expenses deferred for income tax
purposes....................................................... 246 368
Share issue costs.............................................. 483 555
Restructuring costs............................................ -- 830
Other.......................................................... -- 298
---------------- ----------------
Total gross future tax assets.................................. 4,854 21,399
Less valuation allowance....................................... 4,623 19,020
---------------- ----------------
Net future tax assets.......................................... 231 2,379
Future tax liabilities:
Depreciation and amortization.................................. (139) (2,379)
Investment tax credits receivable.............................. (92) --
---------------- ----------------
Total gross future tax liabilities............................. (231) (2,379)
---------------- ----------------
Net future tax assets (liabilities)............................ $ -- $ --
================ ================
</Table>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income, uncertainties related to the industry in which
the Company operates, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods that the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances.
As at March 31, 2001 the Company had $44.1 million of losses and deductions
available to reduce future years' taxable income in Canada and the United
States. Of these losses, $14.1 million are available to reduce future years'
taxable income in Canada, the majority of which expire between 2006 and 2008,
and $30.0 million are available to reduce future years' taxable income in the
United States, the majority of which expire between 2020 and 2021.
48
The Company also has earned investment tax credits ("ITCs") on Canadian eligible
research and development expenditures of $280,000 that expire between 2010 and
2011. These ITCs are available to reduce taxes otherwise payable.
12. SPECIAL CHARGES
Special charges for the year ended March 31, 2001 included a $694,000 asset
impairment charge, a $6.3 million restructuring charge and a $97.0 million
goodwill and identifiable intangibles impairment.
(a) Asset Impairment Charge. During the three months ended March 31, 2001, the
Company restructured its operations to reduce operating expenses. During the
restructuring, it was determined that $694,000 of software and other capital
assets, as well as a long-term investment, had no future value to the Company.
(b) Restructuring Charge. During the three months ended March 31, 2001, the
Company incurred a restructuring charge of $6.3 million as part of a plan to
improve its operating results by reducing employees, by closing duplicative
Company facilities in the USA and Canada, and by implementing other measures.
This charge is part of a plan to streamline the Company's efforts to focus on
achieving profitability. The restructuring charge was comprised of $3.2 million
for reductions in employee numbers, $2.2 million for facilities related costs
including penalties associated with the reduction of lease commitments and
future lease payments and $900,000 related to eliminating the Company's ASP
sales model. As of March 31, 2001, $2.7 million had been paid out on the
restructuring charge.
The Company determined its restructuring charge in accordance with Emerging
Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No.
100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company commit to an
exit plan before it accrues employee termination costs and exit costs. On
January 4, 2001, the Company's senior management prepared a detailed exit plan
that included the termination of 136 employees, closure of certain facilities
and the elimination of the ASP sales model.
In connection with the restructuring actions, the Company terminated the
employment of 102 employees, consisting primarily of applications development
employees, sales and marketing employees, technical and other support employees,
and administrative employees in all locations. In addition, the Company did not
replace approximately 34 employees who resigned voluntarily during the three
months ended March 31, 2001. At March 31, 2001, the Company had terminated all
employees associated with these restructuring actions. At March 31, 2001, the
Company had exited its facilities in Markham and its offices in the USA
identified in the restructuring plan. The Company has entered into sublease
arrangements for some of its office space.
Restructuring reserves are included in accrued liabilities at March 31, 2001.
Detail of the restructuring charges as of and for the year ended March 31, 2001
are summarized below:
<Table>
<Caption>
FOURTH QUARTER 2001
RESTRUCTURING ACTIONS: BALANCE AT
---------------------- ORIGINAL CHARGE REVERSALS UTILIZED MARCH 31, 2001
--------------- --------- -------- --------------
Employee related $ 3,237 $ -- $ 2,188 $ 1,049
Facilities related 2,158 -- 543 1,615
ASP sales model related 868 -- -- 868
------------- --------- --------- -------------
$ 6,263 $ -- $ 2,731 $ 3,532
============= ========= ========= =============
</Table>
<Table>
<Caption>
BALANCE AT
BALANCE SHEET COMPONENTS ORIGINAL CHARGE REVERSALS UTILIZED MARCH 31, 2001
------------------------ --------------- --------- -------- --------------
Accounts payable $ 46 $ -- $ 46 $ --
Accrued liabilities 6,217 -- 2,685 3,532
------------- --------- --------- -------------
$ 6,263 $ -- $ 2,731 $ 3,532
============= ========= ========= =============
</Table>
In April 2001, the Company announced further restructuring plans to reduce its
headcount by 31 percent and close additional offices in the USA and Canada. The
Company expects some of the employees in these offices to consider opportunities
to work in its other remaining offices. There was no impact on the financial
statements for the year ended March 31, 2001 relating to these actions. The
Company expects to recognize a restructuring charge in the first quarter of
fiscal year 2002 relating to the April 2001 restructuring of approximately $5.5
million.
49
(c) Impairment of goodwill and identifiable intangibles. We performed an
impairment assessment of the goodwill and identifiable intangibles recorded in
connection with the acquisition of Continuity and DA. The assessment was
performed primarily due to the significant sustained decline in our stock price
since the valuation date of the shares issued in the Continuity and DA
acquisitions resulting in our net book value of our assets prior to the
impairment charge significantly exceeding our market capitalization, the overall
decline in the industry growth rates, and our lower fourth quarter of 2001
actual and projected operating results. As a result of our review, we recorded a
$97.0 million impairment charge to reduce goodwill and identifiable intangibles.
The charge was determined based upon our estimated discounted cash flows over
the remaining estimated useful life of the goodwill and identifiable intangibles
using a discount rate of 24.8%. The assumptions supporting the cash flows
including the discount rate were determined using our best estimates as of such
date. The remaining goodwill balance of approximately $5.2 million will be
amortized over its remaining useful life. We will continue to assess the
recoverability of the remaining goodwill and identifiable intangibles
periodically in accordance with our policy.
13. RELATED PARTY TRANSACTIONS
On June 1, 1999, the Company entered into a professional services agreement with
a company related to a director of the Company in connection with the management
of the Company's European subsidiary. Under the terms of the agreement, the
Company is required to pay certain annual fees, a portion of which is calculated
based on net revenues, as defined, of the European subsidiary, with the option
of converting all or part of this portion into common shares of the Company
subject to certain terms. As at March 31, 2000, the Company has accrued fees
aggregating $179,000 in respect of this agreement and the related company is
eligible to exercise an option to acquire 18,250 shares at $3.55 per share. In
addition, the Company has recorded stock-based compensation amounting to
$193,000 in connection with this option during the year ended March 31, 2000.
During the year ended March 31, 2001, this agreement was terminated and thus no
amount was outstanding as at March 31, 2001.
The Company has accrued consulting fees payable to a shareholder of the Company
amounting to nil for the periods ended March 31, 1999, $60,900 for the year
ended March 31, 2000 and nil for the year ended March 31, 2001.
During the year ended March 31, 2001, the Company recorded $1.0 million of
revenue related to the eGlobal joint venture.
14. SEGMENTED INFORMATION
The Company reviewed its operations and determined that it operates in a single
reportable operating segment, being the development and marketing of
interaction-based e-business communications applications. All long-lived assets
relating to the Company's operations are located in Canada. Revenue per
geographic location, which is attributable to geographic location based on the
location of the external customer, is as follows (in thousands):
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998 YEAR ENDED YEAR ENDED
(INCEPTION) TO MARCH 31, MARCH 31,
MARCH 31, 1999 2000 2001
-------------- ------------ -----------
Revenue by geographic locations:
United States ............................................. $ -- $ 6,579 $ 20,049
Canada..................................................... -- 2,457 6,034
Europe..................................................... -- 453 3,085
Asia Pacific............................................... -- -- 1,207
-------------- ------------ -----------
$ -- $ 9,489 $ 30,375
============== ============ ===========
</Table>
For the year ended March 31, 2001, no one customer accounted for greater than
10% of total revenues. For the year ended March 31, 2000, one customer accounted
for 15% of total revenues. As at March 31, 2001, the Company had a receivable
from two significant customers amounting to 14% and 10% of total accounts
receivable trade, respectively. As at March 31, 2000, the Company had a
receivable from four significant customers amounting to 15%, 12%, 11% and 11% of
total accounts receivable trade, respectively.
50
15. SUPPLEMENTARY CASH DISCLOSURES:
Supplementary cash disclosures are as follows (in thousands):
<Table>
<Caption>
PERIOD FROM
MAY 7, 1998 YEAR ENDED YEAR ENDED
(INCEPTION) TO MARCH 31, MARCH 31,
MARCH 31, 1999 2000 2001
-------------- --------------- ---------------
Supplemental disclosure of cash flow information:
Cash received for interest................................... $ 14 $ 1,058 $ 4,322
============== =============== ===============
Cash paid for interest....................................... $ 1 $ 37 $ 32
============== =============== ===============
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations incurred for purchase of capital
Assets...................................................... $ 99 $ 443 $ --
============== =============== ===============
Deferred compensation on the grant of options to purchase
common shares with an exercise price below fair value....... $ 557 $ 10,136 $ 3,029
============== =============== ===============
</Table>
16. COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company is required to make minimum payments under the terms of operating
leases for premises, property and equipment expiring on various dates to
December 31, 2010. Future minimum lease payments by fiscal year are as follows
(in thousands):
<Table>
<Caption>
2002............................................................ $ 3,317
2003............................................................ 2,367
2004............................................................ 2,103
2005............................................................ 2,150
2006 and thereafter............................................. 6,550
---------
$ 16,487
=========
</Table>
Rent expense was $62,000, $339,000 and $2,664,000 for the period from May 7,
1998 (inception) to March 31, 1999, for the year ended March 31, 2000 and for
the year ended March 31, 2001, respectively.
(b) Contingencies
On February 22, 2001, We Media, Inc. ("We Media") filed a lawsuit against the
Company in the Supreme Court of the State of New York, County of New York. The
complaint asserts claims for breach of contract, unjust enrichment,
misrepresentation, and tortuous interference with prospective economic advantage
arising out of the Company's efforts to implement certain of its software for We
Media beginning in the second quarter of 2000. On March 21, 2001, the Company
removed the action to the United States District Court for the Southern District
of New York. On April 2, 2001, the Company filed its Answer and Counterclaim,
denying We Media's allegations and seeking damages for breach of contract in the
amount of more than $137,000. The Court has not yet issued a Scheduling Order
establishing deadlines for the case going forward and since this matter is in
its earliest stages, no opinion was expressed as to its likely outcome. The
Company believes that it has numerous meritorious defenses to the action and
intends to defend it vigorously.
17. SUBSEQUENT EVENT
Subsequent to March 31, 2001, the Company paid $100,000 for the remaining
ownership interest in Minerva.
51
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DELANO TECHNOLOGY CORPORATION
<Table>
<Caption>
ALLOWANCE
BALANCE AT RECORDED BY BALANCE AT
BEGINNING OF ACQUIRED CHARGE TO END OF
PERIOD COMPANIES OPERATIONS DEDUCTIONS PERIOD
------------ --------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance for doubtful accounts:
Period ended March 31, 1999....... -- -- -- -- --
Year ended March 31, 2000......... -- -- $ 200 -- $ 200
Year ended March 31, 2001......... $ 200 $ 328 $ 3,000 $ 1,669 $ 1,859
</Table>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
52
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and positions with Delano for each
of our directors and officers as of March 31, 2001.
<Table>
<Caption>
NAME AGE POSITION
- ------------------- --- --------------------------------------
Dennis Bennie(1)(2).............. 48 Chairman
John Foresi...................... 40 Director, Chief Executive Officer
Bahman Koohestani................ 39 Director, Executive Vice-President,
Products and Chief Technology Officer
David Frankland ................. 44 President
Thomas Hearne.................... 36 Chief Financial Officer
Robert Lalonde................... 37 Senior Vice-President, Products
Barry Yates...................... 35 Senior Vice-President, Worldwide Sales
David Lewis...................... 38 General Counsel and Secretary
Albert Amato(1)(2)............... 42 Director
J. (Ian) Giffen(1)............... 43 Director
Donald Woodley(2)................ 55 Director
Al DeLorenzi..................... 52 Director
</Table>
- ----------
(1) Member of the audit committee
(2) Member of the compensation committee
Dennis Bennie has been our Chairman since our inception in May 1998. Currently,
Mr. Bennie is the Chief Executive Officer and President of XDL Capital Corp. and
XDL Intervest, a private venture capital firm that he established in January
1997 to focus on investing in and working with emerging Internet companies and
related technologies. Mr. Bennie is a director of MGI Software Corp., a company
that produces digital imaging software. In 1988, Mr. Bennie co-founded Delrina
Corporation, a designer of fax, data and voice communications software, where he
was the Chairman and Chief Executive Officer until the November 1995 sale of
Delrina to Symantec Corporation. He remained employed with Symantec as Executive
Vice President and was a director until mid-1996. Mr. Bennie has an accounting
degree from the University of Witwatersrand.
John Foresi has been our Chief Executive Officer and has served as one of our
directors since January 1999. From May 1998 to December 1998, he was the
President, Transportation of i2 Technologies, a global supply chain software
company. In May 1998, i2 Technologies acquired InterTrans Logistics Solutions,
of which Mr. Foresi was President and Chief Executive Officer from August 1994
to April 1998. Mr. Foresi has an MBA from the Harvard Business School and a BBA
from Wilfrid Laurier University.
Bahman Koohestani founded Delano in May 1998, has served as one of our directors
since our inception and was our President and Chief Executive Officer from our
inception until January 1999. Mr. Koohestani has been our Executive
Vice-President, Products and Chief Technology Officer since January 1999. Prior
to founding Delano, Mr. Koohestani was Director of Products, Messaging for
Netscape Communications from October 1996 to May 1998. From February 1991 to
September 1996, Mr. Koohestani served as Chief Architect of Electronic Forms and
Products e-Commerce at Delrina. Mr. Koohestani has a Bachelor of Science
(Honors) degree from York University.
53
David Frankland has been President of Delano since January 2, 2001. Prior to
Delano, Mr. Frankland served as President and Chief Executive Officer of Digital
Archaeology, a leading provider of advanced customer analytics for e-business,
which culminated in the sale of the company to Delano. Mr. Frankland also served
as Vice President of Marketing, Sales, and Service for APS Technologies, a
manufacturer and direct marketer of computer peripheral devices. Mr. Frankland
also served as Executive Director of Marketing for Informix Software, Vice
President of Worldwide Sales and Marketing for the division of Sun Microsystems,
Director of OEM Sales and Marketing for ITT Information Systems and Vice
President of Marketing and Sales for Digital Ocean, a wireless networking
start-up company. Mr. Frankland holds a BA in Psychology and Theology from St.
Olaf College and an advanced degree in direct marketing from the Henry Bloch
School of Business at the University of Missouri, Kansas City.
Thomas Hearne has served as our Chief Financial Officer since November 1999.
From October 1997 to November 1999, Mr. Hearne was Chief Financial Officer of
Open Text Corporation, a provider of intranet, extranet and e-community platform
solutions. From September 1996 to October 1997, Mr. Hearne served as Vice
President, Finance and Administration of Algorithmics Incorporated, a developer
of risk management software. From April 1996 to September 1996, Mr. Hearne was
the Controller of Algorithmics. From September 1992 to April 1996, Mr. Hearne
was European Controller and Manager, Financial Reporting at Alias Research Inc.,
a developer of 3D graphics software, which was sold to Silicon Graphics, Inc. in
June 1995. Mr. Hearne is a chartered accountant and has an MBA from York
University and a Bachelor of Economics degree from Trent University.
Robert Lalonde has served as our Senior Vice-President, Products and prior to
that, our Vice-President, Marketing since January 1999. From July 1993 to
January 1999, Mr. Lalonde was the Vice-President, Marketing of the Business
Intelligence Division at Hummingbird Communications, a provider of network
connectivity, business intelligence, document and knowledge management software.
Mr. Lalonde has a Bachelor of Science from Laurentian University.
Barry Yates has served as our Senior Vice-President, Worldwide Sales since March
2000. Between January 2000 and March 2000, Mr. Yates served as our Vice
President, North American Sales. Between September 1998 and January 2000, Mr.
Yates served as our Vice-President, Professional Services. Prior to joining us,
Mr. Yates was Manager at Bain & Company from December 1995 to September 1998.
From April 1992 to November 1995, Mr. Yates was Principal at KPMG Management
Consulting Company. Mr. Yates has a Bachelor of Commerce (Honors) degree from
Queen's University.
David Lewis has served as our General Counsel and Secretary since January 2000.
From February 1999 to January 2000, Mr. Lewis was the Vice President, Legal at
Open Text. From November 1994 to February 1999, Mr. Lewis was the General
Counsel at Alias Wavefront (formerly Alias Research) prior to its acquisition by
Silicon Graphics in June 1995. Between June 1994 and November 1994, Mr. Lewis
was an independent consultant and prior to June 1994, Mr. Lewis was General
Counsel at SoftKey Software Products Inc., a consumer software publisher. Mr.
Lewis has a Bachelor of Law degree from Osgoode Hall Law School.
Albert Amato has served as one of our directors since May 1998. Since November
1995, Mr. Amato has been a technology consultant and advisor to software
companies and technology investment funds. Mr. Amato was a founder and was Chief
Technical Officer of Delrina from 1989 to November 1995. After Delrina was sold
to Symantec, he served as a Vice President with Symantec from November 1995 to
May 1996. Mr. Amato has a Bachelor of Applied Science and Engineering (Honors)
degree from the University of Toronto.
J. (Ian) Giffen has served as one of our directors since June 1998. Since
September 1996, Mr. Giffen has been a technology consultant and advisor to
software companies and technology investment funds. From February 1996 to
September 1996, Mr. Giffen was Chief Financial Officer of Algorithmics. From
January 1992 until February 1996, Mr. Giffen served as Chief Financial Officer
of Alias Research, which was sold to Silicon Graphics in June 1995. Mr. Giffen
is a director of and advisor to Macromedia Inc., a developer of software for web
publishing, multimedia and graphics and a director of MGI Software. Mr. Giffen
was a consultant to XDL Capital until February 2001. Mr. Giffen has a Bachelor
of Arts in Business Administration from the University of Strathclyde.
Donald Woodley has served as one of our directors since November 1999. From
February 1997 to October 1999, Mr. Woodley was President of Oracle Corporation
Canada Inc. From September 1987 to January 1997, he was President of Compaq
Canada Inc. Mr. Woodley serves on the board of directors of BCT.Telus, a
telecommunications company, and Star Data Systems Inc., a supplier of financial
and transaction processing services. Mr. Woodley has a Bachelor of
Communications from the University of Saskatchewan and an MBA from the
University of Western Ontario.
54
Al DeLorenzi has served as one of our directors since January 22, 2001. Mr.
DeLorenzi is the Chief Technology Officer for eBusiness Solutions at Nortel
Networks. eBusiness Solutions is the resulting merger of Clarify, Periphonics,
Epicon, Architel, and Nortel Networks into a single unit. Prior to his position
in eBusiness Solutions, Mr. DeLorenzi held a number of executive positions at
Nortel Networks. Mr. DeLorenzi was one of the founding members of the Frame
Relay forum. In 1991, he gained responsibility for Nortel's new line of Frame
Relay and ATM products. Mr. DeLorenzi began his career in 1972 with Bell Canada,
where he held management positions to develop and introduce a number of the
world's first digital networks, including a national digital data network, a
national packet network, and a nation T1 managed network for voice, data, and
video services. Mr. DeLorenzi is a graduate of the University of Toronto and
holds a Bachelor of Applied Sciences degree in Electrical Engineering.
There are no family relationships among any of our directors and executive
officers.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors is comprised of seven persons. In accordance with the
provisions of the Business Corporations Act (Ontario), our directors are
authorized from time to time to increase the size of the board of directors, and
to fix the number of directors, up to a maximum of ten persons, without the
prior consent of our shareholders. Each director is elected at the annual
meeting of shareholders to serve until the next annual meeting or until a
successor is elected or appointed. The board of directors has established an
audit committee and a compensation committee.
Our audit committee's mandate is to assist the board of directors in fulfilling
its functions relating to corporate accounting and reporting practices as well
as financial and accounting controls, to provide effective oversight of the
financial reporting process, and to review financial statements as well as
proposals for the issue of securities. Messrs. Bennie, Amato and Giffen are
members of the audit committee.
Our compensation committee reviews and approves the compensation and benefits
for our executive officers, administers our stock option plan and performs other
duties as may from time to time be determined by our board of directors. Messrs.
Bennie, Amato and Woodley are members of the compensation committee.
55
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the actual compensation paid or awarded to our
named executive officers for the year ended March 31, 2001, to the individual
who served as Delano's Chief Executive Officer and each of the four other most
highly compensated executive officers whose salary and bonus for the 2000 fiscal
year exceeded $100,000, for services rendered in all capacities to Delano and
its subsidiaries for the fiscal year ended March 31, 2001 and the period from
May 8, 1999 to March 31, 1999. The listed individuals are referred to hereafter
as the "Named Executive Officers." No other executive officers who otherwise
would have been includable in this table on the basis of salary and bonus earned
during 2000 have been excluded because they terminated employment or changed
their executive status during the year.
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION -------------
------------------------------------------- SECURITIES
YEAR OTHER UNDERLYING
NAME AND PRINCIPAL POSITION ENDED SALARY ($) BONUS ($) ($) OPTIONS (#)
--------------------------- ----- ---------- --------- --- -----------
John Foresi(1)............................................. 2001 99,540 -- 4,778 150,000
Chief Executive Officer 2000 104,167 277,778 5,000 --
1999 81,250 -- 1,188 1,144,737
David Frankland(2)......................................... 2001 200,000 140,307 5,000 465,000
President
Barry Yates(3)............................................. 2001 99,540 43,549 4,778 75,000
Senior Vice President, Worldwide Sales 2000 104,167 104,167 5,000 --
1999 58,827 -- 2,916 225,000
Robert Lalonde(4).......................................... 2001 99,540 71,308 4,778 90,000
Senior Vice President, Products 2000 104,167 40,886 5,000 --
1999 20,833 -- -- 135,000
Bruce Cameron(5)........................................... 2001 150,000 45,000 6,000 20,000
Vice President, Sales North America 2000 38,743 35,000 1,250 105,000
</Table>
1. Mr. Foresi joined Delano as President and Chief Executive Officer in January
1999. His annualized salary for 2001 was Cdn$150,000. Mr. Foresi also received a
car allowance of Cdn$7,200 which is included as other compensation. As of March
31, 2001, Mr. Foresi held 250,000 unvested shares of Delano at $0.11 per share
and has a warrant to purchase an additional 394,737 common shares at $0.44 per
share. The warrant expires when he ceases to be employed by us or on January 5,
2002, whichever occurs earlier.
2. Mr. Frankland became President of Delano on January 2, 2001. Prior to Delano,
Mr. Frankland served as President and Chief Executive Officer of Digital
Archaeology. Delano acquired Digital Archaeology in October 2000. Mr. Frankland
had 265,000 fully vested options granted at $1.45 per share pursuant to the
stock incentive plans for Digital Archaeology that have been assumed by us. As
of March 31, 2001, Mr. Frankland held 50,000 unvested shares of Delano at $2.38
per share and 150,000 unvested shares of Delano at $12.25 per share.
3. Mr. Yates joined Delano in September 1998. As of March 31, 2001, Mr. Yates
held 75,000 unvested shares of Delano at $0.11 per share and 75,000 unvested
shares of Delano at $2.38 per share.
4. Mr. Lalonde joined Delano in January 1999. As of March 31, 2001, Mr. Lalonde
held 45,000 unvested shares of Delano at $0.11 per share, 75,000 unvested shares
of Delano at $2.38 per share and 15,000 unvested shares of Delano at $9.56 per
share.
56
5. Mr. Cameron joined Delano in January 2000. As of March 31, 2001, Mr. Cameron
held 78,750 unvested shares of Delano at $6.67 per share and 20,000 unvested
shares of Delano at $2.38 per share. Mr. Cameron left the Company in April 2001.
STOCK OPTIONS
The following table sets forth (1) the number of common shares underlying the
options granted to each of the named executive officers during the fiscal year
ended March 31, 2001, (2) the percentage that these options represent in
comparison to the total number of options granted to our employees during the
same period, (3) the exercise price of such options and (4) their expiration
date.
OPTION GRANTS IN FISCAL 2001
<Table>
<Caption>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF SHARES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION TERM
OPTIONS GRANTED EMPLOYEES IN PRICE PER SHARE EXPIRATION -------------------
NAME (#) FISCAL YEAR ($/SECURITY) DATE 5% ($) 10%($)
---- ----------------- ----------------- --------------- ----------- ------ ------
John Foresi 150,000 2.3% 2.38 January 5, 2006 98,633 217,952
David Frankland 150,000 2.3% 12.25 October 13, 2005 507,667 1,121,812
50,000 * 2.38 January 5, 2006 32,878 72,651
Barry Yates 75,000 1.2% 2.38 January 5, 2006 49,316 108,976
Rob Lalonde 75,000 1.2% 2.38 January 5, 2006 49,316 108,976
15,000 * 9.56 August 7, 2005 39,619 87,547
Bruce Cameron 20,000 * 2.38 January 5, 2006 13,151 29,060
</Table>
* - less than 1%
OPTION EXERCISES IN FISCAL 2001
<Table>
<Caption>
# OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
NUMBER OF OPTIONS AT FISCAL THE-MONEY OPTIONS
SHARES YEAR END AT FISCAL YEAR END
ACQUIRED ON VALUE -----------------------------------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------- -------- ----------- ------------- ----------- -------------
John Foresi -- -- 250,000 400,000 $317,500 $317,500
David Frankland -- -- 265,000 200,000 -- --
Barry Yates 40,000 $533,450 110,000 150,000 $139,700 $95,250
Rob Lalonde 90,000 $614,700 -- 135,000 -- $57,150
Bruce Cameron -- -- 26,250 98,750 -- --
</Table>
COMPENSATION OF DIRECTORS
The By-laws of the Company provide that, subject to Section 136 of the Business
Corporations Act (Ontario) (the "OBCA"), the Company shall indemnify a director
or officer of the Company, a former director or officer of the Company or a
person who acts or acted at the Company's request as a director or officer of a
body corporate of which the Company is or was a shareholder or creditor, and his
or her heirs and legal representatives, against all costs, charges and expenses
reasonably incurred by him or her in respect of certain actions or proceedings
to which he or she is made a party by reason of his or her office, if he or she
meets certain specified standards of conduct, and the Company shall also
indemnify any such person in such other circumstances as the OBCA or the law
permits or requires. The Company maintains directors' and officers' liability
insurance for its directors and officers. With respect to directors and officers
as a group, the Company paid a premium of approx. $420,000 for directors' and
officers' liability insurance, which included coverage required in
57
connection with the Company's initial public offering. The total amount of
insurance purchased for directors and officers as a group was $15,000,000. All
matters insured are subject to a $500,000 securities-related retainer, which
applies to costs of defense and which is waived where claims against all
insureds are dismissed or the insureds are found not liable. We do not otherwise
compensate our directors, but they are reimbursed for out-of-pocket expenses
incurred in connection with meetings of the Board of Directors or its
committees. Directors are eligible to participate in the Company's Stock Option
Plan. To date, options to purchase an aggregate of 850,000 Common Shares have
been granted to members of the Board of Directors as detailed below:
<Table>
<Caption>
NUMBER OF SHARES
UNDERLYING EXERCISE
OPTIONS GRANTED PRICE PER SHARE EXPIRATION
NAME (#) ($/SECURITY) DATE
---- ------------------ ---------------- -----------
John Foresi 500,000 $0.11 Jan. 04, 2004
150,000 $2.38 Jan. 05, 2006
Dennis Bennie 10,000 $2.38 Jan. 05, 2006
Albert Amato 75,000 $0.11 Aug. 26, 2003
10,000 $2.38 Jan. 05, 2006
J. (Ian) Giffen 30,000 $0.11 Aug. 26, 2003
15,000 $3.08 Oct. 18, 2004
10,000 $2.38 Jan. 05, 2006
Donald Woodley 30,000 $4.51 Nov. 26, 2004
10,000 $2.38 Jan. 05, 2006
Al Delorenzi 10,000 $3.50 Jan. 22, 2006
</Table>
EMPLOYMENT AGREEMENTS
The following is a brief description of the employment agreements entered into
between the Company or its subsidiaries and each of the Named Executive
Officers.
We have entered into an agreement with Mr. Foresi pursuant to which he was hired
as our President and Chief Executive Officer effective January 4, 1999. Pursuant
to this agreement, Mr. Foresi receives a salary of C$150,000 (approximately
$98,000) per annum, exclusive of bonuses, benefits and other compensation. Mr.
Foresi was also granted options to purchase 750,000 Common Shares at a price of
$0.11 per share, which options expire on January 4, 2004, and a warrant to
purchase an additional 394,737 Common Shares at a price of $0.44 per share,
which warrant expires when Mr. Foresi ceases to be employed by us or January 5,
2002, whichever is earlier. On January 11, 2000, Mr. Foresi exercised options to
purchase 250,000 Common Shares at a price of $0.11 per share. Mr. Foresi also
receives a yearly car allowance and compensation for all expenses incurred from
time to time in connection with the carrying out of his duties. If Mr. Foresi is
dismissed without cause he will be entitled to receive either six months' notice
or payment of six months' severance. Options that have not vested and warrants
that have not been exercised prior to notice of termination (other than for
cause) or during the six-month notice or severance period thereafter will be
null and void. The agreement further provides that in the event of a change of
control of Delano resulting in the termination of Mr. Foresi's employment
without cause, all of Mr. Foresi's options will vest within three months of the
change of control.
We have also entered into an agreement with Mr. Koohestani pursuant to which he
was hired as our Executive Vice President, Products and Chief Technology Officer
effective January 4, 1999. Pursuant to this agreement, Mr. Koohestani receives a
salary of C$150,000 (approximately $98,000) per annum, exclusive of bonuses,
benefits and other compensation. Mr. Koohestani also receives a yearly car
allowance and compensation for all expenses incurred from time to time in
connection with the carrying out of his duties.
The Company has also entered into separate Employee Confidentiality and
Non-Solicitation Agreements with each of the Named Executive Officers. Under
these agreements, each of them has agreed to keep in confidence all proprietary
information of the Company obtained during his employment with the Company for a
period of three years following the termination of his employment with the
Company.
STOCK OPTION PLAN
We established our Stock Option Plan to provide incentives to our directors,
officers, employees and consultants through participation in our growth and
success. Options to purchase common shares may be granted from time to time by
our board of directors at an exercise price determined by them. The maximum
number of common shares that currently
58
may be issued under the plan is 9,335,382 common shares. Options granted under
the plan must be exercised no later than five years after the date of the grant,
except where our board of directors specifically states otherwise, in which case
the expiry date can be no later than 10 years after the date of grant. The
option price per common share shall be determined by the board of directors at
the time an option is granted. The board of directors may accelerate the vesting
of any or all outstanding options of any or all optionees upon the occurrence of
a change of control.
As at March 31, 2001, options to purchase a total of 8,108,036 common shares are
outstanding under the plan, as follows:
<Table>
<Caption>
COMMON EXERCISE
SHARES UNDER PRICE
HOLDERS OF OPTIONS OPTIONS ($) EXPIRY DATE
------------------ ------------ ------------- -------------------------------------
Executive Officers (six in total) 185,000 0.11 September 1, 2003
500,000 0.11 January 4, 2004
45,000 0.11 January 20, 2004
265,000 1.45 September 10, 2006 to March 6, 2010
430,000 2.38 January 5, 2006
157,500 3.08 October 18, 2004
60,000 5.23 December 1, 2004
105,000 6.67 January 13, 2005
15,000 9.56 August 7, 2005
150,000 12.25 October 13, 2005
Directors who are not Executive
Officers (five in total) 105,000 0.11 August 26, 2003
40,000 2.38 January 5, 2006
15,000 3.08 October 18, 2004
10,000 3.50 January 22, 2006
30,000 4.51 November 26, 2004
Employees 894,863 0.11 to 1.38 May 1, 2003 to August 1, 2010
805,224 1.45 March 31, 2004 to July 11, 2010
1,279,050 1.69 to 2.38 December 1, 2005 to March 21, 2006
2,965,399 2.39 to 17.00 August 25, 2004 to February 23,2006
Others (four in total) 51,000 0.11 to 0.44 August 26, 2003 to June 14, 2004
</Table>
As at March 31, 2001, 949,842 common shares had been issued pursuant to the
exercise of options granted under the plan.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Shares as of May 18, 2001 of (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Shares, (ii) each director of the Company, (iii) each
Named Executive Officer (as defined under "Executive Compensation and Other
Transactions", below) of the Company and (iv) all directors and officers as a
group. Beneficial ownership also includes any shares as to which a person or
entity has the right to acquire beneficial ownership of within 60 days after
March 31, 2001 Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Shares listed below, based on the information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community of property laws where applicable. The address
of our executive officers and directors is in care of Delano Technology
Corporation, 302 Town Centre Blvd., Markham, Ontario L3R 0E8, Canada.
59
<Table>
<Caption>
NUMBER OF SHARES PERCENT OF TOTAL
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------ ------------------ ------------------
Bahman Koohestani (1)....................... 3,500,000 9.4%
Dennis Bennie (2)........................... 1,024,107 2.7%
John Foresi (3)............................. 1,684,603 4.5%
Albert Amato (4)............................ 326,927 *
J. (Ian) Giffen (5)......................... 69,687 *
Donald Woodley (6).......................... 13,375 *
Al DeLorenzi 0 *
All executive officers and directors
as a group (11 Persons) (7)................ 6,861,593 18.4%
</Table>
* Less than 1%
(1) Represents shares held of record by 1329347 Ontario Inc., in its capacity as
general partner of GHI Limited Partnership. Mr. Koohestani is the sole
shareholder of 1329347 Ontario Inc.. A total of 1,350,000 of theses shares are
subject to escrow with the Company.
(2) Represents shares held by 3060357 Canada Inc. and XDL Ventures Corp., both
of which companies are controlled by Mr. Bennie.
(3) Includes 789,474 shares held of record by Tofino Venture Capital Inc, of
which Mr. Foresi is the voting trustee. The shares also include a warrant to
purchase 394,737 shares at a price of $0.44 per share and options for 250,000
shares that are vested.
(4) Includes 276,927 shares owned and options for 50,000 shares that are vested.
(5) Includes 45,000 shares owned and options for 24,687 shares that are vested.
(6) Includes 4,000 shares owned and options for 9,375 shares that are vested.
(7) Includes 6,349,563 shares owned and options/warrants for 512,030 shares that
are vested.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH PROTEGE
Dennis Bennie, our Chairman, is a trustee of the Bennie Children's' Trust, which
owns 11.25% of Protege Software Limited, a company with which we had entered
into a services agreement dated as of June 1, 1999. Pursuant to this agreement,
Protege Software Limited provided administrative assistance and office space to
facilitate the opening of our European offices in return for a management fee of
(pound)125,000 (approximately $200,000) per year, as well as (pound)6,000
(approximately $9,600) per month in respect of its costs and a bonus of up to
15% of sales generated by our European offices. The Company terminated the
agreement in October 2000.
ESCROW ARRANGEMENTS
Pursuant to subscription agreements dated July 17, 1998, an aggregate of
4,500,000 common shares purchased by Bahman Koohestani, Sean Maurik, John Mah
and Robert Gayle were deposited with us in escrow.
The escrow arrangements were entered into with Bahman Koohestani, Sean Maurik,
John Mah and Robert Gayle in order to provide restrictions on the free
disposition by these individuals of the shares held by them and limiting the
ability of these shareholders to immediately divest themselves of all equity
participation in Delano, resulting in a reduced personal economic interest in
our future economic success. Upon completion of this offering, the passage of
time is the only restriction on the release of the escrowed shares. In the event
of termination without cause of an individual's employment resulting from a
change of control of Delano, all of the individual's common shares will be
released from escrow.
In accordance with the terms of the subscription agreement between Delano and
Mr. Koohestani, one-twelfth of the 4,050,000 common shares acquired by him were
released from escrow on July 17, 1998 and an additional one-twelfth of the
common shares are to be released on the last day of each successive calendar
quarter. On June 24, 1999, all the securities of Delano owned by Mr. Koohestani
were transferred to 1329347 Ontario Inc. in its capacity as the general partner
of GHI Limited Partnership. As of March 31, 2001, all of the 4,050,000 common
shares of Mr. Koohestani which were originally subject to escrow had been
released from escrow
60
In accordance with the terms of the subscription agreements between Delano and
each of Mr. Maurik, Mr. Mah and Mr. Gayle, 37,500 of their respective 150,000
common shares were released from escrow on June 30, 1999 and an additional 9,375
of their respective common shares are to be released on the last day of each
successive calendar quarter. As of March 31, 2001, 103,125 common shares had
been released to each of Mr. Maurik, Mr. Mah and Mr. Gayle and 46,875 of their
respective common shares remained in escrow.
61
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
The following exhibits are attached hereto:
<Table>
<Caption>
EXHIBIT
NUMBER TITLE
- ------ -----
3.1* Articles of Incorporation of the Registrant
3.2* By-laws of the Registrant
3.3* Articles of Amalgamation of the Registrant
3.4* Revised By-laws of the Registrant
4.1+ Specimen Common Share certificate
10.1* Registration Rights Agreement, dated as of January 27, 1999,
between the Registrant and certain shareholders of the Registrant
10.2* Agency Agreement, dated as of June 24, 1999, between the
Registrant and the Agents named therein
10.3* Professional Services Agreement, dated June 1, 1999, between the
Registrant and Protege Software Limited
10.4* Form of Subscription Agreement, dated July 17, 1998 between the
Registrant and each of Robert Gayle, Bahman Koohestani, John Mah
and Sean Maurik
10.5* Form of Subscription Agreement, dated July 17, 1998, between the
Registrant and Bahman Koohestani
10.6* Credit Facility, dated July 5, 1998 between the Registrant and
Royal Bank of Canada
10.7* Sub-lease Agreement, dated December 16, 1998 between the
Registrant and MGI Software Corp.
10.8* Lease Agreement, dated November 17, 1999 between the Registrant
and 302 Town Centre Limited.
10.9* Stock Option Plan
10.10* Employment Agreement, dated November 23, 1998, between John
Foresi and the Registrant
10.11* Employment Agreement, dated February 26, 1998, between Bahman
Koohestani and the Registrant
10.12* Employment Agreement and Form of Confidentiality Agreement
between the Registrant and its executive officers
10.13* Employee Stock Purchase Plan
10.14* Amalgamation Agreement, dated November 30, 1999, between the
Registrant and XDL Delano Holdings Inc.
10.15* Amendment No. 1 to the Amalgamation Agreement, dated February 7,
2000, between the Registrant and XDL Delano Holdings Inc.
10.16* Subscription Agreement, dated February 7, 2000, between the
Registrant and Nortel Networks Corporation
10.17* Amendment to Lease Agreement between Registrant and 302 Town
Centre Limited
21.1* Subsidiaries of Registrant
24.1* Powers of Attorney
</Table>
- ----------
* Incorporated by reference to the exhibits contained in the Company's
Registration Statement on Form F-1 (File No. 333-94505).
+ Incorporated by reference from the Company's Registration Statement on
Form 8-A dated January 27, 2000.
The Company hereby files as part of the Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) above. Exhibits which are incorporated herein
by reference can be inspected and copied at the public reference facilities
maintained by the Commission, 450 Fifth Street, NW, Room 1024, Washington, D.C.
and at the Commission's regional offices at 219 South Dearborn Street, Room
1204, Chicago, Illinois; 26 Federal Plaza, Room 1102, New York, New York and
5757 Wilshire Boulevard, Suite 1710, Los Angeles, California. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
B. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required
information is shown in our consolidated financial statements and related notes.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
DELANO TECHNOLOGY CORPORATION
By: /s/ JOHN FORESI
----------------------------
John Foresi
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ JOHN FORESI Chief Executive Officer,
- ------------------------------------------- Director
John Foresi (Principal Executive Officer)
/s/ THOMAS HEARNE Chief Financial Officer
- ------------------------------------------- (Principal Financial Officer
Thomas Hearne And Principal Accounting Officer)
/s/DENNIS BENNIE Chairman of the Board of Directors
- -------------------------------------------
Dennis Bennie
/s/ ALBERT AMATO Director
- -------------------------------------------
Albert Amato
/s/ IAN GIFFEN Director
- -------------------------------------------
Ian Giffen
/s/ BAHMAN KOOHESTANI Director
- -------------------------------------------
Bahman Koohestani
/s/ DONALD WOODLEY Director
- -------------------------------------------
Donald Woodley
/s/ AL DELORENZI Director
- -------------------------------------------
Al DeLorenzi
</Table>
63
ANNEX K
DELANO AUDITED ANNUAL FINANCIAL STATEMENTS FOR THE FISCAL YEARS
ENDED MARCH 31, 2001, 2000 AND 1999 (CANADIAN GAAP)
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Report .......................................... 10
Consolidated Balance Sheets ........................................... 11
Consolidated Statements of Operations ................................. 12
Consolidated Statements of Shareholders' Equity (Deficiency) .......... 13
Consolidated Statements of Cash Flows ................................. 14
Notes to Consolidated Financial Statements ............................ 15
</Table>
- --------------------------------------------------------------------------------
9
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Delano Technology Corporation.
We have audited the consolidated balance sheets of Delano Technology
Corporation as at March 31, 2001 and 2000 and the consolidated statements of
operations, shareholders' equity (deficiency) and cash flows for the years ended
March 31, 2001 and 2000 and for the period from May 7, 1998 (date of inception)
to March 31, 1999.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material mis-statement. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Delano
Technology Corporation as of March 31, 2001 and March 31, 2000, and the results
of its operations and its cash flows for the years ended March 31, 2001 and
March 31, 2000 and for the period from May 7, 1998 (date of inception) to March
31, 1999 in accordance with Canadian generally accepted accounting principles.
On April 30, 2001, we reported separately to the shareholders of Delano
Technology Corporation on the consolidated financial statements for the same
period, prepared in accordance with generally accepted accounting principles in
the United States.
Chartered Accountants
/s/ KPMG LLP
Toronto, Canada
April 30, 2001
- --------------------------------------------------------------------------------
10
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
MARCH 31, MARCH 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 34,209 $ 82,370
Short-term investments ............................................................ 1,155 29,154
Accounts receivable trade, net of allowance for doubtful accounts of $1,859 at
March 31, 2001, and $200 at March 31, 2000 ...................................... 8,099 3,910
Prepaid expenses and other ........................................................ 3,674 2,100
------------ ------------
Total current assets ............................................................ 47,137 117,534
Property and equipment .............................................................. 11,300 2,373
Investments, at cost ................................................................ 120 --
Other assets ........................................................................ 865 --
------------ ------------
Total assets ........................................................................ $ 59,422 $ 119,907
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .......................................... $ 12,492 $ 5,954
Deferred revenue .................................................................. 1,975 961
Current portion of obligations under capital leases ............................... 182 209
------------ ------------
Total current liabilities ....................................................... 14,649 7,124
Long-term liabilities:
Obligations under capital leases .................................................. 49 222
------------ ------------
Total liabilities ................................................................... 14,698 7,346
Shareholders' equity:
Capital stock:
Preference shares:
Authorized: Unlimited
Issued and outstanding: Nil at March 31, 2000 and 2001
Common shares:
Authorized: Unlimited
Issued and outstanding: 37,240,858 shares at March 31, 2001 and 29,929,833
shares at March 31, 2000 ...................................................... 230,717 133,076
Warrant ............................................................................. 496 126
Deferred stock-based compensation ................................................... (8,464) (8,851)
Cumulative translation adjustment ................................................... (211) (211)
Deficit ............................................................................. (177,814) (11,579)
------------ ------------
Total shareholders' equity ...................................................... 44,724 112,561
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 59,422 $ 119,907
============ ============
</Table>
See accompanying notes to consolidated financial statements.
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
--------------- --------------- ---------------
Revenues:
Licenses ................................................. $ 25,636 $ 8,799 --
Services ................................................. 4,739 690 --
--------------- --------------- ---------------
Total revenues ......................................... 30,375 9,489 --
--------------- --------------- ---------------
Cost of revenues:
Licenses ................................................. 332 59 --
Services ................................................. 5,038 1,239 --
--------------- --------------- ---------------
Total cost of revenues ................................. 5,370 1,298 --
--------------- --------------- ---------------
Gross profit ............................................... 25,005 8,191 --
--------------- --------------- ---------------
Operating expenses:
Sales and marketing ...................................... 49,275 11,732 $ 554
Research and development ................................. 17,385 3,649 797
General and administrative ............................... 4,671 1,515 180
Amortization of deferred stock-based compensation ........ 3,416 1,671 171
Amortization of goodwill and identifiable intangibles .... 11,095 -- --
Impairment of goodwill and identifiable intangibles ...... 102,556 -- --
Restructuring charges .................................... 6,263 -- --
--------------- --------------- ---------------
Total operating expenses ............................... 194,661 18,567 1,702
--------------- --------------- ---------------
Loss from operations ....................................... (169,656) (10,376) (1,702)
Interest income (expense), net ........................... 4,393 636 (137)
Equity in loss of associated company ..................... (278) -- --
Asset impairment ......................................... (694) -- --
--------------- --------------- ---------------
Loss before provision for income taxes ..................... (166,235) (9,740) (1,839)
Provision for income taxes ............................... -- -- --
--------------- --------------- ---------------
Loss for the period ........................................ $ (166,235) $ (9,740) $ (1,839)
=============== =============== ===============
Basic and diluted loss per common share .................... $ (4.99) $ (1.53) $ (2.47)
=============== =============== ===============
Shares used in computing basic and diluted loss per
common share (in thousands) .............................. 33,283 6,381 746
=============== =============== ===============
</Table>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
EQUITY
COMMON SHARES COMPONENT OF
---------------------------------- CONVERTIBLE
NUMBER AMOUNT INSTRUMENTS WARRANT
-------------- -------------- -------------- --------------
Balances, May 7, 1998 .............. -- -- -- --
Issuance of common shares .......... 6,000,000 $ 3 -- --
Deferred stock-based
compensation ..................... -- 431 -- $ 126
Amortization of deferred
stock-based compensation ......... -- -- -- --
Issuance of convertible
instruments ...................... -- -- $ 758 --
Currency translation
adjustment ......................... -- -- -- --
Loss for the period ................ -- -- -- --
-------------- -------------- -------------- --------------
Balances, March 31, 1999 ........... 6,000,000 434 758 126
Issuance of common shares .......... 6,250,000 103,855 -- --
Issuance of common shares on
conversion of Class A special
shares ........................... 6,000,000 1,214 (241) --
Issuance of common shares on
conversion of Class B special
shares ........................... 5,684,198 2,766 (517) --
Issuance of common shares on
conversion of special
warrants ......................... 6,490,385 14,643 -- --
Deferred stock-based
compensation ..................... -- 10,136 -- --
Repurchase of common shares ........ (750,000) -- -- --
Amortization of deferred
stock-based compensation ......... -- -- -- --
Exercise of stock options .......... 255,250 28 -- --
Currency translation
adjustment ....................... -- -- -- --
Loss for the period ................ -- -- -- --
-------------- -------------- -------------- --------------
Balances, March 31, 2000 ........... 29,929,833 133,076 -- 126
Issuance of common shares .......... 110,189 261 -- --
Issuance of common shares on
Employee Share Purchase
Program .......................... 461,823 2,128 -- --
Issuance of common shares
and warrants on Continuity
Solutions Inc. acquisition ....... 1,412,959 16,439 -- 380
Issuance of common shares on
Digital Archaeology
Corporation acquisition .......... 4,630,462 75,616 -- --
Deferred stock-based
compensation ..................... -- 2,768 -- --
Amortization of deferred
stock-based compensation ......... -- -- -- --
Exercise of stock options .......... 694,592 412 -- --
Exercise of warrants ............... 1,000 17 -- (10)
Loss for the period ................ -- -- -- --
-------------- -------------- -------------- --------------
Balances, March 31, 2001 ........... 37,240,858 $ 230,717 $ -- $ 496
============== ============== ============== ==============
<Caption>
TOTAL
DEFERRED CUMULATIVE SHAREHOLDERS'
STOCK-BASED TRANSLATION EQUITY
COMPENSATION ADJUSTMENT DEFICIT (DEFICIENCY)
-------------- -------------- -------------- --------------
Balances, May 7, 1998 .............. -- -- -- --
Issuance of common shares .......... -- -- -- $ 3
Deferred stock-based
compensation ..................... $ (557) -- -- --
Amortization of deferred
stock-based compensation ......... 171 -- -- 171
Issuance of convertible
instruments ...................... -- -- -- 758
Currency translation
adjustment ......................... -- $ (6) -- (6)
Loss for the period ................ -- -- (1,839) (1,839)
-------------- -------------- -------------- --------------
Balances, March 31, 1999 ........... (386) (6) (1,839) (913)
Issuance of common shares .......... -- -- -- 103,855
Issuance of common shares on
conversion of Class A special
shares ........................... -- -- -- 973
Issuance of common shares on
conversion of Class B special
shares ........................... -- -- -- 2,249
Issuance of common shares on
conversion of special
warrants ......................... -- -- -- 14,643
Deferred stock-based
compensation ..................... (10,136) -- -- --
Repurchase of common shares ........ -- -- -- --
Amortization of deferred
stock-based compensation ......... 1,671 -- -- 1,671
Exercise of stock options .......... -- -- -- 28
Currency translation
adjustment ....................... -- (205) -- (205)
Loss for the period ................ -- -- (9,740) (9,740)
-------------- -------------- -------------- --------------
Balances, March 31, 2000 ........... (8,851) (211) (11,579) 112,561
Issuance of common shares .......... (261) -- -- --
Issuance of common shares on
Employee Share Purchase
Program .......................... -- -- -- 2,128
Issuance of common shares
and warrants on Continuity
Solutions Inc. acquisition ....... -- -- -- 16,819
Issuance of common shares on
Digital Archaeology
Corporation acquisition .......... -- -- -- 75,616
Deferred stock-based
compensation ..................... (2,768) -- -- --
Amortization of deferred
stock-based compensation ......... 3,416 -- -- 3,416
Exercise of stock options .......... -- -- -- 412
Exercise of warrants ............... -- -- -- 7
Loss for the period ................ -- -- (166,235) (166,235)
-------------- -------------- -------------- --------------
Balances, March 31, 2001 ........... $ (8,464) $ (211) $ (177,814) $ 44,724
============== ============== ============== ==============
</Table>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
------------ ------------ --------------
Cash provided by (used in):
Operating activities:
Net loss ..................................................................... $ (166,235) $ (9,740) $ (1,839)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .............................................. 14,060 299 33
Equity in loss of associated company ....................................... 278 -- --
Amortization of deferred stock-based compensation .......................... 3,416 1,671 171
Accretion of interest on redeemable convertible
special shares and special warrants ...................................... -- 479 150
Impairment of goodwill and identifiable intangibles ........................ 102,556 -- --
Restructuring charges and asset impairment ................................. 3,602 -- --
Changes in non-cash operating working capital, net of effects from
purchase of Continuity and Digital Archaeology:
Accounts receivable trade .................................................. (4,042) (3,852) (200)
Prepaid expenses and other ................................................. (1,944) (1,797) (65)
Accounts payable and accrued liabilities ................................... 1,717 5,335 516
Deferred revenue ........................................................... 874 844 99
------------ ------------ ------------
Net cash used in operating activities ........................................ (45,718) (6,761) (1,135)
Financing activities:
Issuance of redeemable convertible special shares ............................ -- -- 3,375
Issuance of common shares and warrants ....................................... 2,547 103,398 2
Issuance of equity component of convertible instruments ...................... -- 12,225 --
Issuance of special warrants ................................................. -- 2,212 --
Payments on notes payable .................................................... (1,995) -- --
Proceeds from bank loan ...................................................... -- 156 --
Repayment of bank loan ....................................................... -- (156) --
Repayment of obligations under capital leases ................................ (298) (126) (2)
------------ ------------ ------------
Net cash provided by financing activities .................................... 254 117,709 3,375
Investing activities:
Sale (purchase) of short-term investments .................................... 27,999 (29,154) --
Additions to property and equipment .......................................... (12,247) (1,859) (251)
Purchase of long-term investments ............................................ (398) -- --
Cash used in acquisition, net of cash acquired of $2,295 ..................... (18,233) -- --
------------ ------------ ------------
Net cash used in investing activities ........................................ (2,879) (31,013) (251)
Effect of currency translation of cash balances ................................ 182 446 --
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ............................... (48,161) 80,381 1,989
Cash and cash equivalents, beginning of period ................................. 82,370 1,989 --
------------ ------------ ------------
Cash and cash equivalents, end of period ....................................... $ 34,209 $ 82,370 $ 1,989
============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY
Delano Technology Corporation (the "Company") was incorporated on May
7, 1998 and commenced commercial operations during the quarter ended June 30,
1999. The Company develops and markets Customer Relationship Management ("CRM")
software that incorporates advanced analytics with interactive capabilities on a
flexible and scalable technology platform.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are stated in U.S. dollars, except where
otherwise noted. They have been prepared in accordance with accounting
principles generally accepted in Canada.
These consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and a 50% joint venture. An investment in
a 19.9% owned affiliate is accounted for by the equity method of accounting,
whereby the investment is carried at cost of acquisition, plus the Company's
equity in undistributed earnings or losses since acquisition.
All material intercompany transactions and balances have been
eliminated.
a. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
b. Cash and Cash Equivalents
All highly liquid investments, with an original maturity of three
months or less at the date of acquisition, are classified as cash equivalents.
c. Short-term investments
The Company's short-term investments include highly liquid
instruments with an original maturity of 90 days or more and are carried at
cost, which approximates their fair value.
d. Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization, and are amortized over their estimated useful
lives. Expenditures for maintenance and repairs have been charged to the
statement of operations as incurred. Depreciation and amortization are computed
using the straight-line method as follows:
<Table>
Furniture and office equipment 33%
Computer hardware 33%
Computer software 50%
</Table>
The Company regularly reviews the carrying values of its property and
equipment by comparing the carrying amount of the asset to the expected future
cash flows to be generated by the asset. If the carrying value exceeds the
amount recoverable, a write down is charged to the consolidated statement of
operations.
e. Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
the American Institute of Certified Public Accountants' ("AICPA") Statement of
Position ("SOP") No. 97-2, "Software Revenue Recognition" ("SOP No. 97-2") and
- --------------------------------------------------------------------------------
15
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
related provisions as amended by SOP 98-9. The Company's revenues are derived
from product elements, comprised primarily of license fees and service elements,
which include post-contract customer support ("PCS"), installation, training,
consulting and other services. Fees for services are generally billed separately
from licenses of the Company's products. In cases where the Company sells a
multi-element arrangement, the fees are allocated to the elements based on
Company-specific objective evidence of each element's fair value.
Revenue from product elements, consisting primarily of license fees, is
recognized pursuant to a contract or purchase order, when each element is
delivered to the customer and collection of the related receivable is deemed
probable by management. Reserves for product returns and sales allowances are
estimated and provided for at the time of sale. Such reserves are based upon
management's evaluation of historical experience and current industry trends.
Revenue from service elements includes PCS which is recognized ratably over
the term of the agreement, which is typically twelve months. Revenues from
installation, training, consulting and other services are recognized when the
services are performed. Losses on professional services contracts, if any, are
recognized at the time such losses are identified.
Product and service elements that have been prepaid but do not yet qualify
for recognition as revenue under the Company's revenue recognition policy are
reflected as deferred revenue on the Company's balance sheet.
f. Currency Translation
Effective April 1, 2000, the U.S. dollar became the functional currency of
the Company and of its subsidiaries as all of their revenues and a portion of
their expenditures are denominated in U.S. dollars. This change resulted from
the increased significance of U.S. dollar denominated revenue and expenditures
in relation to Canadian dollar denominated transactions. In addition, the
Company's financing is entirely denominated in U.S. dollars. Exchange gains and
losses resulting from transactions denominated in currencies other than U.S.
dollars are included in the results of operations for the period.
Prior to April 1, 2000, the functional currency of the Company and of its
subsidiaries was the Canadian dollar. Accordingly, monetary assets and
liabilities of the Company and of its subsidiaries that were denominated in
foreign currencies were translated into Canadian dollars at the exchange rate
prevailing at the balance sheet date. Transactions included in operations were
translated at the average rate for the period. Exchange gains and losses
resulting from the translation of these amounts were reflected in the
consolidated statement of operations in the period in which they occurred. As
the Company's reporting currency was the U.S. dollar, the Company translated
consolidated assets and liabilities denominated in Canadian dollars into U.S.
dollars at the exchange rate prevailing at the balance sheet date, and the
consolidated results of operations at the average rate for the period.
Cumulative net translation adjustments were included as a separate component of
shareholders' equity.
g. Research and Development Expenses
Research expenses are expensed as incurred. Expenses related to development
projects are deferred and capitalized only when they meet the criteria set out
under Canadian generally accepted accounting principles. To date, no development
costs have been capitalized.
h. Investment Tax Credits
The Company is entitled to Canadian federal and provincial investment tax
credits that are earned as a percentage of eligible current and capital research
and development expenditures incurred in each taxation year. Certain investment
tax credits are fully refundable to the Company prior to going public in
February 2000. All other investment tax credits are available to be applied
against future income tax liabilities, subject to a 10-year carry forward
period. Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related asset
cost for items of a long-term nature, provided that the Company has reasonable
assurance that the tax credits will be realized.
i. Income Taxes
The Company follows the asset and liability method for income taxes,
whereby future tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using enacted or
- --------------------------------------------------------------------------------
16
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
substantively enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
The effect of future tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
j. Stock-based Compensation Plan
The Company has a stock-based compensation plan, which is described in Note
11. The Company records deferred stock-based compensation at the grant date of
the stock option in an amount equal to the difference between the fair market
value of a common share and the exercise price of the option. Deferred
stock-based compensation for options that are contingently issuable based upon
the achievement of performance criteria is recorded based upon the current fair
market value of the shares at the end of each period. Deferred stock based
compensation resulting from employee option grants is amortized over the vesting
period of the individual options, generally three to four years.
k. Loss Per Common Share
Loss per common share has been calculated on the basis of earnings
applicable to common shares divided by the weighted average number of common
shares outstanding during each period. The calculation of weighted average
number of shares outstanding during each period excludes common shares held in
escrow. Diluted loss per common share has been calculated assuming that the
common shares held in escrow pursuant to escrow arrangements with certain
employee/shareholders prior to the date of the completion of the Company's IPO,
redeemable convertible special shares, special warrants, warrant and stock
options outstanding at the end of the period had been issued, converted or
exercised at the later of the beginning of the period or their date of issuance,
where such conversion or exercise would not be anti-dilutive.
l. Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and accounts receivable trade. Cash equivalents and short-term
investments consist of deposits with, or guaranteed by, major commercial banks.
With respect to accounts receivable trade, the Company performs periodic credit
evaluations of the financial condition of its customers and typically does not
require collateral from them. Management assesses the need for allowances for
potential credit losses by considering the credit risk of specific customers,
historical trends and other information.
m. Fair Values of Financial Assets and Financial Liabilities
The carrying values of cash and cash equivalents, short-term investments,
accounts receivable trade, accounts payable and accrued liabilities approximate
their fair values due to the relatively short periods to maturity of the
instruments. In addition, the carrying values of obligations under capital
leases and loans receivable approximate their fair values. The following methods
and assumptions were used to estimate the fair value of the following financial
instruments:
(i) Obligations under capital leases -- at the present value of the
contractual future payments of principal and interest, discounted at
the current market rates of interest available to the Company for the
same or similar debt instrument.
(ii) Loans receivable -- discounted cash flows at the current market rates
of interest available to the Company for the same or similar asset.
n. Goodwill and identifiable intangibles
Goodwill arising from acquisitions (Note 4) is recorded as the excess of
the purchase price over the fair value of assets acquired and amortized over its
estimated useful life of five years. Purchased identifiable intangible assets
are recorded at the appraised value of technology, workforce and customer lists
acquired and amortized using a straight-line method over estimated useful lives
of three years. Accumulated amortization of goodwill and identifiable
intangibles was $11.1 million at March 31, 2001. If events or changes in
circumstances indicate that these long-lived assets will not be recoverable, as
determined based on the undiscounted cash flows of the acquired businesses over
the remaining amortization period, the carrying value is reduced to net
realizable value. For the year ended March 31, 2001, approximately $103.0
million of goodwill and identifiable intangibles was written off. See also Note
13, Special Charges.
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
o. Other assets
Other assets include patent & trademark costs, shareholder loans and other
long-term loans receivable.
3. CHANGE IN ACCOUNTING POLICY
Effective April 1, 1999, the Company changed its method of accounting for
its stock-based compensation plan. The Company now records deferred stock-based
compensation at the option grant date at an amount equal to the difference
between the fair market value of a common share and the exercise price of the
option. Deferred stock-based compensation for options which are contingently
issuable based upon the achievement of certain performance criteria is now also
recorded based upon the current fair market value of the shares at the end of
each period. Deferred stock-based compensation resulting from employee option
grants is amortized over the vesting period of the individual options, generally
three or four years. The change has been applied retroactively and has increased
amounts previously reported for capital stock as at March 31, 1999 by $431 and
deficit as at March 31, 1999 and the loss for the period ended March 31, 1999 by
$171.
4. ACQUISITIONS
On October 16, 2000, the Company acquired Digital Archaeology Corporation,
a Kansas corporation ("DA"), pursuant to an Agreement and Plan of Merger, dated
as of October 13, 2000. At the effective time of the acquisition, the Company
issued approximately 4.6 million of the Company's common shares and paid
approximately $17.4 million in cash, in exchange for all of the outstanding
shares of capital stock of DA, and each outstanding option or right to purchase
DA common stock was assumed by the Company and became a right to purchase 0.53
of the Company's common shares.
In connection with the acquisition, 694,569 of the Company's common shares
issued to the former DA shareholders are being held in escrow until October 2001
to cover any reimbursable claims under the Merger Agreement and related
agreements.
The Company has accounted for the acquisition using the purchase method of
accounting. As a result, Delano recorded on its balance sheet the fair market
value of DA's assets and liabilities, acquisition-related costs of $1.6 million
and goodwill and identifiable intangibles of approximately $94.2 million.
Goodwill and intangible assets acquired in connection with the acquisition will
be amortized over three years for identifiable intangibles and five years for
goodwill, resulting in an approximate $19.5 million charge per year. The
allocation of the purchase price to assets acquired and liabilities assumed is
presented in the table that follows (in thousands).
On September 26, 2000, the Company finalized the acquisition of Continuity
Solutions, Inc. ("Continuity"). In connection with the acquisition, each share
of Continuity common stock outstanding immediately prior to the consummation of
the acquisition was converted into 0.10 shares of Delano common stock (the
"Exchange Ratio") and Delano assumed Continuity's outstanding stock options and
warrants based on the Exchange Ratio, issuing approximately 1.4 million shares
of Delano common stock and assuming options and warrants to acquire
approximately 150,000 of Delano common stock.
In connection with the acquisition, 282,592 of the Company's common shares
issued to the former Continuity shareholders are being held in escrow to cover
any reimbursable claims under the Merger Agreement and related agreements.
The Company has accounted for the acquisition using the purchase method of
accounting. As a result, Delano recorded on its balance sheet the fair market
value of Continuity's assets and liabilities, acquisition-related costs of $1.5
million and goodwill and identifiable intangibles of approximately $19.4
million. Goodwill and intangible assets acquired in connection with the
acquisition will be amortized over three years for identifiable intangibles and
five years for goodwill, resulting in an approximate $6.3 million charge per
year. The allocation of the purchase price to assets acquired and liabilities
assumed is presented in the table that follows (in thousands).
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
<Table>
<Caption>
DIGITAL
ARCHAEOLOGY CONTINUITY
------------ ------------
Net tangible assets acquired ............. $ 349 $ 135
Identifiable intangibles acquired:
Existing technology ...................... 2,920 2,580
In-place workforce ....................... 1,933 280
Goodwill ................................. 89,371 16,567
Liabilities assumed ...................... -- (450)
Notes payable paid ....................... -- (745)
------------ ------------
Net assets acquired ................. $ 94,573 $ 18,367
============ ============
</Table>
The purchase price for the DA acquisition was approximately $94.6 million,
measured as the average fair market value of Delano's outstanding common stock
from October 9 to 23, 2000, five trading days before and after the Merger
Agreement was completed plus the Black-Scholes calculated value of the vested
options of DA assumed by Delano in the acquisition, and other costs directly
related to the acquisition presented in the table that follows (in thousands).
The purchase price for the Continuity acquisition was approximately $18.4
million, measured as the average fair market value of Delano's outstanding
common stock from August 30 to September 14, 2000, five trading days before and
after the Merger Agreement was completed plus the Black-Scholes calculated value
of the vested options and warrants of Continuity assumed by Delano in the
acquisition, and other costs directly related to the acquisition presented in
the table that follows (in thousands):
<Table>
<Caption>
DIGITAL
ARCHAEOLOGY CONTINUITY
------------ ------------
Fair market value of Delano's common stock ..... $ 62,276 $ 15,395
Fair market value of options assumed ........... 13,340 679
Cash paid ...................................... 17,364 --
Debt assumed ................................... -- 745
Acquisition-related costs ...................... 1,593 1,548
------------ ------------
Total .......................................... $ 94,573 $ 18,367
============ ============
</Table>
5. JOINT VENTURES AND INVESTMENT IN AFFILIATE
In June 2000, the Company formed Delano Minerva Holdings Inc. ("Minerva"),
and has a controlling position with a 50% ownership and a majority of the seats
of the Board of Directors. During fiscal 2001, the Company's proportionate share
of Minerva's losses exceeded its investment and therefore the Company
consolidated Minerva's results of operations, which were included within the
Company's fiscal 2001 revenue, cost of revenue and expense categories.
In December 2000, the Company invested in eGlobal joint venture as a
minority interest party by acquiring 19.9% of the common shares. The investment
in this joint venture has been made in the form of a $398,000 capital
contribution, as well as a long-term non-interest bearing loan receivable of
$602,000. This investment is accounted for using the equity method of accounting
and during fiscal 2001, the Company recognized $278,000 of losses, which
represent the Company's proportionate share of eGlobal's losses, net of the
intercompany elimination.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Furniture and office equipment .................... $ 4,201 $ 407
Computer hardware ................................. 5,369 1,426
Computer software ................................. 3,050 321
Leasehold improvements ............................ 1,839 --
Assets under capital leases ....................... 439 557
------------ ------------
14,898 2,711
Less accumulated depreciation and amortization .... 3,598 338
------------ ------------
$ 11,300 $ 2,373
============ ============
</Table>
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
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7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are as follows (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Accounts payable .................................. $ 4,164 $ 2,408
Accrued compensation .............................. 3,080 1,474
Accrued financing ................................. -- 466
Accrued restructuring ............................. 3,532 --
Other accrued liabilities ......................... 1,716 1,606
------------ ------------
$ 12,492 $ 5,954
============ ============
</Table>
8. BANK LOAN
The Company has a lease line of credit available to a maximum of $679,000
(Cdn$1,000,000). Refer to note 9 for details as to the amounts utilized under
this line of credit as at March 31, 2001. The Company has three Letters of
Guarantee outstanding at March 31, 2001 for approximately $1.2 million on
various facilities with maturity dates ranging between February 2002 and June
2005.
9. OBLIGATIONS UNDER CAPITAL LEASES
The following is an analysis by year of the future minimum lease payments for
capital leases (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2001 2000
------------ ------------
March 31, 2002 ............................................ $ -- $ 209
March 31, 2002 ............................................ 205 205
March 31, 2003 ............................................ 59 59
------------ ------------
264 473
Less amount representing interest (at rates ranging from
7.7% to 8.5%) ............................................. 33 42
------------ ------------
Balance of obligation ..................................... 231 431
Less current portion ...................................... 182 209
------------ ------------
$ 49 $ 222
============ ============
</Table>
10. REDEEMABLE CONVERTIBLE SPECIAL SHARES AND SPECIAL WARRANTS
Redeemable Convertible Special Shares
The Company is authorized to issue an unlimited number of Class A,
Class B and Class C special shares. In July 1998, the Company issued 4,000,000
Class A special shares for proceeds of $992,129. During January 1999, the
Company issued 3,789,476 Class B special shares for proceeds of $2,382,528. To
date, no Class C special shares have been issued.
The Class A and Class B special shares automatically converted to
common shares on a 3 for 2 basis when the Company completed its initial public
offering ("IPO").
Special Warrants
On June 24, 1999, the Company closed a private placement of 4,326,924
special warrants at a price of $3.55 per special warrant for proceeds of
$14,486,978, net of issue costs of $873,602.
The special warrants were converted into common shares at a ratio of 3
common shares for each 2 special warrants.
11. SHAREHOLDERS' EQUITY
Stock Option Plan
The Company's stock option plan (the "Plan") was established for the
benefit of the employees, officers, directors and certain consultants of the
Company. The maximum number of common shares which may be set aside for issuance
under the Plan is 9,335,382 shares, provided that the Board of Directors of the
Company has the right, from time to time, to increase such number subject to the
approval of the shareholders of the Company when required by law or regulatory
authority. Generally, options issued subsequent to March 4, 1999 under the Plan
vest over a four-year period. Options
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
issued prior to March 5, 1999 vest annually over a three-year period.
Details of stock option transactions are as follows:
<Table>
<Caption>
WEIGHTED
OPTIONS AVAILABLE AVERAGE
FOR NUMBER EXERCISE PRICE
GRANT OF OPTIONS PER SHARE
----------------- ---------- --------------
Balances, March 31, 1999 ..................... 1,221,000 1,779,000 $ 0.13
Additional options authorized ............. 2,500,000
Options granted ........................... (2,692,725) 2,692,725 $ 3.85
Options exercised ......................... (255,250) $ 0.11
Options cancelled ......................... 202,875 (202,875) $ 1.08
---------- ----------
Balances, March 31, 2000 ..................... 1,231,150 4,013,600 $ 2.51
Additional options authorized ............. 3,835,382
Options granted ........................... (6,466,956) 6,466,956 $ 7.24
Options exercised ......................... (694,592) $ 0.59
Options cancelled ......................... 1,677,928 (1,677,928) $ 7.28
---------- ----------
Balances, March 31, 2001 ..................... 277,504 8,108,036 $ 4.90
========== ==========
Options exercisable at March 31, 2001 ........ 2,123,690 $ 1.86
==========
</Table>
The stock options expire at various dates between May 2003 and September
2010.
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
---------- ---------- --------------
Weighted average fair value of options granted during
the period with exercise prices equal to fair value at
date of grant ................................................... $11.96 -- $ 0.02
Weighted average fair value of options granted during
the period with exercise prices less than fair value at
date of grant ................................................... $ 6.54 $ 5.83 $ 0.29
Weighted average fair value of options granted during
the period with exercise prices greater than fair value at
date of grant ................................................... -- -- --
</Table>
As of March 31, 2001, the range of exercise prices and weighted average
remaining contractual life of outstanding options were as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING
-------------------
OPTIONS EXERCISABLE
------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PER SHARE EXERCISABLE PER SHARE
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
$0.11 .................... 1,246,850 2.56 $ 0.11 660,100 $ 0.11
0.44-1.38 ............... 534,013 3.82 0.47 185,562 $ 0.48
1.45-2.19 ............... 1,165,874 7.57 1.50 889,016 $ 1.45
2.38 .................... 1,653,400 4.77 2.38 -- n/a
2.39-9.50 ............... 1,255,874 3.93 5.77 286,021 $ 4.99
9.56-10.94 .............. 863,525 4.13 10.36 102,991 $ 10.40
11.00-12.25 ............. 958,950 4.48 12.09 -- n/a
12.38-17.00 ............. 429,550 4.34 13.65 -- n/a
</Table>
The Company recorded deferred stock-based compensation amounting to $10.1
million for the year ended March 31, 2000 and $3.0 million for the year ended
March 31, 2001. Amortization of deferred stock-based compensation amounted to
$171,000 for the period from May 7, 1998 (inception) to March 31, 1999, $1.7
million for the year ended March 31, 2000 and $3.4 million for the year ended
March 31, 2001.
For the year ended March 31, 2000, compensation amounting to $39,660
arising on the issuance of 32,000 stock options to consultants was recorded. The
compensation was determined based on the fair value at the grant date of the
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
stock options consistent with the method under SFAS 123 "Accounting for
Stock-based Compensation". To determine the fair value of each option, the
following assumptions were used: dividend yield of 0.0%, 100% volatility, a
weighted average risk free interest rate of 5.5% and a weighted average expected
life of options of 3.5 years.
The amortization of deferred stock-based compensation relates to the
following cost of service revenues and operating expense categories (in
thousands):
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7,1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
---------- ---------- ---------------
Cost of service revenues ...................... $ 73 $ 206 $ --
Sales and marketing ........................... 2,645 1,186 29
Research and development ...................... 373 118 1
General and administrative .................... 325 161 141
------ ------ ------
$3,416 $1,671 $ 171
====== ====== ======
</Table>
Had compensation expense for the Company's stock option plans been
determined based on the fair value at the grant dates for the awards under the
plan consistent with the method under SFAS 123 "Accounting for Stock-Based
Compensation", the Company's loss and loss per common share would have been
reported as the pro forma amounts indicated in the table below. To determine the
fair value of each option on the grant date the following assumptions were used:
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION TO
2001 2002 MARCH 31, 1999
---------- ---------- --------------
Dividend Yield ................................. 0.0% 0.0% 0.0%
Volatility ..................................... 146.0% 0.0% 180.0%
Weighted average risk free interest rate ....... 4.6% 5.5% 5.5%
Weighted average expected life of options ...... 3.5 years 3.5 years 3.5 years
</Table>
Pro forma information for the period indicated is as follows (in
thousands, except per share amounts):
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
----------- ----------- --------------
Loss -- as reported ........................................ $ (166,235) $ (9,740) $ (1,839)
Loss -- pro forma .......................................... (172,145) (10,270) (1,828)
Loss per common share-- as reported ........................ (4.99) (1.53) (2.47)
Loss per common share-- pro forma .......................... (5.17) (1.61) (2.45)
Weighted average grant date fair value of options granted
during the period ....................................... 5.41 5.39 0.24
</Table>
Warrant
During January 1999, the Company issued a warrant for no consideration to
an executive of the Company to purchase 394,737 common shares at a price of
$0.44 per share. The warrant expires when the executive ceases to be employed by
the Company or January 5, 2002 whichever is earlier.
Escrow Shares
At March 31, 2001, 140,625 common shares of the Company are held in
escrow pursuant to escrow arrangements entered into with certain
employee/shareholders. Under the terms of the arrangements the remaining number
of common shares will be released from escrow on June 30, 2001.
Employee Stock Purchase Plan
The Company has established an employee stock purchase plan under which
employees may authorize payroll deductions of up to 15% of their compensation
(as defined in the plan) to purchase common shares at a price equal to 85% of
the lower of the fair market values as of the beginning or the end of the
offering period. As at March 31, 2001, 1.0
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
million shares of common stock were reserved for issuance. In July 2000, 123,334
shares of common stock were purchased under the plan at $8.50 per share, and
338,489 shares of common stock were purchased under the plan in January 2001 at
$3.19 per share.
12. INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the combined federal and provincial income tax rate of 43.6% (1999:
44.6%) to the loss before provision for income taxes as a result of the
following (in thousands):
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
---------- ---------- ---------------
Loss for the period ...................................................... $ 166,235 $ 9,740 $ 1,839
========= ========= =========
Computed expected tax recovery ........................................... $ 72,478 $ 4,247 $ 820
Increase (reduction) in income tax recovery resulting from:
Permanent differences - impairment of goodwill ........................ (44,698) -- --
Permanent differences - other ......................................... (1,185) (154) (79)
Change in beginning of the year balance of the valuation allowance
allocated to income tax expense ....................................... (14,397) (4,107) (785)
Reduction in tax rate for foreign subsidiary .......................... (12,224) (48) --
Additional loss carry forward due to Ontario
superallowance ........................................................ 26 62 44
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</Table>
The tax effects of temporary differences that give rise to significant
portions of the future tax assets and future tax liabilities at March 31, 2000
and March 31, 2001 are presented below (in thousands):
<Table>
<Caption>
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Future tax assets:
Non-capital loss carried forward ........................ $ 19,348 $ 4,125
Research and development expenses deferred for income tax
purposes ................................................ 368 246
Share issue costs ....................................... 555 483
Restructuring costs ..................................... 830 --
Other ................................................... 298 --
-------- --------
Total gross future tax assets ........................... 21,399 4,854
Less valuation allowance ................................ 19,020 4,623
-------- --------
Net future tax assets ................................... 2,379 231
Future tax liabilities:
Depreciation and amortization ........................... (2,379) (139)
Investment tax credits receivable ....................... -- (92)
-------- --------
Total gross future tax liabilities ...................... (2,379) (231)
-------- --------
Net future tax assets (liabilities) ..................... $ -- $ --
======== ========
</Table>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, uncertainties related to the industry
in which the Company operates, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods that the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances.
As at March 31, 2001 the Company had $44.1 million of losses and
deductions available to reduce future years' taxable income in Canada and the
United States. Of these losses, $14.1 million are available to reduce future
years' taxable income in Canada, the majority of which expire between 2006 and
2008, and $30.0 million are available to reduce future years' taxable income in
the United States, the majority of which expire between 2020 and 2021.
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
The Company also has earned investment tax credits ("ITCs") on Canadian
eligible research and development expenditures of $280,000 that expire between
2010 and 2011. These ITCs are available to reduce taxes otherwise payable.
13. SPECIAL CHARGES
Special charges for the year ended March 31, 2001 included a $694,000
asset impairment charge, a $6.3 million restructuring charge and a $103.0
million write-off of goodwill and identifiable intangibles.
(a) Asset Impairment Charge. During the three months ended March 31,
2001, the Company restructured its operations to reduce operating
expenses. During the restructuring, it was determined that $694,000
of software and other capital assets, as well as a long-term
investment, had no future value to the Company.
(b) Restructuring Charge. During the three months ended March 31, 2001,
the Company incurred a restructuring charge of $6.3 million as part
of a plan to improve its operating results by reducing employees,
by closing duplicative Company facilities in the USA and Canada,
and by implementing other measures. This charge is part of a plan
to streamline the Company's efforts to focus on achieving
profitability. The restructuring charge was comprised of $3.2
million for reductions in employee numbers, $2.2 million for
facilities related costs including penalties associated with the
reduction of lease commitments and future lease payments and
$900,000 related to eliminating the Company's ASP sales model. As
of March 31, 2001, $2.7 million had been paid out on the
restructuring charge.
The Company determined its restructuring charge in accordance with
Emerging Issues Committee No. 60 ("EIC 60"), Emerging Issues Task
Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin
No. 100 ("SAB 100"). EIC 60, EITF 94-3 and SAB 100 require that the
Company commit to an exit plan before it accrues employee
termination costs and exit costs. On January 4, 2001, the Company's
senior management prepared a detailed exit plan that included the
termination of 136 employees, closure of certain facilities and the
elimination of the ASP sales model.
In connection with the restructuring actions, the Company
terminated the employment of 102 employees, consisting primarily of
applications development employees, sales and marketing employees,
technical and other support employees, and administrative employees
in all locations. In addition, the Company did not replace
approximately 34 employees who resigned voluntarily during the
three months ended March 31, 2001. At March 31, 2001, the Company
had terminated all employees associated with these restructuring
actions. At March 31, 2001, the Company had exited its facilities
in Markham and its offices in the USA identified in the
restructuring plan. The Company has entered into sublease
arrangements for some of its office space.
Restructuring reserves are included in accrued liabilities at March
31, 2001. Detail of the restructuring charges as of and for the
year ended March 31, 2001 are summarized below:
<Table>
<Caption>
FOURTH QUARTER 2001 RESTRUCTURING BALANCE AT
ACTIONS: ORIGINAL CHARGE REVERSALS UTILIZED MARCH 31, 2001
- --------------------------------- --------------- --------- -------- --------------
Employee related $3,237 $ -- $2,188 $1,049
Facilities related 2,158 -- 543 1,615
ASP sales model related 868 -- -- 868
------ ------ ------ ------
$6,263 $ -- $2,731 $3,532
====== ====== ====== ======
</Table>
<Table>
<Caption>
BALANCE AT
BALANCE SHEET COMPONENTS ORIGINAL CHARGE REVERSALS UTILIZED MARCH 31, 2001
- --------------------------------- --------------- --------- -------- --------------
Accounts payable $ 46 $ -- $ 46 $ --
Accrued liabilities 6,217 -- 2,685 3,532
------- ------ ------ --------
$ 6,263 $ -- $2,731 $ 3,532
======= ====== ====== ========
</Table>
In April 2001, the Company announced further restructuring plans to
reduce its headcount by 31 percent and close additional offices in
the USA and Canada. The Company expects some of the employees in
these offices to consider opportunities to work in its other
remaining offices. There was no impact on the financial
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
statements for the year ended March 31, 2001 relating to these
actions. The Company expects to recognize a restructuring charge in
the first quarter of fiscal year 2002 relating to the April 2001
restructuring of approximately $5.5 million.
(c) Impairment of goodwill and identifiable intangibles. We performed
an impairment assessment of the goodwill and identifiable
intangibles recorded in connection with the acquisition of
Continuity and DA. The assessment was performed primarily due to
the significant sustained decline in our stock price since the
valuation date of the shares issued in the Continuity and DA
acquisitions resulting in our net book value of our assets prior to
the impairment charge significantly exceeding our market
capitalization, the overall decline in the industry growth rates,
and our lower fourth quarter of 2001 actual and projected operating
results. As a result of our review, we recorded a $103.0 million
impairment charge to write-off goodwill and identifiable
intangibles. The charge was determined based upon our estimated
discounted cash flows over the remaining estimated useful life of
the goodwill and identifiable intangibles using a discount rate of
24.8%. The assumptions supporting the cash flows including the
discount rate were determined using our best estimates as of such
date.
14. RELATED PARTY TRANSACTIONS
On June 1, 1999, the Company entered into a professional services
agreement with a company related to a director of the Company in connection with
the management of the Company's European subsidiary. Under the terms of the
agreement, the Company is required to pay certain annual fees, a portion of
which is calculated based on net revenues, as defined, of the European
subsidiary, with the option of converting all or part of this portion into
common shares of the Company subject to certain terms. As at March 31, 2000, the
Company has accrued fees aggregating $179,000 in respect of this agreement and
the related company is eligible to exercise an option to acquire 18,250 shares
at $3.55 per share. In addition, the Company has recorded stock-based
compensation amounting to $193,000 in connection with this option during the
year ended March 31, 2000. During the year ended March 31, 2001, this agreement
was terminated and thus no amount was outstanding as at March 31, 2001.
The Company has accrued consulting fees payable to a shareholder of the
Company amounting to nil for the periods ended March 31, 1999, $60,900 for the
year ended March 31, 2000 and nil for the year ended March 31, 2001.
During the year ended March 31, 2001, the Company recorded $1.0 million
of revenue related to the eGlobal joint venture.
15. SEGMENTED INFORMATION
The Company reviewed its operations and determined that it operates in a
single reportable operating segment, being the development and marketing of
interaction-based e-business communications applications. All long-lived assets
relating to the Company's operations are located in Canada. Revenue per
geographic location, which is attributable to geographic location based on the
location of the external customer, is as follows (in thousands):
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
---------- ---------- --------------
Revenue by geographic locations:
United States .................... $ 20,049 $ 6,579 $ --
Canada ........................... 6,034 2,457 --
Europe ........................... 3,085 453 --
Asia Pacific ..................... 1,207 -- --
--------- --------- ---------
$ 30,375 $ 9,489 $ --
========= ========= =========
</Table>
For the year ended March 31, 2001, no one customer accounted for greater
than 10% of total revenues. For the year ended March 31, 2000, one customer
accounted for 15% of total revenues. As at March 31, 2001, the Company had a
receivable from two significant customers amounting to 14% and 10% of total
accounts receivable trade, respectively. As at March 31, 2000, the Company had
receivables from four significant customers amounting to 15%, 12%, 11% and 11%
of total accounts receivable trade, respectively.
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
16. SUPPLEMENTARY CASH DISCLOSURES:
Supplementary cash disclosures are as follows (in thousands):
<Table>
<Caption>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 7, 1998
MARCH 31, MARCH 31, (INCEPTION) TO
2001 2000 MARCH 31, 1999
--------- --------- --------------
Supplemental disclosure of cash flow information:
Cash received for interest ................................... $ 4,322 $ 1,058 $ 14
========= ========= =========
Cash paid for interest ....................................... $ 32 $ 37 $ 1
========= ========= =========
Supplemental disclosure of non-cash investing and financing
activities:
Capital lease obligations incurred for purchase of capital
assets .................................................... $ -- $ 443 $ 99
========= ========= =========
Deferred compensation on the grant of options to purchase
common shares with an exercise price below fair value ..... $ 3,029 $ 10,136 $ 557
========= ========= =========
</Table>
17. COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company is required to make minimum payments under the terms of
operating leases for premises, property and equipment expiring on various dates
to December 31, 2010. Future minimum lease payments by fiscal year are as
follows (in thousands):
<Table>
2002................................................. $ 3,317
2003................................................. 2,367
2004................................................. 2,103
2005................................................. 2,150
2006 and thereafter.................................. 6,550
----------
$ 16,487
==========
</Table>
Rent expense was $62,000, $339,000 and $2,664,000 for the period from May
7, 1998 (inception) to March 31, 1999, for the year ended March 31, 2000 and for
the year ended March 31, 2001, respectively.
(b) Contingencies
On February 22, 2001, We Media, Inc. ("We Media") filed a lawsuit against
the Company in the Supreme Court of the State of New York, County of New York.
The complaint asserts claims for breach of contract, unjust enrichment,
misrepresentation, and tortuous interference with prospective economic advantage
arising out of the Company's efforts to implement certain of its software for We
Media beginning in the second quarter of On March 21, 2001, the 2000. Company
removed the action to the United States District Court for the Southern District
of New York. On April 2, 2001, the Company filed its Answer and Counterclaim,
denying We Media's allegations and seeking damages for breach of contract in the
amount of more than $137,000. The Court has not yet issued a Scheduling Order
establishing deadlines for the case going forward and since this matter is in
its earliest stages, no opinion was expressed as to its likely outcome. The
Company believes that it has numerous meritorious defenses to the action and
intends to defend it vigorously.
17. SUBSEQUENT EVENT
Subsequent to March 31, 2001, the Company paid $100,000 for the remaining
ownership interest in Minerva.
- --------------------------------------------------------------------------------
26
ANNEX L
DELANO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEARS
ENDED MARCH 31, 2001, 2000 AND 1999 (CANADIAN GAAP)
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21e
of the Securities Exchange Act of 1934. Our actual results and timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors," elsewhere in our other public filings.
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes appearing elsewhere in
this Annual Report.
OVERVIEW
From the date of our incorporation on May 7, 1998 until April 1999 we
were a development stage company and had no revenues. Our operating activities
during this period consisted primarily of conducting research and developing our
initial products. In May 1999, we released and sold the first commercially
available version of the Delano e-Business Interaction Suite.
On September 26, 2000 we acquired Continuity Solutions, Inc. pursuant to
a transaction where Continuity became our wholly owned subsidiary. Continuity is
a provider of integrated multi-channel eCRM solutions, consisting of licensed
and ASP offerings. Continuity is headquartered in San Francisco, California and
had 15 employees as of the date of the acquisition.
In connection with the acquisition, we issued approximately 1.4 million
shares of Delano common stock, no par value, and assumed options and warrants to
acquire approximately 150,000 shares of Delano common stock. The transaction was
accounted for using the purchase method of accounting.
On October 13, 2000, we acquired Digital Archaeology Corporation ("DA")
pursuant to a transaction where DA became our wholly owned subsidiary. DA is a
provider of analytics for e-business. The company's solutions provide
enterprises with a view of customer and trading partner behavior and preferences
across traditional and e-commerce channels. DA was a privately held company
based in Kansas City and had 68 employees as of the date of the acquisition.
In connection with the acquisition, we issued approximately 4.6 million
of the Company's common stock, no par value, and paid $17.4 million in cash, in
exchange for all of the outstanding shares of capital stock of DA, and each
outstanding option or right to purchase DA common stock was assumed by the
Company and became a right to purchase 0.53 of the Company's common shares. The
transaction was accounted for using the purchase method of accounting.
To date, we have derived substantially all of our revenues from the sale
of software product licenses and from the provision of professional services,
including implementation, training and maintenance services. Our products have
been sold primarily through our direct sales force.
Our products are offered on a licensed basis. We license our products
based on:
o a fee for each client, which depends on the specific and individual
needs of the client;
o an additional fee, which covers installation, configuration, training
and professional services; and
o a variable component, which depends on, among other things, the number
of servers and the number of optional applications and add-ons, servers
and component packs purchased.
We recognize our software license revenues in accordance with the
American Institute of Certified Public Accountants, or ("AICPA"), Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," and related amendments
and interpretations contained in the AICPA's SOP 98-9. We generally recognize
revenues allocated to software licenses upon delivery of the software products,
when all of the following conditions have been met:
o persuasive evidence of an arrangement exists;
o the license fee is fixed or determinable; and
o the license fee is collectible.
Because substantially all of our software license agreements include
related maintenance services, these agreements
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
are multiple-element arrangements. We allocate the fees in multiple-element
arrangements based on the respective value for each element, with maintenance
being allocated typically at 18% of license revenue in all sales. Delivery of
the software generally is deemed to occur upon shipment of the software unless
customers are provided the opportunity to return the products. Revenues are
recognized only when all refund obligations have expired. In situations where we
provide online offerings, delivery of the software occurs upon initiation of the
online offerings. Revenues from maintenance and support services and online
offerings are recognized ratably over the related contractual period.
Our cost of revenues includes the cost of product documentation, the cost
of compact disks used to deliver our products, personnel-related expenses,
travel costs, equipment costs and overhead costs.
Our operating expenses are classified into four categories: sales and
marketing, research and development, general and administrative, and
amortization of deferred stock-based compensation.
o Sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows and
marketing materials;
o Research and development expenses consist primarily of compensation and
related costs for research and development employees and contractors
and in connection with the enhancement of existing products and quality
assurance activities;
o General and administrative expenses consist primarily of compensation
and related costs for administrative personnel, legal, accounting and
other general corporate expenses;
o Amortization of deferred stock-based compensation includes the
amortization, over the vesting period of a stock option, of the
difference between the exercise price of options granted to employees
and the deemed fair market value of the options for financial reporting
purposes. In addition, deferred stock-based compensation includes
compensation expense arising on the issuance of options and a warrant
to employees and a consultant, calculated as the difference between the
exercise price of the options and warrant and the fair market value at
the date of issuance. Also included in amortization of deferred
stock-based compensation is compensation expense relating to an option
to acquire shares of the Company issued in connection with a
professional services agreement between the Company and a related
corporation. The compensation expense is calculated as the difference
between the exercise price of the option and the fair market value at
the time the option was issued or earned. Also included in amortization
of deferred stock-based compensation is compensation expense relating
to the unvested options assumed in the acquisitions of Continuity and
DA.
We allocate common costs based on relative headcount or other relevant
measures. These allocated costs include rent and other facility-related costs
for the corporate head office, communication expenses and depreciation expenses
for furniture and equipment.
In connection with the granting of stock options and the issuance of a
warrant to our employees and a consultant, we recorded deferred stock-based
compensation totaling $13.7 million through March 31, 2001. This amount
represents the total difference between the exercise prices of stock options and
the warrant and the deemed fair value of the underlying common stock for
accounting purposes on the date these stock options were granted and the warrant
issued. This amount is included as a component of shareholders' equity and is
being amortized by charges to operations over the vesting period of the options,
consistent with the method described in Financial Accounting Standards Board, or
("FASB"), Interpretation No. 28. We recorded $171,000 of stock-based
compensation amortization expense during the period from May 7, 1998 to March
31, 1999, $1.7 million of stock-based compensation amortization expense during
the year ended March 31, 2000 and $3.4 million of stock-based compensation
amortization expense during the year ended March 31, 2001. As of March 31, 2001,
we had a total of $8.5 million of deferred stock-based compensation that had not
been amortized. The amortization of the remaining deferred stock-based
compensation will result in additional charges to operations through December
2003 of approximately $845,000 per quarter. The amortization of deferred
stock-based compensation is classified as a separate component of operation
expenses in our consolidated statements of operations.
In our development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal product development have been expensed as incurred.
- --------------------------------------------------------------------------------
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
Special charges for the year ended March 31, 2001 included a $694,000
asset impairment charge, a $6.3 million restructuring charge and a $103.0
million goodwill and identifiable intangibles impairment.
(a) Asset Impairment Charge. During the three months ended March 31,
2001, the Company restructured its operations to reduce operating
expenses. During the restructuring, it was determined that $694,000
of software and other capital assets, as well as a long-term
investment, had no future value to the Company.
(b) Restructuring Charge. During the three months ended March 31, 2001,
the Company incurred a restructuring charge of $6.3 million as part
of a plan to improve its operating results by reducing employees, by
closing duplicative Company facilities in the USA and Canada, and by
implementing other measures. This charge is part of a plan to
streamline the Company's efforts to focus on achieving
profitability. The restructuring charge was comprised of $3.2
million for headcount reductions, $2.2 million for facilities
related costs including penalties associated with the reduction of
lease commitments and future lease payments and $900,000 related to
eliminating the Company's ASP sales model. As of March 31, 2001,
$2.7 million had been paid out on the restructuring charge.
The Company determined its restructuring charge in accordance with
Emerging Issues Committee No. 60 ("EIC 60"), Emerging Issues Task
Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No.
100 ("SAB 100"). EIC 60, EITF 94-3 and SAB 100 require that the
Company commit to an exit plan before it accrues employee
termination costs and exit costs. On January 4, 2001, the Company's
senior management prepared a detailed exit plan that included the
termination of 136 employees, closure of certain facilities and the
elimination of the ASP sales model.
In connection with the restructuring actions, the Company terminated
the employment of 102 employees, consisting primarily of
applications development employees, sales and marketing employees,
technical and other support employees, and administrative employees
in all locations. In addition, the Company did not replace
approximately 34 employees who resigned voluntarily during the three
months ended March 31, 2001. At March 31, 2001, the Company had
terminated all employees associated with these restructuring
actions. At March 31, 2001, the Company had exited a portion of its
facilities in Toronto and most of its offices in the USA. The
Company has entered into sublease arrangements for some of its
office space.
In April 2001, the Company announced further restructuring plans to
reduce its headcount by 31 percent and close additional offices in
the USA and Canada. The Company expects some of the employees in
these offices to consider opportunities to work in its other
remaining offices. There was no impact on the financial statements
for the year ended March 31, 2001 relating to these actions. The
Company expects to recognize a restructuring charge in the first
quarter of fiscal year 2002 relating to the April 2001 restructuring
of approximately $5.5 million.
(c) Impairment of goodwill and identifiable intangibles. We performed an
impairment assessment of the goodwill and identifiable intangibles
recorded in connection with the acquisition of Continuity and DA.
The assessment was performed primarily due to the significant
sustained decline in our stock price since the valuation date of the
shares issued in the Continuity and DA acquisitions resulting in our
net book value of our assets prior to the impairment charge
significantly exceeding our market capitalization, the overall
decline in the industry growth rates, and our lower fourth quarter
of 2001 actual and projected operating results. As a result of our
review, we recorded a $103.0 million impairment charge to write-off
the entire amount of goodwill and identifiable intangibles. The
charge was determined based upon our estimated discounted cash flows
over the remaining estimated useful life of the goodwill and
identifiable intangibles using a discount rate of 24.8%. The
assumptions supporting the cash flows including the discount rate
were determined using our best estimates as of such date.
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being a
good indication of our future performance. Our prospects must be considered in
light of the risks, expenses and difficulties frequently experienced by
companies in early stages of development, particularly companies in new and
rapidly evolving markets like ours. Although we have experienced significant
revenue growth recently, this trend may not be sustainable. Furthermore, we may
not achieve or maintain profitability in the future.
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3
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Year ended March 31, 2001 compared to year ended March 31, 2000.
Revenues. Total revenues for the year ended March 31, 2001 were $30.4
million compared to $9.5 million for the year ended March 31, 2000. In the year
ended March 31, 2001, license revenues accounted for $25.6 million or 84.4% of
total revenues. In the year ended March 31, 2000, license revenues accounted for
$8.8 million, or 92.7% of total revenues. Services revenues, including
maintenance and services fees, accounted for $4.7 million, or 15.6% of revenues
for the year ended March 31, 2001, compared to $690,000 or 7.3% of total
revenues for the year ended March 31, 2000. Approximately 66.0% of our total
revenues were generated in the United States, 19.9% were generated in Canada and
14.1% were generated elsewhere in the year ended March 31, 2001, compared to
69.3%, 25.9% and 4.8% respectively for the year ended March 31, 2000.
Cost of revenues. Cost of license revenues was $332,000 or 1.1% of total
revenues for the year ended March 31, 2001 compared to $59,000 for the year
ended March 31, 2000 or 0.6% of total revenues. Cost of services revenues was
$5.0 million, or 16.6% of total revenues for the year ended March 31, 2001,
compared to $1.2 million for the year ended March 31, 2001, or 13.1% of total
revenues. We anticipate that cost of service revenues will decrease in absolute
dollars as we do not anticipate hiring additional services personnel. We
anticipate that the cost of license revenues will stay proportionate with
license revenues.
Sales and marketing. Sales and marketing expenses increased from $11.7
million or 123.6% of revenues for the year ended March 31, 2000 to $49.3 million
or 162.2% of revenues for the year ended March 31, 2001. This increase was
attributable primarily to the addition of 51 sales and marketing personnel and
higher marketing costs due to expanded promotional activities. We anticipate
that sales and marketing expenses will decrease in absolute dollars as we have
reduced the number of sales and marketing personnel and reduced discretionary
marketing programs.
Research and development. Research and development expenses increased from
$3.6 million or 38.5% of revenues for the year ended March 31, 2000 to $17.4
million or 57.2% of revenues for the year ended March 31, 2001. This increase
was attributable primarily to the addition of 85 product development and related
services personnel and to increased consulting and recruiting costs. The
expenses were reduced by investment tax credits of $285,000 for the year ended
March 31, 2000. We anticipate that research and development expenses will
decrease in absolute dollars, and will reduce as a percentage of total revenues
from period to period as we have reduced research and development personnel.
As a Canadian Controlled Private Corporation or ("CCPC"), we qualified for
certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.3 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of the amount of the credit. We will earn
investment tax credits at a rate of 20% of eligible current and capital research
and development expenditures made after our initial public offering. While a
portion of investment tax credits earned as a CCPC are refundable, investment
tax credits earned after our initial public offering may only be used to offset
income taxes otherwise payable.
General and administrative. General and administrative expenses increased
from $1.5 million or 16.0% of revenues for the year ended March 31, 2000 to $4.7
million or 15.4% of revenues for the year ended March 31, 2001, due primarily to
the addition of 29 administrative personnel, increased consulting costs and to
higher facilities-related expenses necessary to support our growth. We expect
that general and administrative expenses will decrease in absolute dollars as we
have reduced personnel and related costs to facilitate the growth of our
business.
Amortization of goodwill and identifiable intangibles. On September 26,
2000, the Company completed its acquisition of Continuity. As a result of the
acquisition, $19.4 million was allocated to goodwill, and identifiable
intangibles. This amount is being amortized on a straight-line basis over a
period of three years for identifiable intangibles, and five years for goodwill
from October 1, 2000. On October 16, 2000, the Company completed its acquisition
of DA. As a result of the acquisition, $94.2 million was allocated to goodwill
and identifiable intangibles. This amount is being
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
amortized from October 16, 2000 on a straight-line basis over a period of three
years for identifiable intangibles and five years for goodwill. For the year
ended March 31, 2001, $11.1 million (2000 - nil) of amortization was recorded.
If events or changes in circumstances indicate that these long lived
assets will not be recoverable, as determined based on the undiscounted cash
flows of the acquired businesses or if determined that the amounts paid for them
would have changed materially based on underlying changes in the financial
markets and therefore fundamental changes in the value of technology companies,
over the remaining amortization period, the carrying value is reduced to net
realizable value. For the year ended March 31, 2001, $103.0 million of goodwill
and identifiable intangibles was written off.
Amortization of deferred stock-based compensation. We incurred a charge of
$1.7 million or 17.6% of revenues in the year ended March 31, 2000 and a charge
of $3.4 million or 11.2% of revenues for the year ended March 31, 2001 related
to the issuance of stock options with exercise prices less than the deemed fair
market value for financial reporting purposes on the date of grant.
Interest income, net. Interest income, net for the period ended March 31,
2000 was $1.1 million. Interest income, net for the year ended March 31, 2001
was $4.4 million, reflecting the interest earned on the cash and cash
equivalents balance arising from our special warrant offering in June 1999 and
our initial public offering in February 2000.
Provision for income taxes. A deferred tax asset of $44.1 million existed
as of March 31, 2001 compared to $4.8 million at March 31, 2000. A valuation
allowance is recorded against a deferred tax asset if it is more likely than not
that the asset will not be realized. A valuation allowance taken against
substantially all of the deferred tax asset reflects the lack of profitability
in the past, the significant risk that taxable income would not be generated in
the future and the non- transferable nature of the deferred tax asset under
certain conditions.
Year ended March 31, 2000 compared to year ended March 31, 1999.
Revenues. For the period from our inception to March 31, 1999, we were a
development stage company and had no revenues. Total revenues for the year ended
March 31, 2000 were $9.5 million. License revenues accounted for $8.8 million,
or 92.7% of total revenues. Services revenues, including maintenance and
services fees, accounted for the remaining $690,000 or 7.3% of total revenues.
Approximately 69.3% of our total revenues were generated in the United States,
25.9% were generated in Canada and 4.8% were generated elsewhere in the year
ended March 31, 2000.
Cost of revenues. Cost of license revenues was $59,000 for the year ended
March 31, 2000 or 0.6% of total revenues. Cost of services revenues was $1.2
million for the year ended March 31, 2000, or 13.1% of total revenues. We
anticipate that cost of service revenues will increase in absolute dollars as we
continue to hire additional services personnel. We anticipate that the cost of
product revenues will increase proportionately with increases in license
revenues.
Sales and marketing. Sales and marketing expenses increased from $554,000
for the period ended March 31, 1999 to $11.7 million for the year ended March
31, 2000. This increase was attributable primarily to the addition of 110 sales
and marketing personnel and higher marketing costs due to expanded promotional
activities. We anticipate that sales and marketing expenses will increase in
absolute dollars as we continue to hire additional sales and marketing personnel
and expand discretionary marketing programs.
Research and development. Research and development expenses increased from
$797,000 for the period ended March 31, 1999 to $3.6 million for the year ended
March 31, 2000. This increase was attributable primarily to the addition of 74
product development and related services personnel and to increased consulting
and recruiting costs. The expenses were reduced by investment tax credits of
$285,000 for the year ended March 31, 2000. We anticipate that research and
development expenses will increase in absolute dollars, but will vary as a
percentage of total revenues from period to period as we continue to hire
additional research and development personnel.
As a Canadian Controlled Private Corporation or ("CCPC"), we qualified for
certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.4 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of
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5
DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
the amount of the credit. We will earn investment tax credits at a rate of 20%
of eligible current and capital research and development expenditures made after
our initial public offering. While a portion of investment tax credits earned as
a CCPC are refundable, investment tax credits earned after our initial public
offering may only be used to offset income taxes otherwise payable.
General and administrative. General and administrative expenses increased
from $180,000 for the period ended March 31, 1999 to $1.5 million for the year
ended March 31, 2000, due primarily to the addition of 18 administrative
personnel, increased consulting costs and to higher facilities- related expenses
necessary to support our growth. We expect that general and administrative
expenses will increase in absolute dollars as we add personnel and incur related
costs to facilitate the growth of our business.
Amortization of deferred stock-based compensation. We incurred a charge of
$171,000 in the year ended March 31, 1999 and a charge of $1.7 million for the
year ended March 31, 2000 related to the issuance of stock options with exercise
prices less than the deemed fair market value for financial reporting purposes
on the date of grant.
Interest income, net. Interest expense, net for the period ended March 31,
1999 was $137,000. Interest income, net for the year ended March 31, 2000 was
$636,000, reflecting the interest earned on the cash and cash equivalents
balance arising from our special warrant offering in June 1999 and our initial
public offering in February 2000.
Provision for income taxes. A deferred tax asset of $4.8 million existed
as of March 31, 2000. A valuation allowance is recorded against a deferred tax
asset if it is more likely than not that the asset will not be realized. A
valuation allowance taken against substantially all of the deferred tax asset
reflects the lack of profitability in the past, the significant risk that
taxable income would not be generated in the future and the non-transferable
nature of the deferred tax asset under certain conditions.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements
of operations data for our eight quarters of operation. In our management's
opinion, this unaudited information has been prepared on the same basis as our
annual consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K and includes all adjustments necessary to fairly present the
unaudited quarterly results. These adjustments consist only of normal recurring
adjustments. This information should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
Annual Report on Form 10-K. The operating results for any quarter are not
necessarily indicative of results for any future period.
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
- --------------------------------------------------------------------------------
<Table>
<Caption>
QUARTER ENDED
---------------------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1999 1999 1999 2000 2000 2000 2000 2001
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
License......................... $ 752 $ 1,561 $ 2,748 $ 3,738 $ 5,361 $ 7,009 $ 8,040 $ 5,226
Services........................ 59 54 183 394 657 1,025 1,230 1,827
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues................ 811 1,615 2,931 4,132 6,018 8,034 9,270 7,053
--------- --------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
License......................... -- 6 14 39 59 122 89 62
Services........................ 149 231 321 538 801 1,169 1,440 1,628
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues........ 149 237 335 577 860 1,291 1,529 1,690
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit...................... 662 1,378 2,596 3,555 5,158 6,743 7,741 5,363
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing............. 818 1,198 3,440 6,276 10,388 11,116 13,641 14,130
Research and development........ 389 801 1,054 1,405 2,320 3,856 6,128 5,081
General and administrative...... 157 255 355 748 998 1,142 1,397 1,134
Amortization of deferred
stock-based compensation...... 107 211 451 902 1,624 856 1,003 (67)
Amortization of goodwill and
identifiable intangibles...... -- -- -- -- -- -- 5,141 5,954
Impairment of goodwill and
identifiable intangibles...... -- -- -- -- -- -- -- 102,556
Restructuring charges........... -- -- -- -- -- -- -- 6,263
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses.......... 1,471 2,465 5,300 9,331 15,330 16,970 27,310 135,051
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations.............. (809) (1,087) (2,704) (5,776) (10,172) (10,227) (19,569) (129,688)
Interest income (expense),
net........................... (137) (19) 4 745 1,542 1,384 926 541
Equity in loss of associated
company....................... -- -- -- -- -- -- -- (278)
Asset impairment................ -- -- -- -- -- -- -- (694)
--------- --------- --------- --------- --------- --------- --------- ---------
Loss before provision for
income taxes.................... (1,162) (1,106) (2,700) (5,031) (8,630) (8,843) (18,643) (130,119)
Provision for income taxes........ -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Loss for the period............... $ (1,162) $ (1,106) $ (2,700) $ (5,031) $ (8,630) $ (8,843) $ (18,643) $(130,119)
========= ========= ========= ========= ========= ========= ========= =========
</Table>
Our quarterly operating results have varied widely in the past, and we
expect that they will continue to fluctuate in the future as a result of a
number of factors, many of which are outside our control. Our limited operating
history and the undeveloped nature of the market for interaction-based
e-business communications products make predicting future revenues difficult.
Our expense levels are based, in part, on expectations regarding future revenue
increases, and to a large extent, such expenses are fixed, particularly in the
short term. There can be no assurance that our expectations regarding future
revenues are accurate. Moreover, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues in relation to our expectations would likely
cause significant increases in our net losses for that period.
Due to the foregoing factors, our operating results are difficult
to forecast. We believe that period-to-period comparisons of our operating
results are not meaningful, and you should not rely on them as indicative of our
future performance. You should also evaluate our prospects in light of the
risks, expenses and difficulties commonly encountered by comparable early-stage
companies in new and rapidly emerging markets. We cannot assure you that we will
successfully address the risks and challenges that face us. In addition,
although we have experienced significant revenue growth recently, we cannot
assure you that our revenues will continue to grow or that we will become or
remain profitable in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since the date of incorporation, we have raised an aggregate of $3.4
million through private placements of special shares. We have raised $14.4
million, net of the agents' commission and offering expenses, through a private
placement of special warrants in June 1999. We have also raised $103.4 million,
net of agents' commissions and offering expenses
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DELANO TECHNOLOGY CORPORATION - Annual Report Canadian GAAP
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through our initial public offering in February 2000.
Our operating activities used cash of $6.8 million for the year ended
March 31, 2000 and cash of $45.7 million for the year ended March 31, 2001. Our
negative operating cash flow resulted principally from the net losses that we
incurred during these periods as we invested in the development of our products,
expanded our sales force and expanded our infrastructure to support our growth.
Our financing activities generated $118 million in the year ended March
31, 2000 and $254,000 in year ended March 31, 2001. In the year ended March 31,
2000 the issuance of special warrants generated net proceeds of $14.4 million
and the issuance of common shares as part of our initial public offering
generated net proceeds of $103.4 million.
Our investing activities, consisting of the purchase of computer
equipment, software, furniture and equipment to support our growing number of
employees, as well as the purchase of short-term investments used cash of $31.0
million during the year ended March 31, 2000, and $2.9 million during the year
ended March 31, 2001.
In March 1999, we obtained a lease line of credit from a Canadian
chartered bank to purchase equipment and furniture. Approximately $431,000 was
outstanding as of March 31, 2001. The ceiling on the lease line of credit is
Cdn$1,000,000 (approximately $634,000). The lease line of credit is not
collateralized with cash for the amount of the line that is used for leasing
equipment.
Our capital requirements depend on a number of factors. We expect to
devote substantial resources to continue our research and development efforts,
expand our sales, support, marketing and product development organizations,
establish additional facilities worldwide and build the infrastructure necessary
to support our growth. Our expenditures have increased substantially since the
date of incorporation, but we anticipate that capital expenditures will decrease
in absolute dollars in the foreseeable future.
At March 31, 2001, we had cash and cash equivalents aggregating $34.2
million. At March 31, 2001, we also had a short-term investment of $1.2 million.
We believe that our current cash and cash equivalents are sufficient to fund our
operations for at least the next 12 months. If cash generated from operations is
insufficient to meet our long-term liquidity needs, we may need to raise
additional funds or seek other financing arrangements. Additional funding may
not be available on favorable terms or at all. In addition, although there are
no present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, we may, from time to
time, evaluate potential acquisitions of other businesses, products and
technologies. In order to consummate potential acquisitions, we may issue
additional securities or need additional equity or debt financing and any such
financing may be dilutive to existing investors.
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8
ANNEX M
DELANO FORM 10-Q
FOR THE THREE AND NINE-MONTH PERIODS
ENDED DECEMBER 31, 2001 (U.S. GAAP)
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarter ended December 31, 2001; or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________.
COMMISSION FILE NO. 333-94505
DELANO TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA 98-0206122
(Province or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
---------------------------
302 TOWN CENTRE BOULEVARD L3R 0E8
MARKHAM, ONTARIO, CANADA (Zip code)
(Address of Registrant's principal executive offices)
Registrant's telephone number, including area code 905-947-2222
Securities registered pursuant to Section 12(b) NONE
of the Act:
Securities registered pursuant to Section 12(g) COMMON STOCK NO PAR VALUE
of the Act: (Title of Class)
---------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No .
As of Thursday, January 31, 2002, Registrant had 43,202,029 outstanding shares
of Common Stock.
================================================================================
DELANO TECHNOLOGY CORPORATION
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at December 31,
2001 and March 31, 2001 ................................. 3
Unaudited Condensed Consolidated Statements of Operations
for the three months and nine months ended December 31,
2001 and 2000 ........................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 2001 and 2000 .... 5
Notes to the Unaudited Condensed Consolidated Financial
Statements .............................................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk .. 20
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ........................................... 31
Item 2 Changes in Securities and Use of Proceeds ................... 31
Item 3 Defaults upon Senior Securities ............................. 31
Item 4 Submission of Matters to a Vote of Security Holders ......... 31
Item 5 Other Information ........................................... 31
Item 6 Exhibits and Reports on Form 8-K ............................ 31
Signatures ............................................................. 32
2
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DELANO TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
DECEMBER 31, MARCH 31,
2001 2001
------------ ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 11,205 $ 34,209
Short-term investments.......................................................... 1,427 1,155
Accounts receivable trade, net of allowance for doubtful accounts of $1,075 at
December 31, 2001, and $1,859 at March 31, 2001............................... 4,132 8,099
Prepaid expenses and other...................................................... 842 3,674
------------ -----------
Total current assets.......................................................... 17,606 47,137
Property and equipment............................................................. 2,867 11,300
Goodwill and identifiable intangibles, net ........................................ -- 5,217
Other assets ...................................................................... 263 985
------------ -----------
Total assets....................................................................... $ 20,736 $ 64,639
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................................ $ 3,469 $ 8,960
Restructuring accrual........................................................... 2,080 2,411
Deferred revenue................................................................ 801 1,975
Current portion of obligations under capital leases............................. 89 182
------------ -----------
Total current liabilities..................................................... 6,439 13,528
Long-term liabilities:
Obligations under capital leases................................................ -- 49
Restructuring accrual........................................................... -- 1,121
------------ -----------
Total liabilities.................................................................. 6,439 14,698
Shareholders' equity:
Capital stock:
Preference shares:
Authorized: Unlimited
Issued and outstanding: Nil at December 31, 2001 and March 31, 2001
Common shares:
Authorized: Unlimited
Issued and outstanding: 42,889,310 shares at December 31, 2001 and
37,240,858 shares at March 31, 2001......................................... 222,765 230,647
Warrant......................................................................... 370 496
Deferred stock-based compensation............................................... (1,930) (8,464)
Accumulated other comprehensive losses.......................................... (340) (340)
Deficit......................................................................... (206,568) (172,398)
------------- ------------
Total shareholders' equity.................................................... 14,297 49,941
------------ -----------
Total liabilities and shareholders' equity......................................... $ 20,736 $ 64,639
============ ===========
See accompanying notes to condensed consolidated financial statements.
3
DELANO TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- --------------------------
2001 2000 2001 2000
-------- --------- --------- ---------
Revenues:
License.................................................... $ 2,541 $ 8,040 $ 5,800 $ 20,410
Service.................................................... 1,619 1,230 5,356 2,912
----- --------- --------- ---------
Total revenues........................................... 4,160 9,270 11,156 23,322
----- --------- --------- ---------
Cost of revenues:
License.................................................... 181 89 567 270
Service (excluding stock-based compensation of $31, $77,
$43 and $207 respectively) .............................. 970 1,440 3,838 3,410
-------- --------- --------- ---------
Total cost of revenues................................... 1,151 1,529 4,405 3,680
-------- --------- --------- ---------
Gross profit.................................................. 3,009 7,741 6,751 19,642
-------- --------- --------- ---------
Operating expenses:
Sales and marketing (excluding stock-based compensation
of $139, $687, $(1,773) and $2,777, respectively)....... 2,097 13,641 11,651 35,145
Research and development (excluding stock-based
compensation of $77, $155, $(56) and $257,
respectively)............................................ 1,007 6,128 7,254 12,304
General and administrative (excluding stock-based
compensation of $152, $84, $41 and $242, respectively)... 670 1,397 2,572 3,537
Amortization (recovery) of deferred stock-based
compensation............................................. 399 1,003 (1,745) 3,483
In-process research and development........................ -- 69 -- 429
Amortization of goodwill and identifiable intangibles...... -- 5,107 287 5,107
Impairment of goodwill..................................... -- -- 4,930 --
Asset impairment........................................... 603 -- 7,629 --
Restructuring charges (recovery)........................... (2,094) -- 8,795 --
-------- --------- --------- ---------
Total operating expenses................................. 2,682 27,345 41,373 60,005
-------- --------- --------- ---------
Operating profit (loss) ...................................... 327 (19,604) (34,622) (40,363)
Interest and other income, net ............................ 35 926 598 3,852
Equity in loss of associated company....................... -- -- (146) --
-------- --------- --------- ---------
Income (loss) before income taxes............................. 362 (18,678) (34,170) (36,511)
Income taxes.................................................. -- -- -- --
------- --------- --------- ---------
Net income (loss) ............................................ $ 362 $ (18,678) $ (34,170) $ (36,511)
======== ========= ========= =========
Basic earnings (loss) per common share........................ $ 0.01 $ (0.52) $ (0.90) $ (1.14)
======== ========== ========= =========
Shares used in computing basic earnings (loss) per
common share (in thousands)............................... 38,959 35,825 37,945 32,055
======== ========= ========= =========
Fully diluted earnings per common share...................... $ 0.01 n/a n/a n/a
======== ========= ========= =========
Shares used in computing fully diluted earnings per
common share (in thousands)............................... 44,001 n/a n/a n/a
======== ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
DELANO TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
NINE MONTHS ENDED
DECEMBER 31,
------------------------
2001 2000
--------- ---------
Cash provided by (used in):
Operating activities:
Loss for the period ........................................ $(34,170) $(36,511)
Depreciation and amortization which does not involve cash .. 2,329 1,917
Amortization (recovery) of deferred stock-based compensation (1,745) 3,483
Impairment of goodwill ..................................... 4,930 --
Equity in loss of associated company ....................... 146 --
Non-cash charges ........................................... 5,302 5,536
Changes in non-cash operating working capital:
Accounts receivable trade ................................ 3,967 (5,517)
Prepaid expenses and other ............................... 2,807 (2,451)
Accounts payable and accrued liabilities ................. (5,425) 4,109
Restructuring accrual .................................... 72 --
Deferred revenue ......................................... (1,174) 237
-------- --------
Net cash used in operating activities ...................... (22,961) (29,197)
Financing activities:
Issuance of common shares and warrants ..................... 272 1,295
Payment on notes payable ................................... -- (1,995)
Repayment of obligations under capital leases .............. (144) (131)
-------- --------
Net cash provided by (used in) financing activities ........ 128 (831)
Investing activities:
Sale (purchase) of short-term investments .................. (272) 28,012
Additions to property and equipment ........................ (239) (11,252)
Purchase of long-term investments .......................... (698)
Cash used in acquisition ................................... -- (17,956)
Proceeds on sale of property and equipment ................. 351 --
-------- --------
Net cash used in investing activities ...................... (160) (1,894)
Effect of currency translation of cash balances ............... (11) 210
-------- --------
Decrease in cash and cash equivalents ......................... (23,004) (31,712)
Cash and cash equivalents, beginning of period ................ 34,209 82,370
-------- --------
Cash and cash equivalents, end of period ...................... $ 11,205 $ 50,658
======== ========
See accompanying notes to condensed consolidated financial statements.
5
DELANO TECHNOLOGY CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States by Delano Technology Corporation ("Delano" or the "Company") and
reflect all adjustments (all of which are normal and recurring in nature) that,
in the opinion of management, are necessary for a fair presentation of the
interim financial information. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending March 31, 2002. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under the Securities and Exchange Commission's rules and
regulations. These unaudited condensed consolidated financial statements and
notes included herein should be read in conjunction with Delano's audited
consolidated financial statements and notes included in Delano's Annual Report
on Form 10-K for the year ended March 31, 2001.
NOTE 2. SHAREHOLDERS' EQUITY
STOCK OPTION PLAN
The Company's stock option plan (the "Plan") was established for the
benefit of the employees, officers, directors and certain consultants of the
Company. The maximum number of common shares which may be set aside for issuance
under the Plan is 9,335,382 shares, provided that the Board of Directors of the
Company has the right, from time to time, to increase such number subject to the
approval of the shareholders of the Company when required by law or regulatory
authority. Generally, options issued subsequent to March 4, 1999 under the Plan
vest over a four-year period. Options issued prior to March 5, 1999 vest
annually over a three-year period.
Details of stock option transactions are as follows:
WEIGHTED
OPTIONS AVAILABLE AVERAGE
FOR NUMBER EXERCISE PRICE
GRANT OF OPTIONS PER SHARE
----------------- ---------- --------------
Balances, March 31, 2000....................................... 1,231,150 4,013,600 $ 2.51
Additional options authorized............................ 3,835,382
Options granted.......................................... (6,466,956) 6,466,956 $ 7.24
Options exercised........................................ (694,592) $ 0.59
Options cancelled........................................ 1,677,928 (1,677,928) $ 7.28
---------- ----------
Balances, March 31, 2001....................................... 277,504 8,108,036 $ 4.90
Additional options authorized............................
Options granted.......................................... (4,255,000) 4,255,000 $ 0.22
Options exercised........................................ (650,672) $ 0.16
Options cancelled........................................ 4,362,098 (4,362,098) $ 5.95
---------- ----------
Balances, December 31, 2001 (unaudited)........................ 384,602 7,350,266 $ 2.01
========== ==========
Options exercisable at December 31, 2001 (unaudited).......... 1,724,101 $ 2.88
==========
The stock options expire at various dates between May 2003 and September
2010.
The Company recorded deferred stock-based compensation amounting to
$111,000 for the three months ended December 31, 2001 compared to $1.2 million
for the three months ended December 31, 2000. Amortization of deferred
stock-based compensation amounted to $399,000 for the three months ended
December 31, 2001 compared to $1.0 million for the three months ended December
31, 2000.
The amortization (recovery) of deferred stock-based compensation relates
to the following cost of service revenues and operating expense categories (in
thousands):
6
THREE MONTHS ENDED NINE MONTHS ENDED
Unaudited DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
2001 2000 2001 2000
----------- --------- ---------- ---------
Cost of service revenues...... $ 31 $ 77 $ 43 $ 207
Sales and marketing........... 139 687 (1,773) 2,777
Research and development ..... 77 155 (56) 257
General and administrative.... 152 84 41 242
--------- --------- -------- ---------
$ 399 $ 1,003 $ (1,745) $ 3,483
========= ========= ========= =========
NOTE 3. COMPREHENSIVE INCOME (LOSS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which established standards for reporting and presentation of
comprehensive income. This standard defines comprehensive income (loss) as the
changes in equity of an enterprise except those resulting from shareholder
transactions. Comprehensive loss for the three months and nine months ended
December 31, 2001 and December 31, 2000, was not materially different from net
income (loss) for the periods.
NOTE 4. SEGMENT INFORMATION
The Company reviewed its operations and determined that it operates in a
single reportable operating segment, being the development and marketing of
interaction-based e-business communications applications. All long-lived assets
relating to the Company's operations are located in Canada in fiscal 2001.
Revenue per geographic location, which is attributable to geographic location
based on the location of the external customer, is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
Unaudited DECEMBER 31, DECEMBER 31,
-------------------- -------------------
2001 2000 2001 2000
--------- -------- -------- --------
Revenue by geographic locations:
United States ................... $ 2,199 $ 7,556 $ 7,480 $ 16,126
Canada........................... 549 827 2,109 3,998
Europe........................... 1,354 247 1,509 2,558
Asia Pacific..................... 58 640 58 640
-------- -------- -------- --------
$ 4,160 $ 9,270 $ 11,156 $ 23,322
======== ======== ======== ========
For the three months ended December 31, 2001, two customers accounted for
26% and 18% of total revenues, respectively. For the three months ended December
31, 2000, one customer accounted for 10% of total revenues. For the nine months
ended December 31, 2001, one customer accounted for 23% of total revenues. For
the nine months ended December 31, 2000, no customer accounted for 10% of total
revenues. As at December 31, 2001, the Company had a receivable from one
significant customer amounting to 23% of total accounts receivable trade. As at
December 31, 2000, the Company did not have a receivable from a customer
amounting to 10% of total accounts receivable trade.
7
NOTE 5. JOINT VENTURES AND INVESTMENT IN AFFILIATE
In June 2000, the Company formed Delano Minerva Holdings Inc. ("Minerva"),
and had a controlling position with a 50% ownership and a majority of the seats
of the Minerva Board of Directors. During fiscal 2001, the Company's
proportionate share of Minerva's losses exceeded its investment. Minerva's
results of operations were included within the Company's fiscal 2001 revenue,
cost and expense categories. During the three months ended September 30, 2001,
the Company agreed to pay $100,000 for the remaining ownership interest in
Minerva and subsequently closed down the operation.
In December 2000, the Company invested in a joint venture, Delano
Asia-Pacific, as a minority interest party by acquiring 19.9% of the common
shares. The joint venture partner was eGlobal Technology Services Holding
Limited ("eGlobal") of Singapore. The investment in this joint venture has been
made in the form of a $398,000 capital cash contribution, and a long-term,
non-interest bearing loan receivable of $602,000. This investment is accounted
for using the equity method of accounting. In the three months and in the six
months ended September 30, 2001 the Company recognized $80,000 and $146,000
respectively of losses and during fiscal 2001, the Company recognized $278,000
of losses, which represent the Company's proportionate share of the joint
ventures losses, net of the intercompany elimination.
During the three months ended December 31, 2001, the Company terminated its
distribution agreement with Delano Asia-Pacific pursuant to the terms of that
agreement.
NOTE 6. SPECIAL CHARGES
Special charges for the three months ended December 31, 2001 include a
$603,000 asset impairment charge and a $2.1 million restructuring recovery.
ASSET IMPAIRMENT:
During the three months ended September 30, 2001, the Company restructured
its operations to reduce operating expenses. During the restructuring, it was
determined that $5.8 million of capital assets and $1.2 million of other assets,
including the long-term, non-interest bearing loan receivable from eGlobal of
$602,000, had no future value to the Company. During the three months ended
December 31, 2001, the Company recorded an additional charge of $603,000 related
to the actions taken during the three months ended September 30, 2001.
RESTRUCTURING CHARGE:
The Company determined its restructuring charges in accordance with
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting
Bulletin No. 100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company
commit to an exit plan before it accrues employee termination costs and exit
costs. On January 4, 2001, the Company's senior management prepared and approved
a detailed exit plan that included the termination of 102 employees, closure of
certain facilities and the elimination of the ASP sales model. On April 23,
2001, the Company's senior management prepared and approved a second detailed
exit plan that included the additional termination of 140 employees and closure
of additional facilities. On July 3, 2001, the Company's senior management
prepared and approved a third detailed exit plan that included the additional
termination of 183 employees, closure of additional facilities, reduction of
capital assets no longer in use and other various exit costs. During the three
months ended December 31, 2001, the Company, under new management, took actions
to reduce the amount of restructuring liability by negotiating settlements with
existing landlords of certain restructured leased premises, by renegotiating
future cost commitments on the ASP model, and a decision to retain the ASP model
in future operations and various other measures. As a result of these efforts,
the Company recorded a $2.1 million restructuring recovery during the three
months ended December 31, 2001.
During the three months ended March 31, 2001, the Company incurred a
restructuring charge of $6.1 million (after adjustment) as part of a plan to
improve its operating results by reducing employees, by closing duplicative
Company facilities in the United States and Canada, and by implementing other
measures. This charge was part of a plan to streamline the Company's efforts to
focus on achieving profitability. Subsequent to March 31, 2001, an additional
$848,000 was accrued relating to a change in estimate for one of the facilities
in the three months ended June 30, 2001 and an additional $683,000 was accrued
relating to a change in estimate of future cost commitments for our ASP model
during the three months ended September 30, 2001. During the three months ended
December 31, 2001, a recovery of $1.7 million was accrued made up of $400,000
recovered in connection with a loan to a shareholder of an acquired company,
$857,000 from the settlement or near settlement of certain lease obligations and
a recovery of $435,000 related to the renegotiations of future cost commitments
on the ASP model. After the adjustments above, the restructuring charge was
comprised of $2.8
8
million for reductions in employee numbers, $2.1 million for facilities related
costs including penalties associated with the reduction of lease commitments and
future lease payments and $1.2 million related to eliminating the Company's ASP
sales model which has now been reinstated as part of future operations. As of
December 31, 2001, $5.0 million had been paid out on the restructuring charge.
Most of the remaining $1.1 million that has not yet been paid is related to
lease commitments.
In connection with the restructuring actions for the three months ended
March 31, 2001, the Company terminated the employment of 102 employees,
consisting of sales and marketing employees, applications development employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 34 employees
who resigned voluntarily during the three months ended March 31, 2001. At March
31, 2001, the Company had terminated all employees associated with these
restructuring actions. At March 31, 2001, the Company had exited a portion of
its facilities in Markham, Canada and most of its offices in the United States.
The Company has entered into sublease arrangements for some of its office space.
During the three months ended June 30, 2001, the Company incurred an
additional restructuring charge of $3.3 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, and by implementing other
measures. This charge was part of a plan to streamline the Company's efforts to
focus on achieving profitability. During the three months ended December 31,
2001, a recovery of $158,000 was accrued. After the adjustment above, the
restructuring charge was comprised of $2.5 million for reductions in employee
numbers, $571,000 for facilities-related costs including penalties associated
with the reduction of lease commitments and future lease payments and $186,000
related to the termination of the Minerva joint venture in Denmark. As of
December 31, 2001, all amounts had been paid out on the restructuring charge.
In connection with the restructuring actions for the three months ended
June 30, 2001, the Company terminated the employment of 140 employees,
consisting of applications development employees, sales and marketing employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 39 employees
who resigned voluntarily during the three months ended June 30, 2001. At June
30, 2001, the Company had terminated all employees associated with these
restructuring actions. At June 30, 2001, the Company had exited its office
facilities in the United States identified in the restructuring plan.
During the three months ended September 30, 2001, the Company incurred an
additional restructuring charge of $5.7 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, Canada and Europe and by
implementing other measures. This charge was part of a plan to streamline the
Company's efforts to focus on achieving profitability. During the three months
ended December 31, 2001, a recovery of $244,000 was accrued relating mostly to
settlement or near settlement of certain lease obligations. After the adjustment
above, the restructuring charge was comprised of $3.7 million for reductions in
employee numbers and $2.0 million for facilities-related costs including
penalties associated with the reduction of lease commitments and future lease
payments. As of December 31, 2001, $4.7 million had been paid out on the
restructuring charge. Most of the remaining $1.0 million relates to employee
termination costs and lease commitments.
In connection with the restructuring actions for the three months ended
September 30, 2001, the Company terminated the employment of 183 employees,
consisting primarily of applications development employees, sales and marketing
employees, technical and other support employees, and administrative employees
in all locations. In addition, the Company did not replace approximately 9
employees who resigned voluntarily during the three months ended September 30,
2001. At September 30, 2001, the Company had terminated all employees associated
with these restructuring actions. At September 30, 2001, the Company had exited
its office facilities in the United States, Canada and Europe identified in the
restructuring plan.
Restructuring charge accruals, both current and long-term, are shown
separately on the condensed consolidated balance sheet at December 31, 2001. The
long-term restructuring charge accrual at March 31, 2001 relates specifically to
future lease payment commitments that extend beyond one year. Detail of the
restructuring charges as of and for the three months ended December 31, 2001 are
summarized below:
BALANCE AT ADJUSTMENTS BALANCE AT
FOURTH QUARTER 2001 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
------------------------------------------ ------------------ ----------- -------- -----------------
Employee related $ -- $ (400) $ (400) $ --
Facilities related 1,884 (857) 120 907
ASP sales model related 791 (435) 156 200
------- -------- ------- -------
$ 2,675 $ (1,692) $ (124) $ 1,107
======= ======== ======= =======
9
BALANCE AT ADJUSTMENTS BALANCE AT
BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
------------------------ ------------------ ----------- -------- -----------------
Accounts payable $ -- $ -- $ -- $ --
Accrued liabilities 2,675 (1,692) (124) 1,107
------- -------- ------ -------
$ 2,675 $ (1,692) $ (124) 1,107
======= ======== ======
Less: current portion 1,107
-------
Long-term portion $ --
=======
BALANCE AT ADJUSTMENTS BALANCE AT
FIRST QUARTER 2002 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
---------------------------------------- ------------------ ----------- -------- -----------------
Employee related $ 156 $ (102) $ 54 $ --
Facilities related 69 (2) 67 --
Joint venture 75 (54) 21 --
-------- ------- -------- --------
$ 300 $ (158) $ 142 $ --
======== ======== ======== ========
BALANCE AT ADJUSTMENTS BALANCE AT
BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
------------------------ ------------------ ----------- -------- -----------------
Accounts payable $ -- $ -- $ -- $ --
Accrued liabilities 300 (158) 142 --
-------- -------- -------- --------
$ 300 $ (158) $ 142 --
======== ======== ========
Less: current portion --
--------
Long-term portion $ --
========
BALANCE AT ADJUSTMENTS BALANCE AT
SECOND QUARTER 2002 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
------------------------------------------ ------------------ ----------- -------- -----------------
Employee related $ 628 $ 18 $ 503 $ 143
Facilities related 1,726 (262) 634 830
-------- -------- -------- -------
$ 2,354 $ (244) $ 1,137 $ 973
======== ======== ======== =======
BALANCE AT ADJUSTMENTS BALANCE AT
BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
------------------------ ------------------ ----------- -------- -----------------
Accounts payable $ -- $ -- $ -- $ --
Accrued liabilities 2,354 (244) 1,137 973
-------- -------- -------- -------
$ 2,354 $ (244) $ 1,137 973
======== ======== ========
Less: current portion 973
-------
Long-term portion $ --
=======
10
NOTE 7. RELATED PARTY TRANSACTIONS
As at September 30, 2001, accrued consulting fees payable to a director
of the Company amounted to $165,000. These consulting fees were paid during the
three months ended December 31, 2001.
The Company named Vikas Kapoor as the Chief Executive Officer of the
Company and certain subsidiaries of the Company effective October 5, 2001. Mr.
Kapoor has served as a member of the Company's Board of Directors since July
2001. Mr. Kapoor's compensation package includes a grant of 4,230,000 Common
Shares, which vest over 30 months (705,000 common shares vested upon grant and
the balance vest at the rate of 117,500 common shares per month) subject to
accelerated vesting in certain circumstances as set out in the Restricted Share
Agreement.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, FASB issued Statement No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets", which retains the fundamental provisions of
SFAS 121. Statement 144 also broadens the definition of discontinued operations
to include all distinguishable components of an entity that will be eliminated
from ongoing operations. SFAS 121 is effective for the Company's year commencing
January 1, 2002 to be applied prospectively. The Company expects the adoption of
this standard will not have a material impact on its financial position, results
of operations or cash flows.
NOTE 9. LEGAL ITEMS
During the period from August 2 to October 1, 2001, three purported
securities class action lawsuits were filed against the Company in the U.S.
District Court for the Southern District of New York, Shapiro, et al. v. Delano
Technology Corporation, et al., Ellis Investments Ltd, et al. v. Delano
Technology Corporation, et al., and Wendy and Joe Scavuzzo, et al. v. Delano
Technology Corporation, et al. The complaints also name one or more of the
Company's underwriters in the Company's initial public offering and certain
officers and directors of the Company. The complaints allege violations of the
federal securities laws regarding statements in the Company's initial public
offering registration statement concerning the underwriters' activities in
connection with the underwriting of the Company's Common Shares to the public.
The actions seek rescission of the plaintiff's alleged purchases of Company
Common Shares and other damages and costs associated with the litigation.
Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 100 other companies. The Company believes it has
meritorious defenses to these lawsuits and will vigorously defend itself.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21e
of the Securities Exchange Act of 1934. Our actual results and timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors," elsewhere in this report and in our other public
filings.
The following discussion should be read in conjunction with our unaudited
consolidated financial statements and the related notes appearing elsewhere in
this Quarterly Report on Form 10-Q.
OVERVIEW
From the date of our incorporation on May 7, 1998 until April 1999, we
were a development stage company and had no revenues. Our operating activities
during this period consisted primarily of conducting research and developing our
initial products. In May 1999, we released and sold the first commercially
available version of the Delano e-Business Interaction Suite.
To date, we have derived substantially all of our revenues from the sale
of software product licenses and from the provision of professional services,
including implementation, training and maintenance services. Our products have
been sold primarily through our direct sales force.
Our products are offered on a licensed basis. We license our products
based on:
- a fee for each client, which depends on the specific and individual
needs of the client;
- an additional fee, which covers installation, configuration, training
and professional services; and
- a variable component, which depends on, among other things, the number
of servers and the number of optional applications and add-ons, servers
and component packs purchased.
Our cost of revenues includes the cost of product documentation, the cost
of compact disks used to deliver our products, personnel-related expenses,
travel costs, equipment costs and overhead costs.
Our operating expenses are classified into four categories: sales and
marketing, research and development, general and administrative, and
amortization of deferred stock-based compensation.
- Sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows and
marketing materials;
- Research and development expenses consist primarily of compensation and
related costs for research and development employees and contractors in
connection with the enhancement of existing products and quality
assurance activities;
- General and administrative expenses consist primarily of compensation
and related costs for administrative personnel, legal, accounting and
other general corporate expenses; and
- Amortization (recovery) of deferred stock-based compensation includes
the amortization, over the vesting period of a stock option, of the
difference between the exercise price of options granted to employees
and the deemed fair market value of the options for financial reporting
purposes. In addition, deferred stock-based compensation includes
compensation expense arising on the issuance of options and a warrant
to employees and a consultant, calculated as the difference between the
exercise price of the options and warrant and the fair market value at
the date of issuance. Also included in amortization of deferred
stock-based compensation is compensation expense relating to an option
to acquire shares of the Company issued in connection with a
professional services agreement between the Company and a related
corporation. The compensation expense is calculated as the difference
between the exercise price of the option and the fair market value at
the time the option was issued or earned. Also included in amortization
of deferred stock-based compensation is compensation expense relating
to the unvested options assumed in the acquisitions of Continuity and
DA. In connection with the restructuring actions, the Company has
recorded a recovery of deferred stock-based compensation relating to
terminated employees.
12
We allocate common costs based on relative headcount or other relevant
measures. These allocated costs include rent and other facility-related costs
for the corporate head office, communication expenses and depreciation expenses
for property and equipment.
In connection with the granting of stock options and the issuance of a
warrant to our employees and a consultant, we recorded deferred stock-based
compensation totaling $13.7 million through March 31, 2001. This amount
represents the total difference between the exercise prices of stock options and
the warrant and the deemed fair value of the underlying common stock for
accounting purposes on the date these stock options were granted and the warrant
issued. This amount is included as a component of shareholders' equity and is
being amortized by charges to operations over the vesting period of the options,
consistent with the method described in FASB, Interpretation No. 28. We recorded
$399,000 of stock-based compensation amortization expense during the three
months ended December 31, 2001 compared to $1.0 million of stock-based
compensation amortization expense during the three months ended December 31,
2000. We recorded a recovery of $1.7 million of stock-based compensation
amortization expense during the nine months ended December 31, 2001 compared to
$3.5 million of stock-based compensation amortization expense during the nine
months ended December 31, 2000. As of December 31, 2001, we had a total of $1.9
million of deferred stock-based compensation that had not been amortized. The
amortization of the remaining deferred stock-based compensation will result in
additional charges to operations through December 2003 of approximately $200,000
per quarter. The amortization of deferred stock-based compensation is classified
as a separate component of operation expenses in our consolidated statement of
operations.
The Company named Vikas Kapoor as the Chief Executive Officer of the
Company and certain subsidiaries of the Company effective October 5, 2001. Mr.
Kapoor has served as a member of the Company's Board of Directors since July
2001. Mr. Kapoor's compensation package includes a grant of 4,230,000 Common
Shares, which vest over 30 months (705,000 common shares vested upon grant and
the balance vest at the rate of 117,500 common shares per month) subject to
accelerated vesting in certain circumstances as set out in the Restricted Share
Agreement.
In our development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal product development have been expensed as incurred.
Special charges for the three months ended December 31, 2001 include a
$603,000 asset impairment charge and a $2.1 million restructuring recovery.
ASSET IMPAIRMENT:
During the three months ended September 30, 2001, the Company restructured
its operations to reduce operating expenses. During the restructuring, it was
determined that $5.8 million of capital assets and $1.2 million of other assets,
including the long-term, non-interest bearing loan receivable from eGlobal of
$602,000, had no future value to the Company. During the three months ended
December 31, 2001, the Company recorded an additional charge of $603,000 related
to the actions taken during the three months ended September 30, 2001.
RESTRUCTURING CHARGE:
The Company determined its restructuring charges in accordance with
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting
Bulletin No. 100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company
commit to an exit plan before it accrues employee termination costs and exit
costs. On January 4, 2001, the Company's senior management prepared and approved
a detailed exit plan that included the termination of 102 employees, closure of
certain facilities and the elimination of the ASP sales model. On April 23,
2001, the Company's senior management prepared and approved a second detailed
exit plan that included the additional termination of 140 employees and closure
of additional facilities. On July 3, 2001, the Company's senior management
prepared and approved a third detailed exit plan that included the additional
termination of 183 employees, closure of additional facilities, reduction of
capital assets no longer in use and other various exit costs. During the three
months ended December 31, 2001, the Company, under new management, took actions
to reduce the amount of restructuring liability by negotiating settlements with
existing landlords of certain restructured leased premises, by renegotiating
future cost commitments on the ASP model, and a decision to retain the ASP model
in future operations and various other measures. As a result of these efforts,
the Company recorded a $2.1 million restructuring recovery during the three
months ended December 31, 2001.
13
During the three months ended March 31, 2001, the Company incurred a
restructuring charge of $6.1 million (after adjustment) as part of a plan to
improve its operating results by reducing employees, by closing duplicative
Company facilities in the United States and Canada, and by implementing other
measures. This charge was part of a plan to streamline the Company's efforts to
focus on achieving profitability. Subsequent to March 31, 2001, an additional
$848,000 was accrued relating to a change in estimate for one of the facilities
in the three months ended June 30, 2001 and an additional $683,000 was accrued
relating to a change in estimate of future cost commitments for our ASP model
during the three months ended September 30, 2001. During the three months ended
December 31, 2001, a recovery of $1.7 million was accrued made up of $400,000
recovered in connection with a loan to a shareholder of an acquired company,
$857,000 from the settlement or near settlement of certain lease obligations and
a recovery of $435,000 related to the renegotiations of future cost commitments
on the ASP model. After the adjustments above, the restructuring charge was
comprised of $2.8 million for reductions in employee numbers, $2.1 million for
facilities related costs including penalties associated with the reduction of
lease commitments and future lease payments and $1.2 million related to
eliminating the Company's ASP sales model which has now been reinstated as part
of future operations. As of December 31, 2001, $5.0 million had been paid out on
the restructuring charge. Most of the remaining $1.1 million that has not yet
been paid is related to lease commitments.
In connection with the restructuring actions for the three months ended
March 31, 2001, the Company terminated the employment of 102 employees,
consisting of sales and marketing employees, applications development employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 34 employees
who resigned voluntarily during the three months ended March 31, 2001. At March
31, 2001, the Company had terminated all employees associated with these
restructuring actions. At March 31, 2001, the Company had exited a portion of
its facilities in Markham, Canada and most of its offices in the United States.
The Company has entered into sublease arrangements for some of its office space.
During the three months ended June 30, 2001, the Company incurred an
additional restructuring charge of $3.3 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, and by implementing other
measures. This charge was part of a plan to streamline the Company's efforts to
focus on achieving profitability. During the three months ended December 31,
2001, a recovery of $158,000 was accrued. After the adjustment above, the
restructuring charge was comprised of $2.5 million for reductions in employee
numbers, $571,000 for facilities-related costs including penalties associated
with the reduction of lease commitments and future lease payments and $186,000
related to the termination of the Minerva joint venture in Denmark. As of
December 31, 2001, all amounts had been paid out on the restructuring charge.
In connection with the restructuring actions for the three months ended
June 30, 2001, the Company terminated the employment of 140 employees,
consisting of applications development employees, sales and marketing employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 39 employees
who resigned voluntarily during the three months ended June 30, 2001. At June
30, 2001, the Company had terminated all employees associated with these
restructuring actions. At June 30, 2001, the Company had exited its office
facilities in the United States identified in the restructuring plan.
During the three months ended September 30, 2001, the Company incurred an
additional restructuring charge of $5.7 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, Canada and Europe and by
implementing other measures. This charge was part of a plan to streamline the
Company's efforts to focus on achieving profitability. During the three months
ended December 31, 2001, a recovery of $244,000 was accrued relating mostly to
settlement or near settlement of certain lease obligations. After the adjustment
above, the restructuring charge was comprised of $3.7 million for reductions in
employee numbers and $2.0 million for facilities-related costs including
penalties associated with the reduction of lease commitments and future lease
payments. As of December 31, 2001, $4.7 million had been paid out on the
restructuring charge. Most of the remaining $1.0 million relates to employee
termination costs and lease commitments.
In connection with the restructuring actions for the three months ended
September 30, 2001, the Company terminated the employment of 183 employees,
consisting primarily of applications development employees, sales and marketing
employees, technical and other support employees, and administrative employees
in all locations. In addition, the Company did not replace approximately 9
employees who resigned voluntarily during the three months ended September 30,
2001. At September 30, 2001, the Company had terminated all employees associated
with these restructuring actions. At September 30, 2001, the Company had exited
its office facilities in the United States, Canada and Europe identified in the
restructuring plan.
14
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being a
good indication of our future performance. Our prospects must be considered in
light of the risks, expenses and difficulties frequently experienced by
companies in early stages of development, particularly companies in new and
rapidly evolving markets like ours. Although we have experienced significant
revenue growth recently, this trend may not be sustainable. Furthermore, we may
not achieve or maintain profitability in the future.
RESULTS OF OPERATIONS
Three months and nine months ended December 31, 2001 compared to three months
and nine months ended December 31, 2000.
Revenues. Total revenues for the three months ended December 31, 2001 were
$4.2 million compared to $9.3 million for the three months ended December 31,
2000. In the three months ended December 31, 2001, license revenues accounted
for $2.5 million or 61.1% of total revenues. In the three months ended December
31, 2000, license revenues accounted for $8.0 million, or 86.7% of total
revenues. Total revenues for the nine months ended December 31, 2001 were $11.2
million compared to $23.3 million for the nine months ended December 31, 2000.
In the nine months ended December 31, 2001, license revenues accounted for $5.8
million or 52.0% of total revenues. In the nine months ended December 31, 2000,
license revenues accounted for $20.4 million, or 87.5% of total revenues.
Service revenues, including maintenance and services fees, accounted for
$1.6 million, or 38.9% of revenues for the three months ended December 31, 2001,
compared to $1.2 million or 13.3% of total revenues for the three months ended
December 31, 2000. Service revenues, including maintenance and services fees,
accounted for $5.4 million, or 48.0% of revenues for the nine months ended
December 31, 2001, compared to $2.9 million or 12.5% of total revenues for the
nine months ended December 31, 2000.
Approximately 52.9% of our total revenues were generated in the United
States, 13.2% were generated in Canada and 33.9% were generated elsewhere in the
three months ended December 31, 2001, compared to 81.5%, 8.9% and 9.6%
respectively, for the three months ended December 31, 2000. Approximately 67.0%
of our total revenues were generated in the United States, 18.9% were generated
in Canada and 14.1% were generated elsewhere in the nine months ended December
31, 2001, compared to 69.1%, 17.1% and 13.8% respectively, for the nine months
ended December 31, 2000.
Cost of revenues. Cost of license revenues was $181,000 or 4.3% of total
revenues for the three months ended December 31, 2001 compared to $89,000 for
the three months ended December 31, 2000 or 1.0% of total revenues. Cost of
service revenues was $970,000, or 23.3% of total revenues for the three months
ended December 31, 2001 compared to $1.4 million for the three months ended
December 31, 2000, or 15.5% of total revenues. Cost of license revenues was
$567,000 or 5.1% of total revenues for the nine months ended December 31, 2001
compared to $270,000 for the nine months ended December 31, 2000 or 1.2% of
total revenues. Cost of service revenues was $3.8 million, or 34.4% of total
revenues for the nine months ended December 31, 2001, compared to $3.4 million
for the nine months ended December 31, 2001, or 14.6% of total revenues.
We anticipate that cost of service revenues will remain relatively
constant in absolute dollars. We anticipate that the cost of license revenues
will be a smaller proportion of license revenues.
Sales and marketing. Sales and marketing expenses decreased to $2.1
million or 50.4% of revenues for the three months ended December 31, 2001 from
$13.6 million or 147.1% of revenues for the three months ended December 31,
2000. Sales and marketing expenses decreased to $11.7 million or 104.4% of
revenues for the nine months ended December 31, 2001 from $35.1 million or
150.7% of revenues for the nine months ended December 31, 2000. This decrease
was attributable primarily to the reduction of sales and marketing personnel and
lower marketing costs due to reduced promotional activities. We anticipate that
sales and marketing expenses will remain relatively constant in the next few
quarters.
Research and development. Research and development expenses decreased to
$1.0 million or 24.2% of revenues for the three months ended December 31, 2001
from $6.1 million or 66.1% of revenues for the three months ended December 31,
2000. Research and development expenses decreased to $7.3 million or 65.0% of
revenues for the nine months ended December 31, 2001 from $12.3 million or 52.7%
of revenues for the nine months ended December 31, 2000. This decrease was
attributable primarily to the reduction of product development and related
services personnel and to decreased consulting and recruiting costs. We
anticipate that research and development expenses will remain constant in
absolute dollars, and will reduce as a percentage of total revenues from period
to period as we have reduced research and development personnel.
15
General and administrative. General and administrative expenses decreased
to $670,000 or 16.1% of revenues for the three months ended December 31, 2001
from $1.4 million or 15.0% of revenues for the three months ended December 31,
2000. General and administrative expenses decreased to $2.6 million or 23.0% of
revenues for the nine months ended December 31, 2001 from $3.5 million or 15.2%
of revenues for the nine months ended December 31, 2000. The decrease is due
primarily to the reduction of administrative personnel, decreased consulting
costs and to lower facilities-related expenses necessary to support our growth.
We expect that general and administrative expenses will remain constant in
absolute dollars as we have reduced personnel and related costs.
Amortization of goodwill and identifiable intangibles. On September 26,
2000, the Company completed its acquisition of Continuity. As a result of the
acquisition, $19.4 million was allocated to goodwill, and identifiable
intangibles. This amount was being amortized on a straight-line basis over a
period of three years for identifiable intangibles, and five years for goodwill
from October 1, 2000. On October 16, 2000, the Company completed its acquisition
of DA. As a result of the acquisition, $94.2 million was allocated to goodwill
and identifiable intangibles. This amount was being amortized from October 16,
2000 on a straight-line basis over a period of three years for identifiable
intangibles and five years for goodwill.
Specific events and changes in circumstances indicated that these long
lived assets were not recoverable, as determined based on the undiscounted cash
flows of the acquired business. In accordance with the Company's policy, the
carrying value has been reduced to net realizable value. For the three months
ended March 31, 2001, goodwill and identifiable intangibles were reduced by
approximately $97.0 million. For the three months ended June 30, 2001, goodwill
was reduced by a further $4.9 million. For the three months ended December 31,
2001, there is no amortization of goodwill and identifiable intangibles.
Amortization of deferred stock-based compensation. We incurred a charge of
$399,000 or 9.6% of revenues in the three months ended December 31, 2001
compared to a charge of $1.0 million or 10.8% of revenues for the three months
ended December 31, 2000. We incurred a recovery of $1.7 million or 15.6% of
revenues in the nine months ended December 31, 2001 compared to a charge of $3.5
million or 14.9% of revenues for the nine months ended December 31, 2000. The
charge is related to the issuance of stock options with exercise prices less
than the deemed fair market value for financial reporting purposes on the date
of grant and the recovery is related to the unvested options of terminated
employees from the restructuring actions.
Interest and other income, net. Interest and other income, net for the
three months ended December 31, 2001 was $35,000, compared to the three months
ended December 31, 2000 at $926,000. Interest and other income, net for the nine
months ended December 31, 2001 was $598,000, compared to the nine months ended
December 31, 2000 at $3.9 million. Interest and other income reflects the
interest earned on the cash and cash equivalents balance arising from our
special warrant offering in September 1999 and our initial public offering in
February 2000. The decrease in interest and other income reflects lower cash
balances and lower interest rates.
Provision for income taxes. A deferred tax asset of $28.5 million existed
as of December 31, 2001 compared to $15.3 million at December 31, 2000. A full
valuation allowance was recorded against the deferred tax asset because it is
more likely than not that the asset will not be realized. A valuation allowance
taken against substantially the entire deferred tax asset reflects the lack of
profitability in the past, the significant risk that taxable income would not be
generated in the future and the non-transferable nature of the deferred tax
asset under certain conditions.
Three and nine months ended December 31, 2000 compared to the three and nine
months ended December 31,1999.
Revenues. Total revenues for the three months ended December 31, 2000 were
$9.3 million, compared to $2.9 million for the three months ended December 31,
1999. License revenues accounted for $8.0 million, or 86.7% of total revenues
for the three months ended December 31, 2000, compared with $2.7 million or
93.8% for the three months ended December 31, 1999. Total revenues for the nine
months ended December 31, 2000 were $23.3 million, compared to $5.4 million for
the nine months ended December 31, 1999. License revenues accounted for $20.4
million, or 87.5% of total revenues for the nine months ended December 31, 2000,
compared with $5.1 million or 94.5% for the nine months ended December 31, 1999.
Service revenues, including maintenance and services fees, accounted for
the remaining $1.2 million or 13.3% of total revenues for the three months ended
December 31, 2000, compared with $183,000 or 6.2% for the three months ended
December 31, 1999. Service revenues, including maintenance and services fees,
accounted for the remaining $2.9 million or 12.5% of total revenues for the nine
months ended December 31, 2000, compared with $296,000 or 5.5% for the nine
months ended December 31, 1999.
16
Approximately 81.5% (1999 - 61.5%) of our total revenues were generated in
the United States, 8.9% (1999 - 38.5%) were generated in Canada and 9.6% (1999 -
0.0%) were generated elsewhere in the three months ended December 31, 2000.
Approximately 69.1% (1999 - 68.4%) of our total revenues were generated in the
United States, 17.1% (1999 - 31.3%) were generated in Canada and 13.8% (1999 -
0.3%) were generated elsewhere in the nine months ended December 31, 2000.
Cost of revenues. Cost of product revenues was $89,000 for the three
months ended December 31, 2000 or 1.0% of total revenues, compared with $14,000
or 0.5% for the three months ended December 31, 1999. Cost of service revenues
was $1.4 million for the three months ended December 31, 2000, or 15.5% of total
revenues, compared with $321,000, or 11.0% of total revenues for the three
months ended December 31, 1999. Cost of product revenues was $270,000 for the
nine months ended December 31, 2000 or 1.2% of total revenues, compared with
$20,000 or 0.4% for the nine months ended December 31, 1999. Cost of service
revenues was $3.4 million for the nine months ended December 31, 2000, or 14.6%
of total revenues, compared with $701,000, or 13.1% of total revenues for the
nine months ended December 31, 1999.
We anticipate that cost of service revenues will increase in absolute
dollars, but at a slower rate than previous quarters as we continue to hire
additional services personnel, but decrease proportionately as a percentage of
service revenues. We anticipate that the cost of product revenues will increase
proportionately with increases in product revenues.
Sales and marketing. Sales and marketing expenses increased to $13.6
million for the three months ended December 31, 2000, or 147.2% of total
revenues, compared with $3.4 million or 117.4% of total revenues for the three
months ended December 31, 1999. Sales and marketing expenses increased to $35.1
million for the nine months ended December 31, 2000, or 150.7% of total
revenues, compared with $5.5 million or 101.8% of total revenues for the nine
months ended December 31, 1999. This increase was attributable primarily to the
addition of sales and marketing personnel and higher marketing costs due to
expanded promotional activities.
Research and development. Research and development expenses increased to
$6.1 million for the three months ended December 31, 2000, or 66.1% of total
revenues, compared with $1.1 million, or 36.0% of total revenues for the three
months ended December 31, 1999. Research and development expenses increased to
$12.3 million for the nine months ended December 31, 2000, or 52.8% of total
revenues, compared with $2.2 million, or 41.9% of total revenues for the nine
months ended December 31, 1999. This increase was attributable primarily to the
addition of product development and related services personnel and to increased
consulting and recruiting costs.
As a Canadian Controlled Private Corporation or ("CCPC"), we qualified for
certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.4 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of the amount of the credit. We will earn
investment tax credits at a rate of 20% of eligible current and capital research
and development expenditures made after our initial public offering. While a
portion of investment tax credits earned as a CCPC are refundable, investment
tax credits earned after our initial public offering may only be used to offset
income taxes otherwise payable.
General and administrative. General and administrative expenses increased
to $1.4 million, or 15.1% of total revenues for the three months ended December
31, 2000, compared to $355,000, or 12.1% of total revenues for the three months
ended December 31, 1999. General and administrative expenses increased to $3.5
million, or 14.9% of total revenues for the nine months ended December 31, 2000,
compared to $767,000, or 14.3% of total revenues for the nine months ended
December 31, 1999. The increase is due primarily to the addition of
administrative personnel, increased consulting costs and to higher
facilities-related expenses necessary to support our growth.
Amortization of goodwill and identifiable intangibles. On September 26,
2000, the Company completed its acquisition of Continuity. As a result of the
acquisition, $19.4 million was allocated to goodwill, and identifiable
intangibles. This amount is being amortized on a straight-line basis over a
period of three years for identifiable intangibles, and five years for goodwill
from October 1, 2000. For the three months and nine months ended December 31,
2000, $1.0 million (1999 - nil) of goodwill amortization was recorded. On
October 16, 2000, the Company completed its acquisition of DA. As a result of
the acquisition, $94.2 million was allocated to goodwill and identifiable
intangibles. This amount is being amortized on a
17
straight-line basis over a period of three years for identifiable intangibles
and five years for goodwill from October 16, 2000. For the three months and nine
months ended December 31, 2000, $4.1 million (1999 - nil) of goodwill
amortization was recorded.
Amortization of deferred stock-based compensation. We incurred a charge of
$1.0 million for the three months ended December 31, 2000, compared to $451,000
for the three months ended December 31, 1999 related to the issuance of stock
options with exercise prices less than the deemed fair market value for
financial reporting purposes on the date of grant. We incurred a charge of $3.5
million for the nine months ended December 31, 2000, compared to $769,000 for
the nine months ended December 31, 1999 related to the issuance of stock options
with exercise prices less than the deemed fair market value for financial
reporting purposes on the date of grant.
In-process research and development. In connection with the acquisition of
Continuity and DA, net intangibles of $429,000 were allocated to in-process
research and development. The fair value allocation to in-process research and
development was determined by identifying the research projects for which
technical feasibility has not been achieved and which have no alternative future
use at the acquisition date, assessing the stage and expected date of completion
of the research and development effort at the acquisition date, and calculating
the net present value of the cash flows expected to result from the successful
deployment of the new technology resulting from the in-process research and
development effort.
The stages of completion were determined by estimating the costs and time
incurred to date relative to the costs and time incurred to develop the
in-process technology into a commercially viable technology or product, while
considering the relative difficulty of completing various tasks and obstacles
necessary to attain technological feasibility.
The estimated net present value of cash flows was based on incremental
future cash flows from revenues expected to be generated by the technologies in
the process of development, taking into account the characteristics and
applications of the technologies, the size and growth rate of existing and
future markets and an evaluation of past and anticipated technology and product
life cycles. Estimated net future cash flows included allocations of operating
expenses and income taxes but excluded the expected completion costs of the
in-process projects, and were discounted to arrive at a net present value. The
discount rate included a factor that took into account the uncertainty
surrounding the successful deployment of in-process technology projects. This
net present value was allocated to in-process research and development based on
the percentage of completion at the acquisition date.
Interest and other income, net. Interest and other income, net for the
three months ended December 31, 2000 was $926,000, compared to $178,000 for the
three months ended December 31, 1999. Interest and other income, net for the
nine months ended December 31, 2000 was $3.9 million, compared to $354,000 for
the nine months ended December 31, 1999. Interest and other income, net reflects
the interest earned on the cash and cash equivalents balance arising from our
special warrant offering in June 1999 and our initial public offering in
February 2000.
Provision for income taxes. A deferred tax asset of $15.3 million existed
as of December 31, 2000. A full valuation allowance was recorded against the
deferred tax asset because it is more likely than not that the asset will not be
realized. A valuation allowance taken against substantially all of the deferred
tax asset reflects the lack of profitability in the past, the significant risk
that taxable income would not be generated in the future and the nontransferable
nature of the deferred tax asset under certain conditions.
LIQUIDITY AND CAPITAL RESOURCES
Since the date of incorporation, we have raised an aggregate of $3.4
million through private placements of special shares. We have raised $14.4
million, net of the agents' commission and offering expenses, through a private
placement of special warrants in June 1999. We have also raised $103.4 million,
net of agents' commissions and offering expenses through our initial public
offering in February 2000.
Our operating activities used cash of $23.0 million for the nine months
ended December 31, 2001 and cash of $29.2 million for the nine months ended
December 31, 2000. Our negative operating cash flow resulted principally from
the net losses that we incurred during these periods. The Company has taken
restructuring actions in January, April and July 2001 to reduce expenses.
Our financing activities provided cash of $128,000 in the nine months
ended December 31, 2001 and used cash of $831,000 in nine months ended December
31, 2000, mostly related to payments on capital leases net of receipts from
issuance of common shares and warrants.
18
Our investing activities, consisting of the purchase or sale of computer
equipment, software, furniture and equipment, net of the purchase or sale of
short-term investments used cash of $160,000 during the nine months ended
December 31, 2001 and used cash of $1.9 million in nine months ended December
31, 2000.
In March 1999, we obtained a lease line of credit from a Canadian
chartered bank to purchase equipment and furniture. Approximately $89,000 was
outstanding as of December 31, 2001. The ceiling on the lease line of credit is
Cdn$1,000,000 (approximately $640,000). The lease line of credit is not
collateralized with cash for the amount of the line that is used for leasing
equipment.
Our capital requirements depend on a number of factors. In January, April
and July 2001, the Company completed restructurings of its operations to reduce
the cost of operating the business and expects quarterly expenses to be less
than or equal to the quarter ended December 31, 2001. The Company will also have
to pay out certain obligations related to these restructurings. We expect to
continue to devote resources to continue our research and development efforts,
our sales, support efforts, and marketing efforts. Our expenditures have
increased substantially since the date of incorporation, but we anticipate that
capital expenditures and quarterly expenses will decrease or stay the same in
absolute dollars compared to the December 31, 2001 quarter.
At December 31, 2001, we had cash and cash equivalents and short-term
investments aggregating $12.6 million. We believe based on current forecasts
that our current cash and cash equivalents and short-term investments are
sufficient to fund our operations and pay out our obligations as a result of our
restructurings for at least the next 12 months. If cash generated from
operations is insufficient to meet our long-term liquidity needs, we may need to
raise additional funds or seek other financing arrangements. Additional funding
may not be available on favorable terms or at all. In addition, although there
are no present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, we may, from time to
time, evaluate potential acquisitions of other businesses, products and
technologies. In order to consummate potential acquisitions, we may issue
additional securities or need additional equity or debt financing and any such
financing may be dilutive to existing investors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Pursuant to recent accounting guidance to disclose significant accounting
policies and business practices that are deemed to be important to the Company's
financial condition, the Company has made the following disclosures:
The preparation of consolidated financial statements requires Delano to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, Delano evaluates its estimates, including
those related to revenue recognition, bad debts, investments, intangible assets,
income taxes, restructuring, and contingencies and litigation. Delano bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue recognition - We recognize our software license revenues in
accordance with the American Institute of Certified Public Accountants, or
("AICPA"), Statement of Position ("SOP") 97-2, "Software Revenue Recognition,"
and related amendments and interpretations contained in the AICPA's SOP 98-9. We
generally recognize revenues allocated to software licenses upon delivery of the
software products, when all of the following conditions have been met:
- persuasive evidence of an arrangement exists;
- the license fee is fixed or determinable; and
- collectibility of the license fee is probable.
Because substantially all of our software license agreements include
related maintenance services, these agreements are multiple-element
arrangements. We allocate the fees in multiple-element arrangements based on the
respective value for each element, with maintenance being allocated typically at
18% of license revenue but not in all cases. Delivery of the software generally
is deemed to occur upon shipment of the software unless customers are provided
the opportunity to return the products. Revenues are recognized only when all
refund obligations have expired. In situations where we provide online
offerings, delivery of the software occurs upon initiation of the online
offerings. Revenues from maintenance and support services and online offerings
are recognized ratably over the related contractual period. Revenues related to
installation and integration services are recognized on a time and material
basis as such services are provided.
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Restructuring charges (recovery) - The Company determined its
restructuring charges (recovery) in accordance with Emerging Issues Task Force
Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No. 100 ("SAB 100").
EITF 94-3 and SAB 100 require that the Company commit to an exit plan before it
accrues employee termination costs and exit costs.
All restructuring related charges involved estimates based on information
available at the time the accrual was made. Actual results may differ from these
estimates under different assumptions or conditions.
RECENT ACCOUNTING PRONOUNCEMENT
In October 2001, FASB issued Statement No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets", which retains the fundamental provisions of
SFAS 121. Statement 144 also broadens the definition of discontinued operations
to include all distinguishable components of an entity that will be eliminated
from ongoing operations. SFAS 121 is effective for the Company's year commencing
January 1, 2002 to be applied prospectively. The Company expects the adoption of
this standard will not have a material impact on its financial position, results
of operations or cash flows.
RISK FACTORS
Our future operating results may vary substantially from period to period.
The price of our Common Shares will fluctuate in the future, and an investment
in our Common Shares is subject to a variety of risks, including but not limited
to the specific risks identified below. Inevitably, some investors in our
securities will experience gains while others will experience losses depending
on the prices at which they purchase and sell securities. Prospective and
existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth herein. This Quarterly Report on Form
10-Q contains forward-looking statements that are not historical facts but
rather are based on current expectations, estimates and projections about our
business and industry, our beliefs and assumptions. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates" and variations
of these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
These risks and uncertainties include those described in this section and
elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements that
were true at the time made may ultimately prove to be incorrect or false.
Readers are cautioned not to place undue reliance on forward-looking statement,
which reflect our management's view only as of the date of this Quarterly Report
on Form 10-Q.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
FORECAST OUR FUTURE OPERATING RESULTS.
We were incorporated on May 7, 1998, and we first recorded revenues in the
quarter ended June 30, 1999. We are still in the early stages of our development
and have a limited operating history, making it difficult to evaluate our
business and prospects. As a result of our limited operating history, it is
difficult or impossible for us to predict future operating results. For example,
we cannot forecast operating expenses based on our historical results because
our historical results are limited and we, to some extent, forecast expenses
based on future revenue projections. Moreover, due to our limited operating
history, any evaluation of our business and prospects must be made in light of
the risks and uncertainties often encountered by early-stage companies in
internet-related markets. Many of these risks are discussed in the sub-headings
below, and include our ability to execute our product development activities,
implement our sales and marketing initiatives, both domestically and
internationally, and attract more clients. We may not successfully address any
of these risks.
FACTORS RELATING TO OUR BUSINESS MAKE OUR FUTURE OPERATING RESULTS UNCERTAIN,
AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO PERIOD.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter, particularly because our
products and services are relatively new and our prospects are uncertain. If our
quarterly revenues or operating results fall below the expectations of
investors, the price of our Common Shares could decline substantially. Factors
that might cause quarterly fluctuations in our operating results include the
risk factors described in the sub-headings below as well as the following:
- the timing of new releases of our products;
20
- changes in our pricing policies or those of our competitors,
including the extent to which we may need to offer discounts to match
competitors' pricing;
- the mix of sales channels through which our products and services are
sold;
- the mix of our domestic and international sales;
- costs related to the customization of our products;
- our ability to expand our operations, and the amount and timing of
expenditures related to this expansion;
- any costs or expenses related to our move to new corporate offices;
and
- our operating results may also be affected by the following factors
over which we have little or no control:
- the evolving and varying demand for interaction-based software
products and services for e-businesses, particularly our products
and services;
- the discretionary nature of our client's purchasing and budgetary
cycles;
- the timing of execution of large contracts that materially affect
our operating results; and
- global economic conditions, as well as those specific to large
enterprises with high e-mail volume.
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, WHICH WOULD CAUSE OUR OPERATING
RESULTS TO VARY FROM PERIOD TO PERIOD.
Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. As a result, if total
revenues for a particular quarter are below our expectations, we cannot
proportionately reduce operating expenses for that quarter. Therefore, this
revenue shortfall would have a disproportionate effect on our operating results
for that quarter.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE.
Since we began operations in May 1998, we have incurred substantial
operating losses in every quarter. As a result of accumulated operating losses,
as of December 31, 2001, we had an accumulated deficit of $206.6 million. For
the nine months ended December 31, 2001, we had a net loss of $34.2 million, or
306.3% of total revenues for that period. Our revenue in recent periods has been
from a limited base of clients, and we may not be able to sustain our revenue.
We expect to decrease our operating expenses as part of our restructuring
efforts. We may experience losses and negative cash flow, even if sale of our
products and services continues to grow, and we may not generate sufficient
revenues to achieve profitability in the future.
OUR BUSINESS IS IMPACTED BY THE SLOWDOWN IN ECONOMIC CONDITIONS.
As a result of recent unfavorable economic conditions and reduced capital
spending, software licensing revenues have declined as a percentage of our total
revenues. In particular, revenues were impacted during the first and second
fiscal quarter of 2002. If the economic conditions in the United States worsen,
or if a wider global economic slowdown occurs, we may experience a material
adverse impact on our business, operating results, and financial condition.
We have taken and expect to continue to take remedial measures to address
the recent slowdown in the market for our products that could have long-term
effects on our business.
In particular, we have reduced our workforce, frozen hiring, and reduced
our planned capital expenditure and expense budgets. These measures will reduce
our expenses in the face of decreased revenues due to decreased customer orders.
However, each of these measures and any additional measures taken in the future
to contain expenditures could have long-term effects on our business by reducing
our pool of technical talent, decreasing or slowing improvements in our
products, and making it more difficult for us to respond to customers.
21
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUSTAIN OUR BUSINESS, WHICH WE MAY
NOT BE ABLE TO DO.
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the success of our existing
and new service offerings as well as competing technological and market
developments. As a result, we may not be able to generate sufficient cash from
our operations to meet additional working capital requirements, support
additional capital expenditures or take advantage of acquisition opportunities.
Accordingly, we may need to raise additional capital in the future. Our ability
to obtain additional financing will be subject to a number of factors, including
market conditions and our operating performance. These factors may make the
timing, amount, terms and conditions of additional financing unattractive for
us. We believe based on current forecasts that our current cash and cash
equivalents are sufficient to fund our operations and pay out our obligations as
a result of our restructurings for at least the next 12 months. If cash
generated from operations is insufficient to meet our long-term liquidity needs,
we may need to raise additional funds or seek other financing arrangements.
Additional funding may not be available on favorable terms or at all. If we
raise additional funds by selling equity securities, the relative equity
ownership of our existing investors could be diluted or the new investors could
obtain terms more favorable than previous investors. If we raise additional
funds through debt financing, we could incur significant borrowing costs. If we
are unable to raise additional funds when needed, our ability to sustain our
business could be impeded.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF CLIENTS, AND A LOSS OF ANY OF THESE
CLIENTS OR A REDUCTION, DELAY OR CANCELLATION IN ORDERS FROM THESE CLIENTS COULD
HARM OUR BUSINESS.
To date, a significant portion of the total revenues has been derived from
sales to a small number of clients. In the three months ended December 31, 2001,
two customers accounted for 26% and 18% of our total revenues, respectively. We
expect that we will continue to be dependent upon a limited number of clients
for a significant portion of our revenue in future periods. There can be no
assurance that our existing clients or any future clients will continue to use
our products. A reduction, delay or cancellation in orders from our clients,
including reductions or delays due to market, economic or competitive
conditions, could have a materially adverse effect on our business, operating
results and financial condition.
DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS COULD HARM OUR BUSINESS.
Our success depends upon the ability of our staff and our clients to
implement our products. This implementation typically involves working with
sophisticated software, computing and communications systems. If we experience
implementation difficulties or do not meet project milestones in a timely
manner, we could be obligated to devote more customer support, engineering and
other resources to a particular project than anticipated. Some clients may also
require us to develop customized features or capabilities. If new or existing
clients require more time to deploy our products than is originally anticipated,
or require significant amounts of our professional services support or
customized features, our revenue recognition could be further delayed and our
costs could increase, causing increased variability in our operating results.
OUR PRODUCTS AND SERVICES MAY NOT BE ACCEPTED BY THE MARKETPLACE.
Of our total revenues of $4.2 million for the three months ended December
31, 2001, $2.6 million were derived from licenses of our products and $1.6
million was from related services. We are not certain that our target clients
will widely adopt and deploy our products and services. Our future financial
performance will depend on the successful development, introduction and client
acceptance of new and enhanced versions of our products. In the future, we may
not be successful in marketing our products and services or any new or enhanced
products.
WE EXPECT TO DEPEND ON SALES OF OUR DELANO INTERACTION SERVER AND APPLICATIONS
FOR A SUBSTANTIAL MAJORITY OF OUR REVENUES FOR THE FORESEEABLE FUTURE.
In the three months ended December 31, 2001, we derived most of our
revenues from licenses of our Delano Interaction Server and applications.
Although we have added a new product offering, we expect to continue to derive a
substantial majority of our revenues from sales of the Delano Interaction Server
and applications for the foreseeable future. Implementation of our strategy
depends on our products being able to solve the communication needs of
businesses engaging in commercial transactions over the internet or having an
internet presence. If current or future clients are not satisfied with our
products, our business and operating results could be seriously harmed.
22
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CLIENTS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. The market for e-business communications software is
characterized by:
- rapid technological change;
- frequent new product introductions;
- changes in customer requirements; and
- evolving industry standards.
Our products are designed to work on, or interoperate with, a variety of
operating systems used by our clients. However, our software may not operate
correctly on evolving versions of operating systems, or the hardware upon which,
or with which, they are intended to run or interoperate, programming languages,
databases and other systems that our clients use. If we cannot successfully
develop these products in response to client demands or improve our existing
products to keep pace with technological changes, our business could suffer.
We must continually improve the performance, features and reliability of
our products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing software and to develop
new services, functionality and technologies that address the increasingly
sophisticated and varied needs of our prospective clients. If we do not properly
identify the feature preferences of prospective clients, or if we fail to
deliver features that meet the requirements of these clients on a timely basis,
our ability to market our products successfully and to increase our revenues
will be impaired.
DELAYS IN INTRODUCING NEW AND ENHANCED PRODUCTS COULD HARM OUR BUSINESS.
The development of proprietary technologies and necessary service
enhancements entail significant technical and business risks and requires
substantial expenditures and lead time. If we experience product delays in the
future we may face:
- customer dissatisfaction;
- cancellation of orders and license agreements;
- negative publicity;
- loss of revenues;
- slower market acceptance; and
- legal action by clients against us.
In the future, our efforts to remedy product delays may not be successful
and we may lose clients as a result. Delays in bringing to market new products
or product enhancements could be exploited by our competitors. If we were to
lose market share as a result of lapses in our product development, our business
would suffer.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE.
The market for our products and services is intensely competitive,
evolving and subject to rapid technological change. We expect the intensity of
competition to increase in the future. Increased competition may result in price
reductions, reduced gross margins and loss of market share. The market for
e-business communications software is new and intensely competitive. There are
no substantial barriers to entry in this emerging market segment, and we expect
established or new entities to enter this market segment in the near future.
23
We currently face competition for our products principally from systems
designed by in-house and third-party development efforts. In addition, some of
our competitors who currently offer licensed software products are now beginning
to offer online offerings, which involve providing software on a rental basis
hosted on the hardware of an application service provider, or ASP. We currently
do not offer online offerings in any material way.
Our competitors include companies providing software that is focused on
operational and analytical CRM, such as Kana/Broadbase, e.Piphany, and Xchange
Applications. We believe competition will increase as our current competitors
increase the sophistication of their offerings and as new participants enter the
market.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we do. In
addition, many of our competitors have well-established relationships with our
current and potential clients and have extensive knowledge of our industry. We
may lose potential clients to competitors for various reasons, including the
ability or willingness of our competitors to offer lower prices and other
incentives that we cannot match. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition may increase as a
result of industry consolidations. We may not be able to compete successfully
against current and future competitors, and competitive pressures may seriously
harm our business.
THE DELANO INTERACTION SERVER ENABLES THIRD PARTIES TO DEVELOP APPLICATIONS THAT
COMPETE WITH OUR APPLICATIONS.
Third parties have the ability to develop their own applications on top of
the Delano Interaction Server. The applications of these third parties could
compete with products developed by us or services which we offer now or will
offer in the future. If our target clients do not widely adopt and purchase our
products, or if third parties compete with applications developed by us, our
business would suffer.
FAILURE TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD ADVERSELY
AFFECT OUR BUSINESS.
Competition for these individuals is intense in our industry, particularly
in the Toronto area where we are headquartered, and there are a limited number
of experienced people available with the necessary technical skills. Our ability
to increase revenues in the future depends considerably upon our success in
retaining and in some cases recruiting additional direct sales personnel and the
success of the direct sales force. Our business will be harmed if we fail to
hire or retain qualified sales personnel, or if newly hired salespeople fail to
develop the necessary sales skills or develop these skills more slowly than we
anticipate. We also are substantially dependent upon our ability to develop new
products and enhance existing products, and we may not be able to retain highly
qualified research and development personnel. Similarly, our failure to attract
and retain the highly trained personnel that are integral to our professional
services group, which is responsible for the implementation and customization
of, and technical support for, our products and services, may limit the rate at
which we can develop and install new products or product enhancements, which
would harm our business.
FAILURE TO INTEGRATE OUR EXECUTIVE TEAM MAY INTERFERE WITH OPERATIONS.
Our executive team has largely been hired in the past two years. To
integrate into our company, these individuals must spend a significant amount of
time developing interpersonal relationships and learning our business model and
management system, in addition to performing their regular duties. Accordingly,
the integration of new personnel has resulted, and may continue to result, in
some disruption of our ongoing operations.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO DEVELOP
ADDITIONAL DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
We believe that our success in penetrating our target markets depends in
part on our ability to enter into agreements with established third-party
distribution companies, consulting organizations and software vendors relating
to the distribution of our products. We have entered into non-exclusive
distribution agreements with various parties, including Nortel Networks,
Deloitte Consulting and PricewaterhouseCoopers. Since these agreements are
non-exclusive and normally terminable without penalty on short notice, some
third parties may choose to discontinue working with us or may decide to work
with our competitors. We derive revenues from these agreements through the sale
of licenses. We may not be able to derive significant revenues in the future
from these agreements.
24
WE HAVE COMPLETED TWO ACQUISITIONS, AND THOSE ACQUISITIONS MAY RESULT IN
DISRUPTIONS TO OUR BUSINESS AND MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING
PERSONNEL AND OPERATIONS.
We may not realize the benefits from the acquisitions we have completed.
In September 2000, we acquired Continuity, and in October 2000, we acquired DA.
In July, 2001 we completed a restructuring of our operations that resulted in a
reduction of many of the employees from the acquired companies. We may not be
able to successfully assimilate the remaining personnel, operations, acquired
technology and products into our business. This is particularly difficult since
DA's operation is located in Kansas while we are headquartered in Markham,
Canada. Key personnel from the acquired companies may in the future decide that
they do not want to work for us. In addition, products of these companies will
have to be integrated into our products, and it is uncertain whether we may
accomplish this easily or at all. These difficulties could disrupt our ongoing
business, distract management and employees or increase expenses. Acquisitions
are inherently risky and we may also face unexpected costs, which may adversely
affect operating results in any quarter.
THE ACQUISITIONS OF CONTINUITY AND DIGITAL ARCHAEOLOGY INTO OUR COMPANY COULD
ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS.
If the benefits of the acquisitions of Continuity and DA into our company
do not exceed the costs associated with these acquisitions, including any
dilution to our stockholders resulting from the issuance of shares in connection
with the acquisitions, our financial results, including earnings per share,
could be adversely affected.
IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES, WE MAY FACE RISKS
SIMILAR TO THOSE FACED IN OUR OTHER ACQUISITIONS.
If we are presented with appropriate opportunities, we may make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
acquire another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to our other acquisitions.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which could be
dilutive to our company or our existing stockholders. In addition, our
profitability may suffer because of acquisition-related costs or amortization
costs for acquired goodwill and other intangible assets.
WE MAY SEEK TO GROW BY MAKING ACQUISITIONS AND WE MAY NOT BE ABLE TO
SUCCESSFULLY COMPLETE ANY ACQUISITIONS WE UNDERTAKE OR INTEGRATE ANY ACQUIRED
BUSINESS WITH OUR OWN.
We may consider other investments in complementary companies, products or
technologies. If we undertake such an acquisition or investment, we may not
realize the anticipated benefits. If we buy a company, we may not be able to
successfully assimilate the acquired personnel, operations, technology and
products into our business. In particular, we will need to assimilate and retain
key technical, professional services, sales and marketing personnel. In
addition, acquired products or technology will have to be integrated into our
products and technology, and it is uncertain whether we may accomplish this.
These difficulties could disrupt our ongoing business, distract our management
and employees or increase our expenses. In connection with a merger, or
acquisition for shares, the issuance of these securities may be dilutive to our
existing shareholders or affect profitability. Furthermore, we may have to issue
equity or incur debt to pay for future acquisitions or investments, the issuance
of which could be dilutive to us or our existing shareholders or affect our
profitability. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
acquired intangible assets.
TECHNICAL PROBLEMS WITH INTERNAL OR OUTSOURCED COMPUTER AND COMMUNICATIONS
SYSTEMS COULD RESULT IN REDUCED REVENUES AND HARM TO OUR REPUTATION.
The success of our online support services depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses and similar adverse events. Our
operations depend on our ability to protect our systems against damage or
interruption. We cannot guarantee that our internet access will be
uninterrupted, error-free or secure. We have no formal disaster recovery plan in
the event of damage or interruption, and our insurance policies may not
adequately compensate us for losses that we may incur. Any system failure that
causes an interruption in our service or a decrease in responsiveness could harm
our relationships with our clients and result in reduced revenues.
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FAILURE TO SELL ONLINE SERVICES MAY IMPAIR OUR FUTURE REVENUE GROWTH.
We currently focus primarily on software sales rather than online offerings.
Our competitors may move to a heavier emphasis on online offerings, and our
failure to focus on it at an early stage may make it difficult to compete if
online offerings become a dominant means of generating revenues within the
industry. In addition, although our sales force sells both our software products
and online offerings, the skills necessary to market and sell online offerings
are different than those relating to our software products. As a result, our
sales and marketing groups may not be able to maintain or increase the level of
sales of our online offerings.
A DECLINE IN OUR LICENSE REVENUES COULD CAUSE A DECLINE IN OUR SERVICE REVENUES.
Our products are designed to enable customers to rapidly develop and
deploy e-business communication applications. Where desirable, our professional
services group can assist our clients' internal IT personnel to implement our
products. Because the revenues associated with these services are largely
correlated with the licensing of our products, a decline in license revenues
could also cause a decline in our service revenues.
CONFLICTS BETWEEN OUR PRODUCTS AND OTHER VENDORS' PRODUCTS COULD HARM OUR
BUSINESS AND REPUTATION.
Our clients generally use our products together with products from other
companies. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. Even when these problems are not caused
by our products, they may cause us to incur significant warranty and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
We rely on contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. None of our
trademarks is registered, nor do we have any trademark applications pending. We
currently have no patent applications pending relating to our software. Despite
any precautions that we take to protect our intellectual property:
- laws and contractual restrictions may be insufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
- current laws that prohibit software copying provide only limited
protection from software "pirates", and effective trademark, copyright
and trade secret protection may be unavailable or limited in foreign
countries;
- other companies may claim common law trademark rights based upon
state, provincial or foreign laws that precede any registrations we
may receive for our trademarks; and
- policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
It is possible that our intellectual property rights could be successfully
challenged by one or more third parties, which could result in our inability to
exploit, or our loss of the right to prevent others from exploiting, certain
intellectual property. We are aware that certain of our competitors have filed
patent applications.
Also, the laws of other countries in which we market our products may
offer little or no effective protection of our technology. Reverse engineering,
unauthorized copying or other misappropriation of our technology could enable
third parties to benefit from our technology without paying us for it, which
would significantly harm our business.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR PRODUCTS.
We use and in the future will use certain software technologies and other
information that we license or otherwise acquire from third parties, usually on
a non-exclusive basis, including software that is integrated with our internally
developed software and used in our products to perform what may be important
functions. If we are not able to continue to use the third-party software and
technologies, or if they fail to adequately update and support their products,
we could suffer delays or reductions in shipments of our products until
alternative software and technologies could be identified, which could adversely
affect our business and financial condition.
26
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
Substantial litigation over intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject to
third-party infringement claims as the numbers of competitors grow and the
functionality of products in different industry segments overlap. Third parties
may currently have, or may eventually be issued patents that our products or
technology infringe.
Any of these third parties might make a claim of infringement against us.
Many of our software license agreements require us to indemnify our clients and
suppliers from any claim or finding of intellectual property infringement. Any
litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement might
cause negative publicity, have an impact on prospective clients, cause product
shipment delays, require us to develop non-infringing technology or require us
to enter into royalty or license agreements, which might not be available on
acceptable terms, or at all. If a successful claim of infringement were made
against us and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
business could be significantly harmed.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS.
Our products are integrated into our client's networks. The sale and
support of our products results in the risk of product liability or warranty
claims based on damage to these networks. In addition, the failure of our
products to perform to client expectations could give rise to warranty claims.
Although we carry general liability insurance, our insurance would likely not
cover potential claims of this type or may not be adequate to protect us from
all liability that may be imposed.
OUR PRODUCTS COULD CONTAIN UNDETECTED DEFECTS OR ERRORS.
We face the possibility of higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the
mission-critical nature of our products and services, undetected errors are of
particular concern. We have only a limited number of clients that test new
features and the functionality of our software before we make these features and
functionalities generally available. If our software contains undetected errors
or we fail to meet our client's expectations in a timely manner, we could
experience:
- loss of, or delay in revenues expected from the new product and an
immediate and significant loss of market share;
- loss of existing clients that upgrade to the new product and of new
clients;
- failure to achieve market acceptance;
- diversion of development resources;
- injury to our reputation;
- increased service and warranty costs;
- legal actions by clients against us; and
- increased insurance costs.
A product liability claim could harm our business by increasing our costs,
damaging our reputation and distracting our management.
OUR INTERNATIONAL EXPANSION EFFORTS MAY NOT BE SUCCESSFUL.
Our operations outside the United States and Canada are located in the
United Kingdom and Asia and, to date, have been limited. We may expand our
existing international operations and establish additional facilities in other
parts of Asia via our joint venture, specifically Australia, Singapore, Hong
Kong, Taiwan, Malaysia, Korea, Indonesia, China, New Zealand and Thailand. We
intend to increase our penetration of these markets by intensifying global
activities, and allying ourselves with selected international third-party
distribution companies, consulting organizations and software vendors.
27
The expansion of our existing international operations and entry into
additional international markets are key parts of our growth strategy and may
require significant management attention and financial resources. In addition,
to expand our international sales operations, we will need to, among other
things:
- expand our international sales channel management and support
organizations;
- develop relationships with international service providers and
additional distributors and systems integrators; and
- customize our products for local markets.
Our investments in facilities in other countries may not produce desired
levels of revenues. Even if we are able to expand our international operations
successfully, we may not be able to maintain or increase international market
demand for our products.
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES
ASSOCIATED WITH OPERATING INTERNATIONALLY.
Expanding our operations outside the United States and Canada subjects us
to numerous inherent potential risks associated with international operations.
These risks include greater difficulty in accounts receivable collection, the
burden of complying with multiple and conflicting regulatory requirements,
foreign exchange controls, longer payment cycles, import and export restrictions
and tariffs, potentially adverse tax consequences, and political and economic
instability, any of which could impair our sales and results of operations. In
addition, our ability to expand our business in certain countries will require
modification of our products, particularly domestic language support.
Our international operations will increase our exposure to international
laws and regulations. If we cannot comply with foreign laws and regulations,
which are often complex and subject to variation and unexpected changes, we
could incur unexpected costs and potential litigation. For example, the
governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our activities. In addition,
foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make it
more difficult to conduct our business. The European Union, in which we have a
sales office, recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information, which, if applied
to the sale of our products and services, could negatively impact our results of
operations.
FLUCTUATIONS IN EXCHANGE RATES MAY AFFECT OUR OPERATING RESULTS.
A substantial portion of our revenues are now, and are expected to
continue to be, realized in currencies other than Canadian dollars. Our
operating expenses are primarily paid in Canadian dollars. Fluctuations in the
exchange rate between the Canadian dollar and these other currencies may have a
material effect on our results of operations. In particular, we may be adversely
affected by a significant strengthening of the Canadian dollar against the U.S.
dollar. We do not currently engage in currency hedging activities. We have not
yet, but may in the future, experience significant foreign exchange rate losses,
especially to the extent that we do not engage in hedging.
IF WE ARE OR BECOME A PASSIVE FOREIGN INVESTMENT COMPANY WE MAY NOT BE ABLE TO
SATISFY RECORD-KEEPING REQUIREMENTS, WHICH COULD HAVE ADVERSE U.S. TAX
CONSEQUENCES TO YOU.
The rules governing passive foreign investment companies can have
significant effects on U.S. investors. We could be classified as a passive
foreign investment company if, for any taxable year, either:
- 75% or more of our gross income is passive income, which includes
interest, dividends and some types of rents and royalties; or
- the average percentage, by fair market value, or, in some cases, by
adjusted tax basis, of our assets that produce or are held for the
production of passive income is 50% or more.
Distributions which constitute "excess distributions," as defined in
Section 1291 of the U.S. Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"), from a passive foreign investment company and
dispositions of shares of a passive foreign investment company are subject to
the highest rate of tax on ordinary income in effect and to an interest charge
based on the value of the tax deferred during the period during which the shares
are owned. However, these rules
28
generally will not apply if the U.S. investor elects to treat the passive
foreign investment company as a qualified electing fund under Section 1295 of
the Internal Revenue Code.
If we are or become a passive foreign investment company we may not be
able to satisfy record-keeping requirements that would permit you to make a
qualified electing fund election.
RISKS RELATED TO OUR INDUSTRY
OUR FUTURE REVENUES AND PROFITS DEPEND ON THE CONTINUED GROWTH IN USE AND
EFFICIENT OPERATION OF THE INTERNET AND E-MAIL.
We sell our products and services primarily to organizations that receive
large volumes of e-mail and communications over the web. Consequently, our
future revenues and profits, if any, substantially depend upon the continued
acceptance and use of the web and e-mail, which are evolving as communications
media. Rapid growth in the use of e-mail is a recent phenomenon and may not
continue. As a result, a broad base of enterprises that use e-mail as a primary
means of communication may not develop or be maintained. Moreover, companies
that have already invested significant resources in other methods of
communications with customers, such as call centers, may be reluctant to adopt a
new strategy that may limit or compete with their existing investments. If
businesses do not continue to accept the web and e-mail as communications media,
our business would suffer.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
DISCOURAGE COMMUNICATION BY E-MAIL OR OTHER INTERNET-BASED COMMUNICATIONS
FACILITATED BY OUR PRODUCTS.
Due to the increasing popularity and use of the internet, it is possible
that Canadian and U.S. federal, Canadian provincial, U.S. state, and other
foreign regulators could adopt laws and regulations that impose additional
burdens on those companies that conduct business online. These laws and
regulations could discourage communication by e-mail or other internet-based
communications facilitated by our products, which could reduce demand for our
products and services.
The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may slow the
growth of the internet. A decline in the growth of the internet, particularly as
it relates to online communication, could decrease demand for our products and
services and increase our cost of doing business, or otherwise harm our
business.
BECAUSE WE ARE A CANADIAN COMPANY, IT MAY BE DIFFICULT FOR YOU TO ENFORCE
AGAINST US LIABILITIES BASED SOLELY UPON THE FEDERAL SECURITIES LAWS OF THE
UNITED STATES.
We have been incorporated under the laws of the Province of Ontario, and
our executive offices are located in Ontario. Many of our directors, controlling
persons and officers, and representatives of the experts named in our Annual
Report on Form 10-K, are residents of Canada and a substantial portion of their
assets and a majority of our assets are located outside the United States.
Consequently, it may be difficult for you to enforce against us or any of our
directors, controlling persons, officers or experts who are not resident in the
United States, liabilities based solely upon the federal securities laws of the
United States.
OUR BOARD OF DIRECTORS MAY ISSUE, WITHOUT SHAREHOLDER APPROVAL, PREFERENCE
SHARES THAT HAVE RIGHTS AND PREFERENCES SUPERIOR TO THOSE OF COMMON SHARES AND
THAT MAY DELAY OR PREVENT A CHANGE OF CONTROL.
Our articles of incorporation allow the issuance an unlimited number of
preference shares in one or more series. After the offering, there will be no
preference shares outstanding. However, our Board of Directors may set the
rights and preferences of any class of preference shares in its sole discretion
without the approval of the holders of Common Shares. The rights and preferences
of these preference shares may be superior to those of the common shares.
Accordingly, the issuance of preference shares may adversely affect the rights
of holders of common shares. The issuance of preference shares also could have
the effect of delaying or preventing a change of control of our Company.
WE DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON SHARES.
We have not paid any cash dividends on our shares and we currently do not
have any plans to pay dividends on our shares. In addition, our lease line of
credit specifically prohibits the payment of dividends on our common shares.
29
ITEM 3: QUALITATIVE AND QUANTITATIVE MARKET RISK
We develop products in Canada and sell these products in North America,
Europe and Asia Pacific. Generally, our sales are made in local currency, which
to date has been mostly United States dollars. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. We do not
currently use derivative instruments to hedge our foreign exchange risk. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of our investments are in short-term
instruments. Due to the nature of our short-term investments, we have concluded
that there is no material market risk exposure.
30
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
During the period from August 2 to October 1, 2001, three purported
securities class action lawsuits were filed against the Company in the U.S.
District Court for the Southern District of New York, Shapiro, et al. v. Delano
Technology Corporation, et al., Ellis Investments Ltd, et al. v. Delano
Technology Corporation, et al., and Wendy and Joe Scavuzzo, et al. v. Delano
Technology Corporation, et al. The complaints also name one or more of the
Company's underwriters in the Company's initial public offering and certain
officers and directors of the Company. The complaints allege violations of the
federal securities laws regarding statements in the Company's initial public
offering registration statement concerning the underwriters' activities in
connection with the underwriting of the Company's Common Shares to the public.
The actions seek rescission of the plaintiff's alleged purchases of Company
Common Shares and other damages and costs associated with the litigation.
Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 100 other companies. The Company believes it has
meritorious defenses to these lawsuits and will vigorously defend itself.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Restricted Share Agreement by and between the Company and Vikas Kapoor,
dated as of October 5, 2001 (incorporated by reference to Exhibit 99.3
to the October 31, 2001 8-K)
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated October 31, 2001
announcing Vikas Kapoor as the Chief Executive Officer of the Company
and certain subsidiaries of the Company.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
February 13, 2002 Delano Technology Corporation
/s/ Vikas Kapoor Chief Executive Officer
- ------------------------------- (Principal Executive Officer)
Vikas Kapoor
/s/ David Garland Vice President, Finance
- ------------------------------- (Principal Financial Officer
David Garland And Principal Accounting Officer)
32
ANNEX N
DELANO INTERIM FINANCIAL STATEMENTS AND
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE-MONTH PERIODS ENDED DECEMBER 31, 2001
(CANADIAN GAAP)
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
DECEMBER 31, MARCH 31,
2001 2001
------------ ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 11,205 $ 34,209
Short-term investments ...................................................... 1,427 1,155
Accounts receivable trade, net of allowance for doubtful accounts of $1,075
at December 31, 2001, and $1,859 at March 31, 2001 ......................... 4,132 8,099
Prepaid expenses and other .................................................. 842 3,674
--------- ---------
Total current assets ....................................................... 17,606 47,137
Property and equipment ....................................................... 2,867 11,300
Other assets ................................................................. 263 985
--------- ---------
Total assets ................................................................. $ 20,736 $ 59,422
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................................... $ 3,469 $ 8,960
Restructuring accrual ....................................................... 2,080 2,411
Deferred revenue ............................................................ 801 1,975
Current portion of obligations under capital leases ......................... 89 182
--------- ---------
Total current liabilities .................................................. 6,439 13,528
Long-term liabilities:
Obligations under capital leases ............................................ -- 49
Restructuring accrual ....................................................... -- 1,121
--------- ---------
Total liabilities ............................................................ 6,439 14,698
Shareholders' equity:
Capital stock:
Preference shares:
Authorized: Unlimited
Issued and outstanding: Nil at December 31, 2001 and March 31, 2001
Common shares:
Authorized: Unlimited
Issued and outstanding: 42,889,310 shares at December 31, 2001 and
37,240,858 shares at March 31, 2001 ....................................... 222,835 230,717
Warrant ..................................................................... 370 496
Deferred stock-based compensation ........................................... (1,930) (8,464)
Cumulative translation adjustment ........................................... (211) (211)
Deficit ..................................................................... (206,767) (177,814)
--------- ---------
Total shareholders' equity ................................................. 14,297 44,724
--------- ---------
Total liabilities and shareholders' equity ................................... $ 20,736 $ 59,422
========= =========
See accompanying notes to the unaudited condensed
consolidated financial statements.
- --------------------------------------------------------------------------------
1
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
License ............................................ $ 2,541 $ 8,040 $ 5,800 $ 20,410
Service ............................................ 1,619 1,230 5,356 2,912
-------- -------- -------- --------
Total revenues .................................... 4,160 9,270 11,156 23,322
-------- -------- -------- --------
Cost of revenues:
License ............................................ 181 89 567 270
Service ............................................ 970 1,440 3,838 3,410
-------- -------- -------- --------
Total cost of revenues ............................ 1,151 1,529 4,405 3,680
-------- -------- -------- --------
Gross profit ........................................ 3,009 7,741 6,751 19,642
-------- -------- -------- --------
Operating expenses:
Sales and marketing ................................ 2,097 13,641 11,651 35,145
Research and development ........................... 1,007 6,128 7,254 12,304
General and administrative ......................... 670 1,397 2,572 3,537
Amortization (recovery) of deferred stock-based
compensation ...................................... 399 1,003 (1,745) 3,483
Amortization of goodwill and identifiable
intangibles ....................................... -- 5,141 -- 5,141
Asset impairment ................................... 603 -- 7,629 --
Restructuring charges (recovery) ................... (2,094) -- 8,795 --
-------- -------- -------- --------
Total operating expenses .......................... 2,682 27,310 36,156 59,610
-------- -------- -------- --------
Operating profit (loss) ............................. 327 (19,569) (29,405) (39,968)
Interest and other income, net ..................... 35 926 598 3,852
Equity in loss of associated company ............... -- -- (146) --
-------- -------- -------- --------
Income (loss) before income taxes ................... 362 (18,643) (28,953) (36,116)
Income taxes ........................................ -- -- -- --
-------- -------- -------- --------
Net income (loss) ................................... $ 362 $(18,643) $(28,953) $(36,116)
======== ======== ======== ========
Basic earnings (loss) per common share .............. $ 0.01 $ (0.52) $ (0.76) $ (1.13)
======== ======== ======== ========
Shares used in computing basic earnings (loss) per
common share (in thousands) ........................ 38,959 35,825 37,945 32,055
======== ======== ======== ========
Fully diluted earnings per common share ............. $ 0.01 n/a n/a n/a
======== ======== ======== ========
Shares used in computing fully diluted earnings per
common share (in thousands) ........................ 44,001 n/a n/a n/a
======== ======== ======== ========
See accompanying notes to the unaudited condensed
consolidated financial statements.
- --------------------------------------------------------------------------------
2
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Cash provided by (used in):
Operating activities:
Income (loss) for the period ............................... $ 362 $(18,643) $(28,953) $(36,116)
Depreciation and amortization which does not involve cash .. 432 6,074 2,042 7,058
Amortization (recovery) of deferred stock-based compensation 399 1,003 (1,745) 3,483
Equity in loss of associated company ....................... -- -- 146 --
Non-cash (recovery) charges ................................ (1,699) -- 5,302 --
Changes in non-cash operating working capital:
Accounts receivable trade ................................. 1,215 (818) 3,967 (5,517)
Prepaid expenses and other assets ......................... 455 (1,287) 2,807 (2,451)
Accounts payable and accrued liabilities .................. 379 111 (5,425) 4,109
Restructuring charge accrual .............................. (1,725) -- 72 --
Deferred revenue .......................................... 97 157 (1,174) 237
-------- -------- -------- --------
Net cash used in operating activities ...................... (85) (13,403) (22,961) (29,197)
Financing activities:
Issuance of common shares and warrants ..................... 198 234 272 1,295
Payment on notes payable ................................... -- (1,250) -- (1,995)
Repayment of obligations under capital leases .............. (56) (43) (144) (131)
-------- -------- -------- --------
Net cash provided by (used in) financing activities ........ 142 (1,059) 128 (831)
Investing activities:
Sale (purchase) of short-term investments .................. (1,427) -- (272) 28,012
Additions to property and equipment ........................ (5) (3,128) (239) (11,252)
Purchase of long-term investments .......................... -- (698) -- (698)
Cash used in acquisition ................................... -- (16,505) -- (17,956)
Proceeds on sale of capital assets ......................... 176 -- 351 --
-------- -------- -------- --------
Cash used in investing activities .......................... (1,256) (20,331) (160) (1,894)
Effect of currency translation of cash balances ............. 26 247 (11) 210
-------- -------- -------- --------
Decrease in cash and cash equivalents ....................... (1,173) (34,546) (23,004) (31,712)
Cash and cash equivalents, beginning of period .............. 12,378 85,204 34,209 82,370
-------- -------- -------- --------
Cash and cash equivalents, end of period .................... $ 11,205 $ 50,658 $ 11,205 $ 50,658
======== ======== ======== ========
See accompanying notes to the unaudited condensed
consolidated financial statements.
- --------------------------------------------------------------------------------
3
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
DELANO TECHNOLOGY CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles by
Delano Technology Corporation ("Delano" or the "Company") and reflect all
adjustments (all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for a fair presentation of the interim
financial information. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending March 31, 2002. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with Canadian generally accepted accounting principles
have been condensed or omitted. These unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with Delano'
s audited consolidated financial statements and notes included in Delano's
Annual Report for the year ended March 31, 2001.
NOTE 2. SHAREHOLDERS' EQUITY
Stock Option Plan
The Company's stock option plan (the "Plan") was established for the
benefit of the employees, officers, directors and certain consultants of the
Company. The maximum number of common shares which may be set aside for issuance
under the Plan is 9,335,382 shares, provided that the Board of Directors of the
Company has the right, from time to time, to increase such number subject to the
approval of the shareholders of the Company when required by law or regulatory
authority. Generally, options issued subsequent to March 4, 1999 under the Plan
vest over a four-year period. Options issued prior to March 5, 1999 vest
annually over a three-year period.
Details of stock option transactions are as follows:
WEIGHTED
OPTIONS AVAILABLE AVERAGE
FOR NUMBER EXERCISE PRICE
GRANT OF OPTIONS PER SHARE
----------------- ---------- --------------
Balances, March 31, 2000 ........................... 1,231,150 4,013,600 $ 2.51
Additional options authorized ..................... 3,835,382
Options granted ................................... (6,466,956) 6,466,956 $ 7.24
Options exercised ................................. (694,592) $ 0.59
Options cancelled ................................. 1,677,928 (1,677,928) $ 7.28
---------- ----------
Balances, March 31, 2001 ........................... 277,504 8,108,036 $ 4.90
Additional options authorized
Options granted ................................... (4,255,000) 4,255,000 $ 0.22
Options exercised ................................. (650,672) $ 0.16
Options cancelled ................................. 4,362,098 (4,362,098) $ 5.95
---------- ----------
Balances, December 31, 2001 (unaudited) ............ 384,602 7,350,266 $ 2.01
========== ==========
Options exercisable at December 31, 2001 (unaudited) 1,724,101 $ 2.88
==========
The stock options expire at various dates between May 2003 and September
2010.
The Company recorded deferred stock-based compensation amounting to
$111,000 for the three months ended December 31, 2001 compared to $1.2 million
for the three months ended December 31, 2000. Amortization of deferred
stock-based compensation amounted to $399,000 for the three months ended
December 31, 2001 compared to $1.0 million for the three months ended December
31, 2000.
The amortization (recovery) of deferred stock-based compensation relates to
the following cost of service revenues and operating expense categories (in
thousands):
- --------------------------------------------------------------------------------
4
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
Unaudited 2001 2000 2001 2000
-------- -------- -------- --------
Cost of service revenues .......................... $ 31 $ 77 $ 43 $ 207
Sales and marketing ............................... 139 687 (1,773) 2,777
Research and development .......................... 77 155 (56) 257
General and administrative ........................ 152 84 41 242
-------- -------- -------- --------
$ 399 $ 1,003 $ (1,745) $ 3,483
======== ======== ======== ========
NOTE 3. SEGMENT INFORMATION
The Company reviewed its operations and determined that it operates in a
single reportable operating segment, being the development and marketing of
interaction-based e-business communications applications. All long-lived assets
relating to the Company's operations are located in Canada in fiscal 2001.
Revenue per geographic location, which is attributable to geographic location
based on the location of the external customer, is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
Unaudited 2001 2000 2001 2000
-------- -------- -------- --------
Revenue by geographic locations:
United States ......................................$ 2,199 $ 7,556 $ 7,480 $ 16,126
Canada ............................................. 549 827 2,109 3,998
Europe ............................................. 1,354 247 1,509 2,558
Asia Pacific ....................................... 58 640 58 640
-------- -------- -------- --------
$ 4,160 $ 9,270 $ 11,156 $ 23,322
======== ======== ======== ========
For the three months ended December 31, 2001, two customers accounted for
26% and 18% of total revenues, respectively. For the three months ended December
31, 2000, one customer accounted for 10% of total revenues. For the nine months
ended December 31, 2001, one customer accounted for 23% of total revenues. For
the nine months ended December 31, 2000, no customer accounted for 10% of total
revenues. As at December 31, 2001, the Company had a receivable from one
significant customer amounting to 23% of total accounts receivable trade. As at
December 31, 2000, the Company did not have a receivable from a customer
amounting to 10% of total accounts receivable trade.
NOTE 4. JOINT VENTURES AND INVESTMENT IN AFFILIATE
In June 2000, the Company formed Delano Minerva Holdings Inc. (" Minerva"),
and had a controlling position with a 50% ownership and a majority of the seats
of the Minerva Board of Directors. During fiscal 2001, the Company' s
proportionate share of Minerva' s losses exceeded its investment. Minerva' s
results of operations were included within the Company' s fiscal 2001 revenue,
cost and expense categories. During the three months ended September 30, 2001,
the Company agreed to pay $100,000 for the remaining ownership interest in
Minerva and subsequently closed down the operation.
In December 2000, the Company invested in a joint venture, Delano
Asia-Pacific, as a minority interest party by acquiring 19.9% of the common
shares. The joint venture partner was eGlobal Technology Services Holding
Limited (" eGlobal" ) of Singapore. The investment in this joint venture has
been made in the form of a $398,000 capital cash contribution, and a long-term,
non-interest bearing loan receivable of $602,000. This investment is accounted
for using the equity method of accounting. In the three months and in the six
months ended September 30, 2001 the Company recognized $80,000 and $146,000
respectively of losses and during fiscal 2001, the Company recognized $278,000
of losses, which represent the Company' s proportionate share of the joint
ventures losses, net of the intercompany elimination. During the three months
ended December 31, 2001, the Company terminated its distribution agreement with
Delano Asia-Pacific pursuant to the terms of that agreement.
NOTE 5. SPECIAL CHARGES
Special charges for the three months ended December 31, 2001 include a
$603,000 asset impairment charge and a $2.1 million restructuring recovery.
- --------------------------------------------------------------------------------
5
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
Asset impairment:
During the three months ended September 30, 2001, the Company restructured
its operations to reduce operating expenses. During the restructuring, it was
determined that $5.8 million of capital assets and $1.2 million of other assets,
including the long-term, non-interest bearing loan receivable from eGlobal of
$602,000, had no future value to the Company. During the three months ended
December 31, 2001, the Company recorded an additional charge of $603,000 related
to the actions taken during the three months ended September 30, 2001.
Restructuring charge:
The Company determined its restructuring charges in accordance with
Emerging Issues Committee No. 60 (" EIC 60" ), Emerging Issues Task Force Issue
No. 94-3 (" EITF 94-3" ) and Staff Accounting Bulletin No. 100 (" SAB 100" ).
EIC 60, EITF 94-3 and SAB 100 require that the Company commit to an exit plan
before it accrues employee termination costs and exit costs. On January 4, 2001,
the Company' s senior management prepared and approved a detailed exit plan that
included the termination of 102 employees, closure of certain facilities and the
elimination of the ASP sales model. On April 23, 2001, the Company' s senior
management prepared and approved a second detailed exit plan that included the
additional termination of 140 employees and closure of additional facilities. On
July 3, 2001, the Company' s senior management prepared and approved a third
detailed exit plan that included the additional termination of 183 employees,
closure of additional facilities, reduction of capital assets no longer in use
and other various exit costs. During the three months ended December 31, 2001,
the Company, under new management, took actions to reduce the amount of
restructuring liability by negotiating settlements with existing landlords of
certain restructured leased premises, by renegotiating future cost commitments
on the ASP model, and a decision to retain the ASP model in future operations
and various other measures. As a result of these efforts, the Company recorded a
$2.1 million restructuring recovery during the three months ended December 31,
2001.
During the three months ended March 31, 2001, the Company incurred a
restructuring charge of $6.1 million (after adjustment) as part of a plan to
improve its operating results by reducing employees, by closing duplicative
Company facilities in the United States and Canada, and by implementing other
measures. This charge was part of a plan to streamline the Company' s efforts to
focus on achieving profitability. Subsequent to March 31, 2001, an additional
$848,000 was accrued relating to a change in estimate for one of the facilities
in the three months ended June 30, 2001 and an additional $683,000 was accrued
relating to a change in estimate of future cost commitments for our ASP model
during the three months ended September 30, 2001. During the three months ended
December 31, 2001, a recovery of $1.7 million was accrued made up of $400,000
recovered in connection with a loan to a shareholder of an acquired company,
$857,000 from the settlement or near settlement of certain lease obligations and
a recovery of $435,000 related to the renegotiations of future cost commitments
on the ASP model. After the adjustments above, the restructuring charge was
comprised of $2.8 million for reductions in employee numbers, $2.1 million for
facilities related costs including penalties associated with the reduction of
lease commitments and future lease payments and $1.2 million related to
eliminating the Company' s ASP sales model which has now been reinstated as part
of future operations. As of December 31, 2001, $5.0 million had been paid out on
the restructuring charge. Most of the remaining $1.1 million that has not yet
been paid is related to lease commitments.
In connection with the restructuring actions for the three months ended
March 31, 2001, the Company terminated the employment of 102 employees,
consisting of sales and marketing employees, applications development employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 34 employees
who resigned voluntarily during the three months ended March 31, 2001. At March
31, 2001, the Company had terminated all employees associated with these
restructuring actions. At March 31, 2001, the Company had exited a portion of
its facilities in Markham, Canada and most of its offices in the United States.
The Company has entered into sublease arrangements for some of its office space.
During the three months ended June 30, 2001, the Company incurred an
additional restructuring charge of $3.3 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, and by implementing other
measures. This charge was part of a plan to streamline the Company' s efforts to
focus on achieving profitability. During the three months ended December 31,
2001, a recovery of $158,000 was accrued. After the adjustment above, the
restructuring charge was comprised of $2.5 million for reductions in employee
numbers, $571,000 for facilities-related costs including penalties associated
with the reduction of lease commitments and future lease payments and $186,000
related to the termination of the Minerva joint venture in Denmark. As of
December 31, 2001, all amounts had been paid out on the restructuring charge.
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DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
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In connection with the restructuring actions for the three months ended
June 30, 2001, the Company terminated the employment of 140 employees,
consisting of applications development employees, sales and marketing employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 39 employees
who resigned voluntarily during the three months ended June 30, 2001. At June
30, 2001, the Company had terminated all employees associated with these
restructuring actions. At June 30, 2001, the Company had exited its office
facilities in the United States identified in the restructuring plan.
During the three months ended September 30, 2001, the Company incurred an
additional restructuring charge of $5.7 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, Canada and Europe and by
implementing other measures. This charge was part of a plan to streamline the
Company' s efforts to focus on achieving profitability. During the three months
ended December 31, 2001, a recovery of $244,000 was accrued relating mostly to
settlement or near settlement of certain lease obligations. After the adjustment
above, the restructuring charge was comprised of $3.7 million for reductions in
employee numbers and $2.0 million for facilities-related costs including
penalties associated with the reduction of lease commitments and future lease
payments. As of December 31, 2001, $4.7 million had been paid out on the
restructuring charge. Most of the remaining $1.0 million relates to employee
termination costs and lease commitments.
In connection with the restructuring actions for the three months ended
September 30, 2001, the Company terminated the employment of 183 employees,
consisting primarily of applications development employees, sales and marketing
employees, technical and other support employees, and administrative employees
in all locations. In addition, the Company did not replace approximately 9
employees who resigned voluntarily during the three months ended September 30,
2001. At September 30, 2001, the Company had terminated all employees associated
with these restructuring actions. At September 30, 2001, the Company had exited
its office facilities in the United States, Canada and Europe identified in the
restructuring plan.
Restructuring charge accruals, both current and long-term, are shown
separately on the condensed consolidated balance sheet at December 31, 2001. The
long-term restructuring charge accrual at March 31, 2001 relates specifically to
future lease payment commitments that extend beyond one year. Detail of the
restructuring charges as of and for the three months ended December 31, 2001 are
summarized below:
BALANCE AT ADJUSTMENTS BALANCE AT
FOURTH QUARTER 2001 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
- ------------------------------------------ ------------------ ----------- -------- -----------------
Employee related $ -- $ (400) $ (400) $ --
Facilities related 1,884 (857) 120 907
ASP sales model related 791 (435) 156 200
------- ------- ------ -------
$ 2,675 $(1,692) $ (124) $ 1,107
======= ======= ====== =======
BALANCE AT ADJUSTMENTS BALANCE AT
BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
- ------------------------ ------------------ ----------- -------- -----------------
Accounts payable $ -- $ -- $ -- $ --
Accrued liabilities 2,675 (1,692) (124) 1,107
------- ------- ------ -------
$ 2,675 $(1,692) $ (124) 1,107
======= ======= ======
Less: current portion 1,107
-------
Long-term portion $ --
=======
BALANCE AT ADJUSTMENTS BALANCE AT
FIRST QUARTER 2002 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
- ----------------------------------------- ------------------ ----------- -------- -----------------
Employee related $ 156 $ (102) $ 54 $ --
Facilities related 69 (2) 67 --
Joint venture 75 (54) 21 --
------- ------- ------ -------
$ 300 $ (158) $ 142 $ --
======= ======= ====== =======
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DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
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BALANCE AT ADJUSTMENTS BALANCE AT
BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
- ------------------------ ------------------ ----------- -------- -----------------
Accounts payable $ -- $ -- $ -- $ --
Accrued liabilities 300 (158) 142 --
------- ------- ------ -------
$ 300 $ (158) $ 142 --
======= ======= ======
Less: current portion --
-------
Long-term portion $ --
=======
BALANCE AT ADJUSTMENTS BALANCE AT
SECOND QUARTER 2002 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
- ------------------------------------------ ------------------ ----------- -------- -----------------
Employee related $ 628 $ 18 $ 503 $ 143
Facilities related 1,726 (262) 634 830
------- ------- ------ -------
$ 2,354 $ (244) $1,137 $ 973
======= ======= ====== =======
BALANCE AT ADJUSTMENTS BALANCE AT
BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001
- ------------------------ ------------------ ----------- -------- -----------------
Accounts payable $ -- $ -- $ -- $ --
Accrued liabilities 2,354 (244) 1,137 973
------- ------- ------ -------
$ 2,354 $ (244) $1,137 973
======= ======= ======
Less: current portion 973
-------
Long-term portion $ --
=======
NOTE 6. RELATED PARTY TRANSACTIONS
As at September 30, 2001, accrued consulting fees payable to a director of
the Company amounted to $165,000. These consulting fees were paid during the
three months ended December 31, 2001.
The Company named Vikas Kapoor as the Chief Executive Officer of the
Company and certain subsidiaries of the Company effective October 5, 2001. Mr.
Kapoor has served as a member of the Company' s Board of Directors since July
2001. Mr. Kapoor' s compensation package includes a grant of 4,230,000 Common
Shares, which vest over 30 months (705,000 common shares vested upon grant and
the balance vest at the rate of 117,500 common shares per month) subject to
accelerated vesting in certain circumstances as set out in the Restricted Share
Agreement.
NOTE 7. LEGAL ITEMS
During the period from August 2 to October 1, 2001, three purported
securities class action lawsuits were filed against the Company in the U.S.
District Court for the Southern District of New York, Shapiro, et al. v. Delano
Technology Corporation, et al., Ellis Investments Ltd, et al. v. Delano
Technology Corporation, et al., and Wendy and Joe Scavuzzo, et al. v. Delano
Technology Corporation, et al. The complaints also name one or more of the
Company' s underwriters in the Company' s initial public offering and certain
officers and directors of the Company. The complaints allege violations of the
federal securities laws regarding statements in the Company' s initial public
offering registration statement concerning the underwriters' activities in
connection with the underwriting of the Company' s Common Shares to the public.
The actions seek rescission of the plaintiff' s alleged purchases of Company
Common Shares and other damages and costs associated with the litigation.
Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 100 other companies. The Company believes it has
meritorious defenses to these lawsuits and will vigorously defend itself.
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DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Financial Condition and Results of
Operations contains forward-looking statements. Our actual results and timing of
certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors," in our other public filings.
The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and the related notes appearing
elsewhere in this Quarterly Report.
OVERVIEW
From the date of our incorporation on May 7, 1998 until April 1999, we were
a development stage company and had no revenues. Our operating activities during
this period consisted primarily of conducting research and developing our
initial products. In May 1999, we released and sold the first commercially
available version of the Delano e-Business Interaction Suite.
To date, we have derived substantially all of our revenues from the sale of
software product licenses and from the provision of professional services,
including implementation, training and maintenance services. Our products have
been sold primarily through our direct sales force.
Our products are offered on a licensed basis. We license our products based
on:
o a fee for each client, which depends on the specific and individual
needs of the client;
o an additional fee, which covers installation, configuration, training
and professional services; and
o a variable component, which depends on, among other things, the number
of servers and the number of optional applications and add-ons,
servers and component packs purchased.
Our cost of revenues includes the cost of product documentation, the cost
of compact disks used to deliver our products, personnel-related expenses,
travel costs, equipment costs and overhead costs.
Our operating expenses are classified into four categories: sales and
marketing, research and development, general and administrative, and
amortization of deferred stock-based compensation.
o Sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows and
marketing materials;
o Research and development expenses consist primarily of compensation
and related costs for research and development employees and
contractors in connection with the enhancement of existing products
and quality assurance activities;
o General and administrative expenses consist primarily of compensation
and related costs for administrative personnel, legal, accounting and
other general corporate expenses; and
o Amortization (recovery) of deferred stock-based compensation includes
the amortization, over the vesting period of a stock option, of the
difference between the exercise price of options granted to employees
and the deemed fair market value of the options for financial
reporting purposes. In addition, deferred stock-based compensation
includes compensation expense arising on the issuance of options and a
warrant to employees and a consultant, calculated as the difference
between the exercise price of the options and warrant and the fair
market value at the date of issuance. Also included in amortization of
deferred stock-based compensation is compensation expense relating to
an option to acquire shares of the Company issued in connection with a
professional services agreement between the Company and a related
corporation. The compensation expense is calculated as the difference
between the exercise price of the option and the fair market value at
the time the option was issued or earned. Also included in
amortization of deferred stock-based compensation is compensation
expense relating to the unvested options assumed in the acquisitions
of Continuity and DA. In connection with the restructuring actions,
the Company has recorded a recovery of deferred stock-based
compensation relating to terminated employees.
We allocate common costs based on relative headcount or other relevant
measures. These allocated costs include rent
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DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
and other facility-related costs for the corporate head office, communication
expenses and depreciation expenses for property and equipment.
In connection with the granting of stock options and the issuance of a
warrant to our employees and a consultant, we recorded deferred stock-based
compensation totaling $13.7 million through March 31, 2001. This amount
represents the total difference between the exercise prices of stock options and
the warrant and the deemed fair value of the underlying common stock for
accounting purposes on the date these stock options were granted and the warrant
issued. This amount is included as a component of shareholders' equity and is
being amortized by charges to operations over the vesting period of the options,
consistent with the method described in FASB, Interpretation No. 28. We recorded
$399,000 of stock-based compensation amortization expense during the three
months ended December 31, 2001 compared to $1.0 million of stock-based
compensation amortization expense during the three months ended December 31,
2000. We recorded a recovery of $1.7 million of stock-based compensation
amortization expense during the nine months ended December 31, 2001 compared to
$3.5 million of stock-based compensation amortization expense during the nine
months ended December 31, 2000. As of December 31, 2001, we had a total of $1.9
million of deferred stock-based compensation that had not been amortized. The
amortization of the remaining deferred stock-based compensation will result in
additional charges to operations through December 2003 of approximately $200,000
per quarter. The amortization of deferred stock-based compensation is classified
as a separate component of operation expenses in our consolidated statement of
operations.
The Company named Vikas Kapoor as the Chief Executive Officer of the
Company and certain subsidiaries of the Company effective October 5, 2001. Mr.
Kapoor has served as a member of the Company's Board of Directors since July
2001. Mr. Kapoor's compensation package includes a grant of 4,230,000 Common
Shares, which vest over 30 months (705,000 common shares vested upon grant and
the balance vest at the rate of 117,500 common shares per month) subject to
accelerated vesting in certain circumstances as set out in the Restricted Share
Agreement.
In our development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal product development have been expensed as incurred.
Special charges for the three months ended December 31, 2001 include a
$603,000 asset impairment charge and a $2.1 million restructuring recovery.
Asset impairment:
During the three months ended September 30, 2001, the Company restructured
its operations to reduce operating expenses. During the restructuring, it was
determined that $5.8 million of capital assets and $1.2 million of other assets,
including the long-term, non-interest bearing loan receivable from eGlobal of
$602,000, had no future value to the Company. During the three months ended
December 31, 2001, the Company recorded an additional charge of $603,000 related
to the actions taken during the three months ended September 30, 2001.
Restructuring charge:
The Company determined its restructuring charges in accordance with Emerging
Issues Committee No. 60 ("EIC 60" ), Emerging Issues Task Force Issue No. 94-3
("EITF 94-3" ) and Staff Accounting Bulletin No. 100 ("SAB 100" ). EIC 60, EITF
94-3 and SAB 100 require that the Company commit to an exit plan before it
accrues employee termination costs and exit costs. On January 4, 2001, the
Company's senior management prepared and approved a detailed exit plan that
included the termination of 102 employees, closure of certain facilities and the
elimination of the ASP sales model. On April 23, 2001, the Company's senior
management prepared and approved a second detailed exit plan that included the
additional termination of 140 employees and closure of additional facilities. On
July 3, 2001, the Company's senior management prepared and approved a third
detailed exit plan that included the additional termination of 183 employees,
closure of additional facilities, reduction of capital assets no longer in use
and other various exit costs. During the three months ended December 31, 2001,
the Company, under new management, took actions to reduce the amount of
restructuring liability by negotiating settlements with existing landlords of
certain restructured leased premises, by renegotiating future cost commitments
on the ASP model, and a decision to retain the ASP model in future operations
and various other measures. As a result of these efforts, the Company recorded a
$2.1 million restructuring recovery during the three months ended December 31,
2001.
During the three months ended March 31, 2001, the Company incurred a
restructuring charge of $6.1 million (after
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10
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
adjustment) as part of a plan to improve its operating results by reducing
employees, by closing duplicative Company facilities in the United States and
Canada, and by implementing other measures. This charge was part of a plan to
streamline the Company's efforts to focus on achieving profitability.
Subsequent to March 31, 2001, an additional $848,000 was accrued relating to a
change in estimate for one of the facilities in the three months ended June 30,
2001 and an additional $683,000 was accrued relating to a change in estimate of
future cost commitments for our ASP model during the three months ended
September 30, 2001. During the three months ended December 31, 2001, a recovery
of $1.7 million was accrued made up of $400,000 recovered in connection with a
loan to a shareholder of an acquired company, $857,000 from the settlement or
near settlement of certain lease obligations and a recovery of $435,000 related
to the renegotiations of future cost commitments on the ASP model. After the
adjustments above, the restructuring charge was comprised of $2.8 million for
reductions in employee numbers, $2.1 million for facilities related costs
including penalties associated with the reduction of lease commitments and
future lease payments and $1.2 million related to eliminating the Company's ASP
sales model which has now been reinstated as part of future operations. As of
December 31, 2001, $5.0 million had been paid out on the restructuring charge.
Most of the remaining $1.1 million that has not yet been paid is related to
lease commitments.
In connection with the restructuring actions for the three months ended
March 31, 2001, the Company terminated the employment of 102 employees,
consisting of sales and marketing employees, applications development employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 34 employees
who resigned voluntarily during the three months ended March 31, 2001. At March
31, 2001, the Company had terminated all employees associated with these
restructuring actions. At March 31, 2001, the Company had exited a portion of
its facilities in Markham, Canada and most of its offices in the United States.
The Company has entered into sublease arrangements for some of its office space.
During the three months ended June 30, 2001, the Company incurred an
additional restructuring charge of $3.3 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, and by implementing other
measures. This charge was part of a plan to streamline the Company's efforts to
focus on achieving profitability. During the three months ended December 31,
2001, a recovery of $158,000 was accrued. After the adjustment above, the
restructuring charge was comprised of $2.5 million for reductions in employee
numbers, $571,000 for facilities-related costs including penalties associated
with the reduction of lease commitments and future lease payments and $186,000
related to the termination of the Minerva joint venture in Denmark. As of
December 31, 2001, all amounts had been paid out on the restructuring charge.
In connection with the restructuring actions for the three months ended
June 30, 2001, the Company terminated the employment of 140 employees,
consisting of applications development employees, sales and marketing employees,
technical and other support employees, and administrative employees in all
locations. In addition, the Company did not replace approximately 39 employees
who resigned voluntarily during the three months ended June 30, 2001. At June
30, 2001, the Company had terminated all employees associated with these
restructuring actions. At June 30, 2001, the Company had exited its office
facilities in the United States identified in the restructuring plan.
During the three months ended September 30, 2001, the Company incurred an
additional restructuring charge of $5.7 million (after adjustment) as part of a
plan to improve its operating results by reducing employees, by closing
duplicative Company facilities in the United States, Canada and Europe and by
implementing other measures. This charge was part of a plan to streamline the
Company's efforts to focus on achieving profitability. During the three months
ended December 31, 2001, a recovery of $244,000 was accrued relating mostly to
settlement or near settlement of certain lease obligations. After the adjustment
above, the restructuring charge was comprised of $3.7 million for reductions in
employee numbers and $2.0 million for facilities-related costs including
penalties associated with the reduction of lease commitments and future lease
payments. As of December 31, 2001, $4.7 million had been paid out on the
restructuring charge. Most of the remaining $1.0 million relates to employee
termination costs and lease commitments.
In connection with the restructuring actions for the three months ended
September 30, 2001, the Company terminated the employment of 183 employees,
consisting primarily of applications development employees, sales and marketing
employees, technical and other support employees, and administrative employees
in all locations. In addition, the Company did not replace approximately 9
employees who resigned voluntarily during the three months ended September 30,
2001. At September 30, 2001, the Company had terminated all employees associated
with these restructuring actions. At September 30, 2001, the Company had exited
its office facilities in the United States, Canada and Europe identified in the
restructuring plan.
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and
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DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
should not be relied upon as being a good indication of our future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently experienced by companies in early stages of development,
particularly companies in new and rapidly evolving markets like ours. Although
we have experienced significant revenue growth recently, this trend may not be
sustainable. Furthermore, we may not achieve or maintain profitability in the
future.
RESULTS OF OPERATIONS
Three months and nine months ended December 31, 2001 compared to three months
and nine months ended December 31, 2000.
Revenues. Total revenues for the three months ended December 31, 2001 were
$4.2 million compared to $9.3 million for the three months ended December 31,
2000. In the three months ended December 31, 2001, license revenues accounted
for $2.5 million or 61.1% of total revenues. In the three months ended December
31, 2000, license revenues accounted for $8.0 million, or 86.7% of total
revenues. Total revenues for the nine months ended December 31, 2001 were $11.2
million compared to $23.3 million for the nine months ended December 31, 2000.
In the nine months ended December 31, 2001, license revenues accounted for $5.8
million or 52.0% of total revenues. In the nine months ended December 31, 2000,
license revenues accounted for $20.4 million, or 87.5% of total revenues.
Service revenues, including maintenance and services fees, accounted for
$1.6 million, or 38.9% of revenues for the three months ended December 31, 2001,
compared to $1.2 million or 13.3% of total revenues for the three months ended
December 31, 2000. Service revenues, including maintenance and services fees,
accounted for $5.4 million, or 48.0% of revenues for the nine months ended
December 31, 2001, compared to $2.9 million or 12.5% of total revenues for the
nine months ended December 31, 2000.
Approximately 52.9% of our total revenues were generated in the United
States, 13.2% were generated in Canada and 33.9% were generated elsewhere in the
three months ended December 31, 2001, compared to 81.5%, 8.9% and 9.6%
respectively, for the three months ended December 31, 2000. Approximately 67.0%
of our total revenues were generated in the United States, 18.9% were generated
in Canada and 14.1% were generated elsewhere in the nine months ended December
31, 2001, compared to 69.1%, 17.1% and 13.8% respectively, for the nine months
ended December 31, 2000.
Cost of revenues. Cost of license revenues was $181,000 or 4.3% of total
revenues for the three months ended December 31, 2001 compared to $89,000 for
the three months ended December 31, 2000 or 1.0% of total revenues. Cost of
service revenues was $970,000, or 23.3% of total revenues for the three months
ended December 31, 2001 compared to $1.4 million for the three months ended
December 31, 2000, or 15.5% of total revenues. Cost of license revenues was
$567,000 or 5.1% of total revenues for the nine months ended December 31, 2001
compared to $270,000 for the nine months ended December 31, 2000 or 1.2% of
total revenues. Cost of service revenues was $3.8 million, or 34.4% of total
revenues for the nine months ended December 31, 2001, compared to $3.4 million
for the nine months ended December 31, 2001, or 14.6% of total revenues.
We anticipate that cost of service revenues will remain relatively constant
in absolute dollars. We anticipate that the cost of license revenues will be a
smaller proportion of license revenues.
Sales and marketing. Sales and marketing expenses decreased to $2.1 million
or 50.4% of revenues for the three months ended December 31, 2001 from $13.6
million or 147.1% of revenues for the three months ended December 31, 2000.
Sales and marketing expenses decreased to $11.7 million or 104.4% of revenues
for the nine months ended December 31, 2001 from $35.1 million or 150.7% of
revenues for the nine months ended December 31, 2000. This decrease was
attributable primarily to the reduction of sales and marketing personnel and
lower marketing costs due to reduced promotional activities. We anticipate that
sales and marketing expenses will remain relatively constant in the next few
quarters.
Research and development. Research and development expenses decreased to
$1.0 million or 24.2% of revenues for the three months ended December 31, 2001
from $6.1 million or 66.1% of revenues for the three months ended December 31,
2000. Research and development expenses decreased to $7.3 million or 65.0% of
revenues for the nine months ended December 31, 2001 from $12.3 million or 52.7%
of revenues for the nine months ended December 31, 2000. This decrease was
attributable primarily to the reduction of product development and related
services personnel and to decreased consulting and recruiting costs. We
anticipate that research and development expenses will remain constant in
absolute dollars, and will reduce as a percentage of total revenues from period
to period as we have reduced research and development personnel.
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DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
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General and administrative. General and administrative expenses decreased
to $670,000 or 16.1% of revenues for the three months ended December 31, 2001
from $1.4 million or 15.0% of revenues for the three months ended December 31,
2000. General and administrative expenses decreased to $2.6 million or 23.0% of
revenues for the nine months ended December 31, 2001 from $3.5 million or 15.2%
of revenues for the nine months ended December 31, 2000. The decrease is due
primarily to the reduction of administrative personnel, decreased consulting
costs and to lower facilities-related expenses necessary to support our growth.
We expect that general and administrative expenses will remain constant in
absolute dollars as we have reduced personnel and related costs.
Amortization of goodwill and identifiable intangibles. On September 26,
2000, the Company completed its acquisition of Continuity. As a result of the
acquisition, $19.4 million was allocated to goodwill, and identifiable
intangibles. This amount was being amortized on a straight-line basis over a
period of three years for identifiable intangibles, and five years for goodwill
from October 1, 2000. On October 16, 2000, the Company completed its acquisition
of DA. As a result of the acquisition, $94.2 million was allocated to goodwill
and identifiable intangibles. This amount was being amortized from October 16,
2000 on a straight-line basis over a period of three years for identifiable
intangibles and five years for goodwill.
Specific events and changes in circumstances indicated that these
long-lived assets were not recoverable, as determined based on the undiscounted
cash flows of the acquired business. In accordance with the Company's policy,
the carrying value has been reduced to net realizable value. For the year ended
March 31, 2001, $103.0 million of goodwill and identifiable intangibles was
written off.
Amortization of deferred stock-based compensation. We incurred a charge of
$399,000 or 9.6% of revenues in the three months ended December 31, 2001
compared to a charge of $1.0 million or 10.8% of revenues for the three months
ended December 31, 2000. We incurred a recovery of $1.7 million or 15.6% of
revenues in the nine months ended December 31, 2001 compared to a charge of $3.5
million or 14.9% of revenues for the nine months ended December 31, 2000. The
charge is related to the issuance of stock options with exercise prices less
than the deemed fair market value for financial reporting purposes on the date
of grant and the recovery is related to the unvested options of terminated
employees from the restructuring actions.
Interest and other income, net. Interest and other income, net for the
three months ended December 31, 2001 was $35,000, compared to the three months
ended December 31, 2000 at $926,000. Interest and other income, net for the nine
months ended December 31, 2001 was $598,000, compared to the nine months ended
December 31, 2000 at $3.9 million. Interest and other income reflects the
interest earned on the cash and cash equivalents balance arising from our
special warrant offering in September 1999 and our initial public offering in
February 2000. The decrease in interest and other income reflects lower cash
balances and lower interest rates.
Provision for income taxes. A deferred tax asset of $28.5 million existed
as of December 31, 2001 compared to $15.3 million at December 31, 2000. A full
valuation allowance was recorded against the deferred tax asset because it is
more likely than not that the asset will not be realized. A valuation allowance
taken against substantially the entire deferred tax asset reflects the lack of
profitability in the past, the significant risk that taxable income would not be
generated in the future and the non-transferable nature of the deferred tax
asset under certain conditions.
Three and nine months ended December 31, 2000 compared to the three and nine
months ended December 31,1999.
Revenues. Total revenues for the three months ended December 31, 2000 were
$9.3 million, compared to $2.9 million for the three months ended December 31,
1999. License revenues accounted for $8.0 million, or 86.7% of total revenues
for the three months ended December 31, 2000, compared with $2.7 million or
93.8% for the three months ended December 31, 1999. Total revenues for the nine
months ended December 31, 2000 were $23.3 million, compared to $5.4 million for
the nine months ended December 31, 1999. License revenues accounted for $20.4
million, or 87.5% of total revenues for the nine months ended December 31, 2000,
compared with $5.1 million or 94.5% for the nine months ended December 31, 1999.
Service revenues, including maintenance and services fees, accounted for
the remaining $1.2 million or 13.3% of total revenues for the three months ended
December 31, 2000, compared with $183,000 or 6.2% for the three months ended
December 31, 1999. Service revenues, including maintenance and services fees,
accounted for the remaining $2.9 million or 12.5% of total revenues for the nine
months ended December 31, 2000, compared with $296,000 or 5.5% for the nine
months ended December 31, 1999.
- --------------------------------------------------------------------------------
13
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
Approximately 81.5% (1999 61.5%) of our total revenues were generated in
the United States, 8.9% (1999 38.5%) were generated in Canada and 9.6% (1999
0.0%) were generated elsewhere in the three months ended December 31, 2000.
Approximately 69.1% (1999 68.4%) of our total revenues were generated in the
United States, 17.1% (1999 31.3%) were generated in Canada and 13.8% (1999 0.3%)
were generated elsewhere in the nine months ended December 31, 2000.
Cost of revenues. Cost of product revenues was $89,000 for the three months
ended December 31, 2000 or 1.0% of total revenues, compared with $14,000 or 0.5%
for the three months ended December 31, 1999. Cost of service revenues was $1.4
million for the three months ended December 31, 2000, or 15.5% of total
revenues, compared with $321,000, or 11.0% of total revenues for the three
months ended December 31, 1999. Cost of product revenues was $270,000 for the
nine months ended December 31, 2000 or 1.2% of total revenues, compared with
$20,000 or 0.4% for the nine months ended December 31, 1999. Cost of service
revenues was $3.4 million for the nine months ended December 31, 2000, or 14.6%
of total revenues, compared with $701,000, or 13.1% of total revenues for the
nine months ended December 31, 1999.
We anticipate that cost of service revenues will increase in absolute
dollars, but at a slower rate than previous quarters as we continue to hire
additional services personnel, but decrease proportionately as a percentage of
service revenues. We anticipate that the cost of product revenues will increase
proportionately with increases in product revenues.
Sales and marketing. Sales and marketing expenses increased to $13.6
million for the three months ended December 31, 2000, or 147.2% of total
revenues, compared with $3.4 million or 117.4% of total revenues for the three
months ended December 31, 1999. Sales and marketing expenses increased to $35.1
million for the nine months ended December 31, 2000, or 150.7% of total
revenues, compared with $5.5 million or 101.8% of total revenues for the nine
months ended December 31, 1999. This increase was attributable primarily to the
addition of sales and marketing personnel and higher marketing costs due to
expanded promotional activities.
Research and development. Research and development expenses increased to
$6.1 million for the three months ended December 31, 2000, or 66.1% of total
revenues, compared with $1.1 million, or 36.0% of total revenues for the three
months ended December 31, 1999. Research and development expenses increased to
$12.3 million for the nine months ended December 31, 2000, or 52.8% of total
revenues, compared with $2.2 million, or 41.9% of total revenues for the nine
months ended December 31, 1999. This increase was attributable primarily to the
addition of product development and related services personnel and to increased
consulting and recruiting costs.
As a Canadian Controlled Private Corporation or ("CCPC" ), we qualified
for certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.4 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of the amount of the credit. We will earn
investment tax credits at a rate of 20% of eligible current and capital research
and development expenditures made after our initial public offering. While a
portion of investment tax credits earned as a CCPC are refundable, investment
tax credits earned after our initial public offering may only be used to offset
income taxes otherwise payable.
General and administrative. General and administrative expenses increased
to $1.4 million, or 15.1% of total revenues for the three months ended December
31, 2000, compared to $355,000, or 12.1% of total revenues for the three months
ended December 31, 1999. General and administrative expenses increased to $3.5
million, or 14.9% of total revenues for the nine months ended December 31, 2000,
compared to $767,000, or 14.3% of total revenues for the nine months ended
December 31, 1999. The increase is due primarily to the addition of
administrative personnel, increased consulting costs and to higher
facilities-related expenses necessary to support our growth.
Amortization of goodwill and identifiable intangibles. On September 26,
2000, the Company completed its acquisition of Continuity. As a result of the
acquisition, $19.4 million was allocated to goodwill, and identifiable
intangibles. This amount is being amortized on a straight-line basis over a
period of three years for identifiable intangibles, and five years for goodwill
from October 1, 2000. For the three months and nine months ended December 31,
2000, $1.0 million (1999 nil) of goodwill amortization was recorded. On October
16, 2000, the Company completed its acquisition
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14
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
of DA. As a result of the acquisition, $94.2 million was allocated to goodwill
and identifiable intangibles. This amount is being amortized on a straight-line
basis over a period of three years for identifiable intangibles and five years
for goodwill from October 16, 2000. For the three months and nine months ended
December 31, 2000, $4.1 million (1999 -- nil) of goodwill amortization was
recorded.
Amortization of deferred stock-based compensation. We incurred a charge of
$1.0 million for the three months ended December 31, 2000, compared to $451,000
for the three months ended December 31, 1999 related to the issuance of stock
options with exercise prices less than the deemed fair market value for
financial reporting purposes on the date of grant. We incurred a charge of $3.5
million for the nine months ended December 31, 2000, compared to $769,000 for
the nine months ended December 31, 1999 related to the issuance of stock options
with exercise prices less than the deemed fair market value for financial
reporting purposes on the date of grant.
Interest and other income, net. Interest and other income, net for the
three months ended December 31, 2000 was $926,000, compared to $178,000 for the
three months ended December 31, 1999. Interest and other income, net for the
nine months ended December 31, 2000 was $3.9 million, compared to $354,000 for
the nine months ended December 31, 1999. Interest and other income, net reflects
the interest earned on the cash and cash equivalents balance arising from our
special warrant offering in June 1999 and our initial public offering in
February 2000.
Provision for income taxes. A deferred tax asset of $15.3 million existed
as of December 31, 2000. A full valuation allowance was recorded against the
deferred tax asset because it is more likely than not that the asset will not be
realized. A valuation allowance taken against substantially all of the deferred
tax asset reflects the lack of profitability in the past, the significant risk
that taxable income would not be generated in the future and the nontransferable
nature of the deferred tax asset under certain conditions.
LIQUIDITY AND CAPITAL RESOURCES
Since the date of incorporation, we have raised an aggregate of $3.4
million through private placements of special shares. We have raised $14.4
million, net of the agents' commission and offering expenses, through a private
placement of special warrants in June 1999. We have also raised $103.4 million,
net of agents' commissions and offering expenses through our initial public
offering in February 2000.
Our operating activities used cash of $23.0 million for the nine months
ended December 31, 2001 and cash of $29.2 million for the nine months ended
December 31, 2000. Our negative operating cash flow resulted principally from
the net losses that we incurred during these periods. The Company has taken
restructuring actions in January, April and July 2001 to reduce expenses.
Our financing activities provided cash of $128,000 in the nine months ended
December 31, 2001 and used cash of $831,000 in nine months ended December 31,
2000, mostly related to payments on capital leases net of receipts from issuance
of common shares and warrants.
Our investing activities, consisting of the purchase or sale of computer
equipment, software, furniture and equipment, net of the purchase or sale of
short-term investments used cash of $160,000 during the nine months ended
December 31, 2001 and used cash of $1.9 million in nine months ended December
31, 2000.
In March 1999, we obtained a lease line of credit from a Canadian chartered
bank to purchase equipment and furniture. Approximately $89,000 was outstanding
as of December 31, 2001. The ceiling on the lease line of credit is
Cdn$1,000,000 (approximately $640,000). The lease line of credit is not
collateralized with cash for the amount of the line that is used for leasing
equipment.
Our capital requirements depend on a number of factors. In January, April
and July 2001, the Company completed restructurings of its operations to reduce
the cost of operating the business and expects quarterly expenses to be less
than or equal to the quarter ended December 31, 2001. The Company will also have
to pay out certain obligations related to these restructurings. We expect to
continue to devote resources to continue our research and development efforts,
our sales, support efforts, and marketing efforts. Our expenditures have
increased substantially since the date of incorporation, but we anticipate that
capital expenditures and quarterly expenses will decrease or stay the same in
absolute dollars compared to the December 31, 2001 quarter.
At December 31, 2001, we had cash and cash equivalents and short-term
investments aggregating $12.6 million. We
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15
DELANO TECHNOLOGY CORPORATION -- Quarterly Report Canadian GAAP
- --------------------------------------------------------------------------------
believe based on current forecasts that our current cash and cash equivalents
and short-term investments are sufficient to fund our operations and pay out our
obligations as a result of our restructurings for at least the next 12 months.
If cash generated from operations is insufficient to meet our long-term
liquidity needs, we may need to raise additional funds or seek other financing
arrangements. Additional funding may not be available on favorable terms or at
all. In addition, although there are no present understandings, commitments or
agreements with respect to any acquisition of other businesses, products or
technologies, we may, from time to time, evaluate potential acquisitions of
other businesses, products and technologies. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and any such financing may be dilutive to existing investors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Pursuant to recent accounting guidance to disclose significant accounting
policies and business practices that are deemed to be important to the Company's
financial condition, the Company has made the following disclosures:
The preparation of consolidated financial statements requires Delano to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, Delano evaluates its estimates, including
those related to revenue recognition, bad debts, investments, intangible assets,
income taxes, restructuring, and contingencies and litigation. Delano bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue recognition - We recognize our software license revenues in
accordance with the American Institute of Certified Public Accountants, or
("AICPA"), Statement of Position ("SOP") 97-2, "Software Revenue Recognition,"
and related amendments and interpretations contained in the AICPA's SOP 98-9. We
generally recognize revenues allocated to software licenses upon delivery of the
software products, when all of the following conditions have been met:
o persuasive evidence of an arrangement exists;
o the license fee is fixed or determinable; and
o collectibility of the license fee is probable.
Because substantially all of our software license agreements include
related maintenance services, these agreements are multiple-element
arrangements. We allocate the fees in multiple-element arrangements based on the
respective value for each element, with maintenance being allocated typically at
18% of license revenue but not in all cases. Delivery of the software generally
is deemed to occur upon shipment of the software unless customers are provided
the opportunity to return the products. Revenues are recognized only when all
refund obligations have expired. In situations where we provide online
offerings, delivery of the software occurs upon initiation of the online
offerings. Revenues from maintenance and support services and online offerings
are recognized ratably over the related contractual period. Revenues related to
installation and integration services are recognized on a time and material
basis as such services are provided.
Restructuring charges (recovery) - The Company determined its restructuring
charges (recovery) in accordance with Emerging Issues Task Force Issue No. 94-3
("EITF 94-3") and Staff Accounting Bulletin No. 100 ("SAB 100"). EITF 94-3 and
SAB 100 require that the Company commit to an exit plan before it accrues
employee termination costs and exit costs.
All restructuring related charges involved estimates based on information
available at the time the accrual was made. Actual results may differ from these
estimates under different assumptions or conditions.
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16
ANNEX O
DELANO MANAGEMENT INFORMATION CIRCULAR DATED JUNE 11, 2001,
PREPARED FOR THE ANNUAL AND SPECIAL MEETING OF
DELANO SHAREHOLDERS ON JULY 26, 2001
DELANO TECHNOLOGY CORPORATION
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
JULY 26, 2001
The Annual and Special Meeting of shareholders of Delano Technology
Corporation ("Delano" or the "Company") will be held at The Toronto Stock
Exchange, The Exchange Tower, 130 King Street West, Toronto, Ontario, Canada, on
Thursday, July 26, 2001 at 9:00 a.m., Eastern Time, for the following purposes:
1. to receive and consider the Company's 2001 Annual Report, the
consolidated financial statements of the Company for the fiscal
year ended March 31, 2001 and the report of the auditors thereon;
2. to elect directors;
3. to appoint independent auditors for the Company and authorize the
Board of Directors to fix their remuneration;
4. to consider and, if deemed advisable, to approve amendments to
the Employee Stock Purchase Plan of the Company increasing the
maximum number of Common Shares of the Company issuable
thereunder; and
5. to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items are fully discussed in the Management Information
Circular/Proxy Statement accompanying this notice.
The close of business on June 11, 2001 has been fixed as the record date
for the meeting. Only shareholders of record at that time are entitled to notice
of and to vote at the meeting and any adjournment or postponement thereof.
However, a transferee of Common Shares acquired since the record date shall be
entitled to vote at the meeting if he or she produces properly endorsed share
certificates for such Common Shares or otherwise establishes that he or she owns
such Common Shares and demands, no later than 10 days before the meeting that
his or her name be included in the list of shareholders entitled to receive the
notice of meeting.
All shareholders are cordially invited to attend the meeting. Shareholders
who are unable to attend the meeting in person are requested to date, sign and
return in the envelope provided for that purpose, the enclosed form of proxy. To
be effective, the completed form of proxy must be received by Computershare
Investor Services, 100 University Avenue 8th Floor, Toronto, Ontario M5J 2Y1
before 5:00 p.m. (Toronto time) on Wednesday July 25, 2001. The return of the
proxy will not affect your right to vote in person if you attend the meeting. A
copy of the annual report for the year ended March 31, 2001 and a Management
Information Circular/Proxy Statement accompany this notice. This last document
provides additional information relating to the matters to be dealt with at the
meeting, and is deemed to form part of this notice.
By Order of the Board of Directors
"David L. Lewis"
Corporate Secretary
June 11, 2001
DELANO TECHNOLOGY CORPORATION
302 TOWN CENTRE DRIVE MARKHAM, ONTARIO CANADA
MANAGEMENT INFORMATION CIRCULAR
PROXY STATEMENT
THIS MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT AND ACCOMPANYING FORM
OF PROXY ARE FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES BY THE
MANAGEMENT OF DELANO TECHNOLOGY CORPORATION ("DELANO" OR THE "COMPANY") FOR USE
IN VOTING AT THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS (THE "MEETING") TO
BE HELD AT THE TORONTO STOCK EXCHANGE, THE EXCHANGE TOWER, 130 KING STREET WEST,
TORONTO, ONTARIO, CANADA, ON THURSDAY, JULY 26, 2001 AT 9:00 A.M. EASTERN TIME,
and at any postponement or adjournment thereof, for the purposes set forth in
the attached notice. This Management Information Circular/Proxy Statement, the
attached notice and the enclosed proxy are being sent to shareholders on or
about June 22, 2001.
Management of the Company does not intend to bring any matters before the
Meeting except those indicated in the notice and does not know of any matter
which anyone else proposes to present for consideration at the Meeting. If any
other matters properly come before the Meeting, however, the persons named in
the enclosed proxy, or their duly constituted substitutes acting at the Meeting,
will be authorized to vote or otherwise act thereon in accordance with their
judgment on such matters.
Only votes cast in person at the Meeting or by proxy received by the
Company before the commencement of the Meeting will be counted at the Meeting.
With regard to Proposal #1, the election of directors, votes may be cast for or
withheld from all nominees. Votes that are withheld will have no effect on the
outcome of the election because directors will be elected by a plurality of the
votes cast. With regard to Proposals #2, #3 and #4, a vote may be withheld which
will be counted as present for purposes of determining a quorum and have the
effect of a negative vote.
If proxies are properly dated, executed and returned, the Common Shares
they represent will be voted at the Meeting in accordance with the instructions
of the shareholder. IF NO SPECIFIC INSTRUCTIONS ARE GIVEN, THE COMMON SHARES
REPRESENTED BY PROXY WILL BE VOTED FOR the election of the nominees for
directors set forth herein, FOR the appointment of KPMG LLP, Chartered
Accountants, as independent auditors for the Company in fiscal 2002, FOR
authorizing the directors to fix the auditors' remuneration, and FOR the
proposed amendments to the Employee Stock Purchase Plan. A proxy given pursuant
to this solicitation may be revoked by an instrument in writing, including
another proxy bearing a later date, executed by the shareholder or by his or her
attorney authorized in writing, and deposited either at the registered office of
the Company at any time up to and including the last business day preceding the
day of the Meeting, or any adjournment or postponement thereof, at which the
proxy is to be used, or with the chairman of the Meeting on the day of the
Meeting, or adjournment or postponement thereof; or in any other manner
permitted by law. Attendance at the Meeting will not automatically revoke a
proxy, but a shareholder in attendance may request a ballot and vote in person,
thereby revoking a previously granted proxy.
THE SOLICITATION OF PROXIES FROM THE SHAREHOLDERS IS BEING MADE BY
MANAGEMENT OF THE COMPANY AND THE COST OF SOLICITATION, INCLUDING THE COST OF
PREPARING THE MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT, THE FORM OF PROXY
AND NOTICE OF ANNUAL AND SPECIAL MEETING IS BEING PAID FOR BY THE COMPANY. In
addition to solicitation by mail, the Company will request banks, brokers and
other custodian nominees and fiduciaries to supply proxy material to the
beneficial owners of Common Shares of the Company of whom they have knowledge,
and may reimburse them for their expense in so doing.
1
RECORD DATE, OUTSTANDING
SHARES AND HOLDINGS
OF CERTAIN SHAREHOLDERS
RECORD DATE AND OUTSTANDING SHARES
At the close of business on June 11, 2001, the record date fixed for the
determination of shareholders entitled to notice of and to vote at the Meeting,
there were outstanding 37,305,826 Common Shares of the Company ("Common
Shares"), the only class of voting securities outstanding. Shareholders of
record of Common Shares as of the close of business on June 11, 2001 will be
entitled to vote. However, a transferee of Common Shares acquired since the
record date shall be entitled to vote at the Meeting if he or she produces
properly endorsed share certificates for such shares or otherwise establishes
that he or she owns such shares and demands prior to the commencement of the
Meeting, that his or her name be included in the list of shareholders entitled
to receive the notice of Meeting. The presence at the Meeting, in person or by
proxy, of shareholders entitled to cast a third of the votes which all
shareholders are entitled to cast will constitute a quorum. Each Common Share is
entitled to one vote, without cumulation, on each matter to be voted upon at the
Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Shares as of May 11, 2001 of (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Shares, (ii) each director of the Company, (iii) each
Named Executive Officer (as defined under "Executive Compensation and Other
Transactions", below) of the Company and (iv) all directors and officers as a
group. Beneficial ownership also includes any shares as to which a person or
entity has the right to acquire beneficial ownership of within 60 days after
March 31, 2001 Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Shares listed below, based on the information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community of property laws where applicable. The address
of our executive officers and directors is in care of Delano Technology
Corporation, 302 Town Centre Blvd., Markham, Ontario L3R 0E8, Canada.
NUMBER OF SHARES PERCENT OF TOTAL
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
- ------------------------ --------- -----
Bahman Koohestani (1) ........................ 3,500,000 9.4%
Dennis Bennie (2) ............................ 1,024,107 2.7%
John Foresi (3) .............................. 1,684,603 4.5%
Albert Amato (4) ............................. 326,927 *
J. (Ian) Giffen (5) .......................... 69,687 *
Donald Woodley (6) ........................... 13,375 *
Al DeLorenzi ................................. 0 *
Vikas Kapoor ................................. 0 *
All executive officers and directors
as a group (12 Persons) (7) .................. 6,861,593 18.4%
* Less than 1%
- -------------------
(1) Represents shares held of record by 1329347 Ontario Inc., in its capacity
as general partner of GHI Limited Partnership. Mr. Koohestani is the sole
shareholder of 1329347 Ontario Inc.
(2) Represents shares held by 3060357 Canada Inc. and XDL Ventures Corp., both
of which companies are controlled by Mr. Bennie.
(3) Includes 789,474 shares held of record by Tofino Venture Capital Inc, of
which Mr. Foresi is the voting trustee. The shares also include a warrant
to purchase 394,737 shares at a price of $0.44 per share and options for
250,000 shares that are vested.
(4) Includes 276,927 shares owned and options for 50,000 shares that are
vested.
(5) Includes 45,000 shares owned and options for 24,687 shares that are vested.
(6) Includes 4,000 shares owned and options for 9,375 shares that are vested.
(7) Includes 6,349,563 shares owned and options/warrants for 512,030 shares
that are vested.
2
CURRENCY
Unless otherwise specified in the document, all references shall be to US
dollars. The prefix "C" before a specified dollar amount designates Canadian
dollars. US dollar amounts which follow any amount specified in another currency
are estimates only.
ELECTION OF DIRECTORS
The number of directors to be elected at the Meeting is eight (8). Under
the by-laws of the Company, directors are elected annually.
At the Meeting, the shareholders will elect the directors to hold office,
subject to the provisions of the Company's Bylaws, until the next Annual Meeting
of shareholders and until their successors shall have been duly elected and
qualified. Unless contrary instructions are given, the shares represented by the
enclosed proxy will be voted FOR the election of the nominees set forth below.
The nominees set forth below have consented to being named in this
Management Information Circular/Proxy Statement and to serve if elected.
However, if any nominee at the time of his election is unable or unwilling to
serve or is otherwise unavailable for election, an event management have no
reason to believe will occur, and as a result another nominee is designated by
the Board of Directors or is otherwise nominated, the persons named in the
enclosed proxy, or their substitutes, will have discretion and authority to vote
or refrain from voting for such nominee in accordance with their judgment.
Under the Articles and By-laws of the Company, the Board of Directors
consists of a minimum of three (3) directors and a maximum of ten (10) persons.
The current number of directors is eight (8) and it is proposed that eight (8)
directors be elected at the Meeting. The nominees for election as director,
together with certain information about them, are set forth below.
NAME AGE TITLE
- ---- --- -----
Dennis Bennie(1)(2)............................... 48 Chairman
John Foresi....................................... 40 Director and Chief Executive
Officer
Bahman Koohestani................................. 39 Director, Executive Vice-President, Products
and Chief Technology Officer
Albert Amato(1)(2)................................ 42 Director
J. (Ian) Giffen(1)................................ 43 Director
Donald Woodley(2)................................. 55 Director
Al Delorenzi...................................... 52 Director
Vikas Kapoor...................................... 39 Director
- ------------------
(1) Member of the audit committee
(2) Member of the compensation committee
(3) Member of the corporate governance committee
Dennis Bennie has been our Chairman since our inception in May 1998.
Currently, Mr. Bennie is the Chief Executive Officer and President of XDL
Capital Corp., a private venture capital firm that he established in January
1997 to focus on investing in and working with emerging Internet companies and
related technologies. Mr. Bennie is a director of MGI Software Corp., a company
that produces digital imaging software. In 1988, Mr. Bennie co-founded Delrina
Corporation, a designer of fax, data and voice communications software, where he
was the Chairman and Chief Executive Officer until the November 1995 sale of
Delrina to Symantec Corporation. He remained employed with Symantec as Executive
Vice President and was a director until mid-1996. Mr. Bennie has an accounting
degree from the University of Witwatersrand.
3
John Foresi has been our Chief Executive Officer and has served as one of
our directors since January 1999. From May 1998 to December 1998, he was the
President, Transportation of i2 Technologies, a global supply chain software
company. In May 1998, i2 Technologies acquired InterTrans Logistics Solutions,
of which Mr. Foresi was President and Chief Executive Officer from August 1994
to April 1998. Mr. Foresi has an MBA from the Harvard Business School and a BBA
from Wilfrid Laurier University.
Bahman Koohestani founded Delano in May 1998, has served as one of our
directors since our inception and was our President and Chief Executive Officer
from our inception until January 1999. Mr. Koohestani has been our Executive
Vice-President, Products and Chief Technology Officer since January 1999. Prior
to founding Delano, Mr. Koohestani was Director of Products, Messaging for
Netscape Communications from October 1996 to May 1998. From February 1991 to
September 1996, Mr. Koohestani served as Chief Architect of Electronic Forms and
Products e-Commerce at Delrina. Mr. Koohestani has a Bachelor of Science
(Honors) degree from York University.
Albert Amato has served as one of our directors since May 1998. Since
November 1995, Mr. Amato has been a technology consultant and advisor to
software companies and technology investment funds. Mr. Amato was a co-founder
and was Chief Technical Officer of Delrina from 1989 to November 1995. After
Delrina was sold to Symantec, he served as a Vice President with Symantec from
November 1995 to May 1996. Mr. Amato has a Bachelor of Applied Science and
Engineering (Honors) degree from the University of Toronto.
J. (Ian) Giffen has served as one of our directors since June 1998. Since
September 1996, Mr. Giffen has been a consultant and advisor to software
companies and technology investment funds. From February 1996 to September 1996,
Mr. Giffen was Chief Financial Officer of Algorithmics. From January 1992 until
February 1996, Mr. Giffen served as Chief Financial Officer of Alias Research,
which was sold to Silicon Graphics in June 1995. Mr. Giffen is a director of and
advisor to Macromedia Inc., a developer of software for web publishing,
multimedia and graphics and a director of MGI Software. Mr. Giffen has a
Bachelor of Arts in Business Administration from the University of Strathclyde.
Donald Woodley has served as one of our directors since November 1999. From
February 1997 to October 1999, Mr. Woodley was President of Oracle Corporation
Canada Inc. From September 1987 to January 1997, he was President of Compaq
Canada Inc. Mr. Woodley serves on the board of directors of Telus Corporation
Inc., a telecommunications company and ThinWEB Technologies Inc. Mr. Woodley has
a Bachelor of Commerce from the University of Saskatchewan and an MBA from the
University of Western Ontario.
Al Delorenzi has served as one of our directors since January, 2001. From
October, 1999 to present, Mr. DeLorenzi has held the position of Chief
Technology Officer for eBusiness Solutions at Nortel Networks, where he is
responsible for Business Development, Strategic Planning, Strategic Alliances,
and Technology Innovation. Prior to his position in eBusiness Solutions, Mr.
DeLorenzi held a number of executive positions at Nortel Networks. He was
responsible for Business Development and Technology for Nortel Networks'
enterprise networking portfolio, which comprised data networking, communications
applications and telephony systems. Mr. DeLorenzi began his career at Nortel in
1988 in Research and Development and has since held executive positions in
product management and marketing. Mr. DeLorenzi is a graduate of the University
of Toronto and holds a Bachelor of Applied Sciences degree in Electrical
Engineering. Mr. DeLorenzi is based in the San Jose CA offices of Nortel
Networks.
Vikas Kapoor has served as one of our directors since June, 2001. Mr.
Kapoor is Chairman and Chief Executive Officer of Opera Ventures, a privately
held firm which specializes in turnarounds and restructurings. Prior to founding
Opera, Mr. Kapoor was President and Chief Executive Officer of Walker Digital,
an Internet Incubator from April to November, 2000. Prior to that, Mr Kapoor had
a successful career as a management consultant, first at McKinsey & Co, (1989 to
1992) then at AT Kearney, Inc (1992 to 1994), and finally at his own firm,
Mitchell Madison Group, which he co-founded in 1994, built into a global 700
person firm and sold to marchFIRST in 1999. Mr. Kapoor received a Bachelor of
Arts in Philosophy from Princeton University in 1984, a Master of Arts in
Philosophy from Harvard University in 1989 and a Masters of Business
Administration from the Harvard Business School in 1989.
4
The Board currently has three committees, the Audit Committee, the
Compensation Committee and the Corporate Governance Committee.
AUDIT COMMITTEE
Our Audit Committee's mandate is to assist the Board of Directors in
fulfilling its functions relating to corporate accounting and reporting
practices as well as financial and accounting controls, to provide effective
oversight of the financial reporting process, and to review financial statements
as well as proposals for the issue of securities. Messrs. Bennie, Amato and
Giffen are members of the Audit Committee.
COMPENSATION COMMITTEE
Our Compensation Committee reviews and approves the compensation and
benefits for our executive officers, administers our stock option plan and
performs other duties as may from time to time be determined by our board of
directors. Messrs. Bennie, Amato and Woodley are members of the Compensation
Committee.
CORPORATE GOVERNANCE COMMITTEE
The Company's Board of Directors met 9 times during fiscal 2001. No
director participated in fewer than 75% of the meetings of the Board of
Directors and the total number of meetings held by all committees on which such
director served. The Corporate Governance Committee was formally established by
the Board of Directors on June 8, 2001. Messrs. Bennie and Giffen are members of
the Corporate Governance Committee. To date the Corporate Governance Committee
has not yet met as a separate committee and the governance matters discussed in
this circular have been addressed by the full Board of Directors or its
Committees on an ad hoc basis.
COMPENSATION OF DIRECTORS
Effective July, 2000, we compensate directors, who are not employees of the
Company for serving on the Board of Directors at a rate of $2,500 per quarter.
In addition, the chairman of each of the Audit and Compensation Committees
received $2,500 per quarter and each member of the committees receives $1,500
per quarter. We also reimburse directors for out-of-pocket expenses for
attending board and committee meetings.
DIRECTORS AND OFFICERS INSURANCE
The By-laws of the Company provide that, subject to Section 136 of the
Business Corporations Act (Ontario) (the "OBCA"), the Company shall indemnify a
director or officer of the Company, a former director or officer of the Company
or a person who acts or acted at the Company's request as a director or officer
of a body corporate of which the Company is or was a shareholder or creditor,
and his or her heirs and legal representatives, against all costs, charges and
expenses reasonably incurred by him or her in respect of certain actions or
proceedings to which he or she is made a party by reason of his or her office,
if he or she meets certain specified standards of conduct, and the Company shall
also indemnify any such person in such other circumstances as the OBCA or the
law permits or requires. The Company maintains directors' and officers'
liability insurance for its directors and officers. With respect to directors
and officers as a group, the Company paid a premium of $450,846 for directors'
and officers' liability insurance, which included coverage required in
connection with the Company's initial public offering. The total amount of
insurance purchased for directors and officers as a group was $15,000,000. All
matters insured are subject to a $500,000 securities-related retainer, which
applies to costs of defense and which is waived where claims against all
insureds are dismissed or the insureds are found not liable. We do not otherwise
compensate our directors, but they are reimbursed for out-of-pocket expenses
incurred in connection with meetings of the Board of Directors or its
committees.
DIRECTORS' STOCK OPTIONS
Directors are eligible to participate in the Company's Stock Option Plan.
To date, options to purchase an aggregate of 850,000 Common Shares have been
granted to members of the Board of Directors as detailed below:
5
Number of Shares
Underlying Exercise
Options Granted Price Per Share Expiration
Name (#) ($/Security) Date
- -------------- ------- ------------ -------------
John Foresi 500,000 $0.11 Jan. 04, 2004
John Foresi 150,000 $2.38 Jan. 05, 2006
Dennis Bennie 10,000 $2.38 Jan. 05, 2006
Albert Amato 75,000 $0.11 Aug. 26, 2003
Albert Amato 10,000 $2.38 Jan. 05, 2006
J. (Ian) Giffen 30,000 $0.11 Aug. 26, 2003
J. (Ian) Giffen 15,000 $3.08 Oct. 18, 2004
J. (Ian) Giffen 10,000 $2.38 Jan. 05, 2006
Donald Woodley 30,000 $4.51 Nov. 26, 2004
Donald Woodley 10,000 $2.38 Jan. 05, 2006
Albert DeLorenzi 10,000 $3.50 Jan. 22, 2006
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the Company's directors or senior officers were indebted to the Company
or to any of its subsidiaries at any time since the beginning of the last
completed fiscal year.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF ITS
NOMINEES TO SERVE ON THE COMPANY'S BOARD OF DIRECTORS.
EXECUTIVE COMPENSATION AND OTHER TRANSACTIONS
The following individuals comprise the executive officers of the Company as
at the date hereof:
NAME TITLE
- ---- -----
John Foresi.................................... 40 Director and Chief Executive
Officer
Bahman Koohestani.............................. 39 Director, Executive Vice-President, Products
and Chief Technology Officer
David Frankland................................ 44 President
Thomas Hearne.................................. 36 Chief Financial Officer
Robert Lalonde................................. 37 Senior Vice-President, Products
Barry Yates.................................... 35 Senior Vice-President, Worldwide Sales
David Lewis.................................... 38 Vice-President, Legal, General Counsel and Secretary
John Foresi. Please see biographical information in "Election of
Directors".
Bahman Koohestani. Please see biographical information in "Election of
Directors".
David Frankland has been President of Delano since January 2, 2001. Prior
to Delano, Mr. Frankland served as President and Chief Executive Officer of
Digital Archaeology, a leading provider of advanced customer analytics for
e-business, which culminated in the sale of the company to Delano. Mr. Frankland
also served as Vice President of Marketing, Sales, and Service for APS
Technologies, a manufacturer and direct marketer of computer peripheral devices.
As well, Mr. Frankland served as Executive Director of Marketing for Informix
Software, Vice President of Worldwide
6
Sales and Marketing for the division of Sun Microsystems, Director of OEM Sales
and Marketing for ITT Information Systems and Vice President of Marketing and
Sales for Digital Ocean, a wireless networking start-up company. Mr. Frankland
holds a BA in Psychology and Theology from St. Olaf College and an advanced
degree in direct marketing from the Henry Bloch School of Business at the
University of Missouri, Kansas City.
Thomas Hearne has served as our Chief Financial Officer since November
1999. From October 1997 to November 1999, Mr. Hearne was Chief Financial Officer
of Open Text Corporation, a provider of intranet, extranet and e-community
platform solutions. From September 1996 to October 1997, Mr. Hearne served as
Vice President, Finance and Administration of Algorithmics Incorporated, a
developer of risk management software. From April 1996 to September 1996, Mr.
Hearne was the Controller of Algorithmics. From September 1992 to April 1996,
Mr. Hearne was European Controller and Manager, Financial Reporting at Alias
Research Inc., a developer of 3D graphics software, which was sold to Silicon
Graphics, Inc. in June 1995. Mr. Hearne is a chartered accountant and has an MBA
from York University and a Bachelor of Economics degree from Trent University.
Robert Lalonde has served as our Senior Vice-President, Products and prior
to that our Vice-President of Marketing since January 1999. From July 1993 to
January 1999, Mr. Lalonde was the Vice-President, Marketing of the Business
Intelligence Division at Hummingbird Ltd., a provider of network connectivity,
business intelligence, document and knowledge management software. Mr. Lalonde
has a Bachelor of Science degree from Laurentian University.
Barry Yates has served as our Senior Vice-President, Worldwide Sales since
March 2000. Between January 2000 and March 2000, Mr. Yates served as our Vice
President, North American Sales. Between September 1998 and January 2000, Mr.
Yates served as our Vice-President, Professional Services. Prior to joining us,
Mr. Yates was Manager at Bain & Company, a management consulting firm, from
December 1995 to September 1998. From April 1992 to November 1995, Mr. Yates was
Principal at KPMG Management Consulting Company. Mr. Yates has a Bachelor of
Commerce (Honors) degree from Queen's University.
David Lewis has served as our Vice President, Legal, General Counsel and
Secretary since January 2000. From February 1999 to January 2000, Mr. Lewis was
the Vice President, Legal at Open Text. From November 1994 to February 1999, Mr.
Lewis was the General Counsel at Alias|Wavefront (formerly Alias Research) prior
to its acquisition by Silicon Graphics in June 1995. Between June 1994 and
November 1994, Mr. Lewis was an independent consultant and prior to June 1994,
Mr. Lewis was General Counsel at SoftKey Software Products Inc., a consumer
software publisher. Mr. Lewis has a Bachelor of Laws (LL.B.) degree from Osgoode
Hall Law School.
EXECUTIVE COMPENSATION
The following table sets forth the actual compensation paid or awarded to
our named executive officers for the year ended March 31, 2001, by the
individual who served as Delano's Chief Executive Officer and each of the four
other most highly compensated executive officers whose salary and bonus for the
2001 fiscal year exceeded $100,000, for services rendered in all capacities to
Delano and its subsidiaries for the fiscal year ended March 31, 2001 and the
period from May 8, 1999 to March 31, 1999. The listed individuals are referred
to hereafter as the "Named Executive Officers." No other executive officers who
otherwise would have been includable in this table on the basis of salary and
bonus earned during 2001 have been excluded because they terminated employment
or changed their executive status during the year.
7
Long-term
Compensation
Awards
-----------
Annual
Compensation
------------------------------------------ Securities
Year Underlying
Name and Principal Position Ended Salary ($) Bonus ($) Other Options (#)
- --------------------------- ----- ---------- --------- ----- -----------
($)
John Foresi(1)........................... 2001 99,540 -- 4,778 150,000
Chief Executive Office................... 2000 104,167 277,778 5,000 --
1999 81,250 -- 1,188 1,144,737
David Frankland(2)....................... 2001 200,000 140,307 5,000 465,000
President
Barry Yates(3)........................... 2001 99,540 43,549 4,778 75,000
Senior Vice President, Worldwide Sales... 2000 104,167 104,167 5,000 --
1999 58,827 -- 2,916 225,000
Robert Lalonde(4)........................ 2001 99,540 71,308 4,778 90,000
Senior Vice President, Products.......... 2000 104,167 40,886 5,000 --
1999 20,833 -- -- 135,000
Bruce Cameron(5)......................... 2001 150,000 45,000 6,000 20,000
Vice President, Sales North America...... 2000 38,743 35,000 1,250 105,000
- ---------------
1. Mr. Foresi joined Delano as President and Chief Executive Officer in
January 1999. His annualized salary for 2001 was Cdn$150,000. Mr. Foresi
also received a car allowance of Cdn$7,200 which is included as other
compensation. As of March 31, 2001, Mr. Foresi held 250,000 unvested shares
of Delano at $0.11 per share and has a warrant to purchase an additional
394,737 common shares at $0.44 per share. The warrant expires when he
ceases to be employed by us or on January 5, 2002, whichever occurs
earlier.
2. Mr. Frankland became President of Delano on January 2, 2001. Prior to
Delano, Mr. Frankland served as President and Chief Executive Officer of
Digital Archaeology. Delano acquired Digital Archaeology in October 2000.
Mr. Frankland had 265,000 fully vested options granted at $1.45 per share
pursuant to the stock incentive plans for Digital Archaeology that have
been assumed by us. As of March 31, 2001, Mr. Frankland held 50,000
unvested shares of Delano at $2.38 per share and 150,000 unvested shares of
Delano at $12.25 per share.
3. Mr. Yates joined Delano in September 1998. As of March 31, 2001, Mr. Yates
held 75,000 unvested shares of Delano at $0.11 per share and 75,000
unvested shares of Delano at $2.38 per share.
4. Mr. Lalonde joined Delano in January 1999. As of March 31, 2001, Mr.
Lalonde held 45,000 unvested shares of Delano at $0.11 per share, 75,000
unvested shares of Delano at $2.38 per share and 15,000 unvested shares of
Delano at $9.56 per share.
5. Mr. Cameron joined Delano in January 2000. As of March 31, 2001, Mr.
Cameron held 78,750 unvested shares of Delano at $6.67 per share and 20,000
unvested shares of Delano at $2.38 per share. Mr. Cameron left the Company
in April 2001.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The following is a brief description of the employment agreements entered
into between the Company or its subsidiaries and each of the Named Executive
Officers.
We have entered into an agreement with Mr. Foresi pursuant to which he was
hired as our President and Chief Executive Officer effective January 4, 1999.
Pursuant to this agreement, Mr. Foresi receives a salary of C$150,000
(approximately $104,000) per annum, exclusive of bonuses, benefits and other
compensation. Mr. Foresi was also granted options to purchase 750,000 Common
Shares at a price of $0.11 per share, which options expire on January 4, 2004,
and a warrant to purchase an additional 394,737 Common Shares at a price of
$0.44 per share, which warrant expires when Mr. Foresi ceases to be employed by
us or January 5, 2002, whichever is earlier. On January 11, 2000, Mr. Foresi
exercised options to purchase 250,000 Common Shares at a price of $0.11 per
share. Mr. Foresi also receives a yearly car allowance and compensation for all
expenses incurred from time to time in connection with the carrying out of his
duties. If Mr. Foresi is dismissed without cause he will be entitled to receive
either six months' notice or payment of six months' severance.
8
Options that have not vested and warrants that have not been exercised prior to
notice of termination (other than for cause) or during the six-month notice or
severance period thereafter will be null and void. The agreement further
provides that in the event of a change of control of Delano resulting in the
termination of Mr. Foresi's employment without cause, all of Mr. Foresi's
options will vest within three months of the change of control.
We have also entered into an agreement with Mr. Koohestani pursuant to
which he was hired as our Executive Vice President, Products and Chief
Technology Officer effective January 4, 1999. Pursuant to this agreement, Mr.
Koohestani receives a salary of C$150,000 (approximately $104,000) per annum,
exclusive of bonuses, benefits and other compensation. Mr. Koohestani also
receives a yearly car allowance and compensation for all expenses incurred from
time to time in connection with the carrying out of his duties.
The Company has also entered into separate Employee Confidentiality and
Non-Solicitation Agreements with each of the Named Executive Officers. Under
these agreements, each of them has agreed to keep in confidence all proprietary
information of the Company obtained during his employment with the Company for a
period of three years following the termination of his employment with the
Company.
STOCK PLAN
The Delano 1999 Stock Option Plan. The Delano 1999 Stock Option Plan was
established to provide incentives to our directors, officers, employees and
consultants through participation in the Company's growth and success. Options
to purchase Common Shares may be granted from time to time by our Board of
Directors at an exercise price determined by them. The maximum number of Common
Shares that currently may be issued under the plan is 6,550,158 Common Shares.
Options granted under the plan must be exercised no later than five years after
the date of the grant, except where our board of directors specifically states
otherwise, in which case the expiry date can be no later than 10 years after the
date of grant. The option price per Common Share shall be determined by the
board of directors at the time an option is granted. The board of directors may
accelerate the vesting of any or all outstanding options of any or all optionees
upon the occurrence of a change of control. Generally, options granted
subsequent to March 4, 1999 vest over a four year period; and options granted
prior to March 5, 1999 vest annually over a three year period.
Summary of Outstanding Stock Options and Potential Issuances. As of March
31, 2001, options to purchase an aggregate of 8,108,036 Common Shares were
outstanding under all of the Company's stock option plans out of an allowable
pool of options totaling 9,335,382. Options to purchase 2,123,690 Common Shares
were fully vested and the remaining options vest over the next four years.
STOCK OPTION INFORMATION
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth (1) the number of common shares underlying
the options granted to each of the named executive officers during the fiscal
year ended March 31, 2001, (2) the percentage that these options represent in
comparison to the total number of options granted to our employees during the
same period, (3) the exercise price of such options and (4) their expiration
date.
9
OPTION GRANTS IN FISCAL 2000
Potential
Realizable
Value at Assumed
Annual Rates of
Number of Stock Price
Shares Percent of Total Appreciation for
Underlying Options Granted to Exercise Option Term
Options Granted Employees in Price Per Share Expiration -----------------------
Name (#) Fiscal Year ($/Security) Date 5% ($) 10%($)
- ---- ------- ----------- ------------ --------------- ------ ------
John Foresi 150,000 2.3% 2.38 January 5, 2006 98,633 217,952
David Frankland 150,000 2.3% 12.25 October 13, 2005 507,667 1,121,812
50,000 * 2.38 January 5, 2006 32,878 72,651
Barry Yates 75,000 1.2% 2.38 January 5, 2006 49,316 108,976
Rob Lalonde 75,000 1.2% 2.38 January 5, 2006 49,316 108,976
15,000 * 9.56 August 7, 2005 39,619 87,547
Bruce Cameron 20,000 * 2.38 January 5, 2006 13,151 29,060
- -------------
* - less than 1%
OPTION EXERCISES IN FISCAL 2000
# of Securities
Underlying Unexercised Value of Unexercised In-
Number of Options at Fiscal the-Money Options
Shares Year End at Fiscal Year End
Acquired on Value ---------------------------- -----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
John Foresi -- -- 250,000 400,000 $317,500 $317,500
David Frankland -- -- 265,000 200,000 -- --
Barry Yates 40,000 $533,450 110,000 150,000 $139,700 $ 95,250
Rob Lalonde 90,000 $614,700 -- 135,000 -- $ 57,150
Bruce Cameron -- -- 26,250 98,750 -- --
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dennis Bennie, our Chairman, is a trustee of the Bennie Children's' Trust,
which owns 11.25% of Protege Software Limited, a company with which we had
entered into a services agreement dated as of June 1, 1999. Pursuant to this
agreement, Protege Software Limited provided administrative assistance and
office space to facilitate the opening of our European offices in return for a
management fee of (pound)125,000 (approximately $200,000) per year, as well as
(pound)6,000 (approximately $9,600) per month in respect of its costs and a
bonus of up to 15% of sales generated by our European offices. The Company
terminated the agreement in October 2000.
A consulting arrangement exists between Opera Ventures, a company of which
Mr. Kapoor is the largest shareholder, and the Company pursuant to which Opera
Ventures provides assistance to the Company in addition to Mr. Kapoor serving as
a director of the Company. Opera Ventures is being paid $50,000 per month for
providing such services. The initial term of this arrangement is for three
months ending July 9, 2001.
COMPANY POLICY CONCERNING TRANSACTIONS WITH AFFILIATES
The Company has adopted a policy that all transactions with directors,
executive officers and other affiliates will be on terms that are believed to be
at least as favorable to the Company as could be obtained from unaffiliated
third parties and must be reviewed by the Compensation Committee and approved by
a majority of the Company's disinterested directors.
The Company believes that the foregoing transactions with directors,
executive officers and other affiliates were completed on terms as favorable to
the Company as could have been obtained from unaffiliated third parties.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
10
The Company is a foreign private issuer and as such its insiders are not
required to file reports under Section 16(a) of the United States Securities
Exchange Act of 1934.
CORPORATE GOVERNANCE
The Toronto Stock Exchange ("TSE") Committee on Corporate Governance in
Canada has issued a series of proposed guidelines for effective corporate
governance. The guidelines address matters such as the constitution and
independence of corporate boards, the functions to be performed by boards and
their committees, and the effectiveness and education of board members. To
implement these guidelines, the TSE has adopted as a listing requirement the
disclosure by each listed corporation of its approach to corporate governance
with reference to the proposed guidelines. The Company's Board of Directors and
senior management consider good corporate governance to be central to the
effective operation of the Company.
The TSE guidelines on Corporate Governance pay a great deal of attention to
the make up and independence of corporate boards. An "unrelated" director, under
the guidelines is a director who is free from any interest in any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director's ability to act in the best interests of the
Company, other than interests arising from shareholding. In defining an
unrelated director, the guidelines place emphasis on the ability of a director
to exercise objective judgment, independent of management. An informal
distinction is made between inside and outside directors. An inside director is
a director who is an officer or employee of the Company or any of its
affiliates. In deciding whether a particular director is a "related director" or
an "unrelated director" the Corporate Governance Committee examined the factual
circumstances of each director and considered them in the context of the
criteria set out in the TSE Guidelines. On the basis of the foregoing, three of
the existing directors of the Company are "related" to the Company. Of the
proposed directors, a majority are unrelated and are also outside directors. Two
of the proposed directors are insiders of the Company, namely John Foresi, the
Chief Executive Officer of the Company and Bahman Koohestani, the Chief
Technology Officer of the Company. Below is a table setting out the TSE
Guidelines and commentary concerning the extent to which the Company conforms
with such Guidelines.
Does Delano
TSE Corporate Governance Committee align with this
Guideline Guideline? Comments
- --------- ---------- --------
1. Board should explicitly assume
responsibility for stewardship of the
corporation, and specifically for:
a) adoption of a strategic planning Yes. The Board generally participates in, and is fully informed of,
process; strategic initiatives as they develop, and sets aside one Board
meeting a year for strategic planning.
b) identification of principal risks, and Yes. The Board, in its deliberations, considers the principal risks of
implementing risk-management systems; the Company's business and receives reports of the Company's
assessment and management of those risks.
c) succession planning and monitoring Yes. The Board has addressed with the CEO the question of succession
senior management; planning. The Board participates in the appointment of senior
management in conjunction with the Company's Compensation Committee,
which Committee reports to the Board on succession planning matters
and organizational structure.
d) communications policy; Yes. The Board has verified that procedures are in place to ensure
effective communication between the Company and its
stakeholders and the public. The Company promptly provides
full and plain disclosure of all material information, as required
by law. In additon, all material press releases and other
significant corporate disclosures are reviewed by outside
counsel. The Company has a web site on which its press
releases are posted as well as links to SEC filings and other
meaningful information. The Company holds quarterly
11
TSE Corporate Governance Committee Does Delano Comments
Guideline align with this
Guideline?
meetings with analysts and institutional investors by telephone
conference call, which are open to the financial press and the
public (through simultaneous webcast).
e) integrity of internal control and Yes. The Board directly, and through its Audit Committee, assesses
management systems. the integrity of the Company's internal control and management
information systems.
2. Majority of directors should be Yes. The proposed Board is to be composed of 8 members: five are
"unrelated" (free from conflicting unrelated, two are officers of the Company and one director
interests). receives material remuneration from the Company for services
rendered to the Company.
3. Disclose for each director whether he No. Apart from John Foresi and Bahman Koohestani, all directors
or she is related, and how that are unrelated to the Company or each other. John Foresi is the
conclusion was reached. Chief Executive Officer and an employee of the Company.
Bahman Koohestani is the Chief Technology Officer and an employee of
the Company. Vikas Kapoor provides consulting services to the
Company.
4. Appoint a committee responsible for:
a) the appointment/assessment of No. The Board of Directors has recently appointed the Corporate
directors; and Governance Committee with this mandate, although the
Committee has not yet met. The Corporate Governance
Committee has the mandate to recommend candidates for the
Board, annually review credentials for nominees for
re-election and ensure qualifications are maintained.
b) composed exclusively of non- Yes. The Corporate Governance Committee is composed exclusively
management directors, the majority of of non-management directors, all of whom are unrelated.
whom are unrelated.
5. Implement a process for assessing the No. The Corporate Governance Committee is mandated to
effectiveness of the Board, its continually assesses the effectiveness of the Board, its directors
committees and individual directors. and its committees, however to date the Committee has not yet
met and as such, not addressed this issue.
6. Provide orientation and education No. To date, the Company has not established any formal
programs for new directors. procedures to provide for the orientation and education of new
directors. New directors do have access to fellow directors and
senior management.
7. Consider reducing the size of Board, Yes. The Board has considered the effect of its size on its
with a view to improving effectiveness. effectiveness and has concluded that the proposed number of
directors is in the appropriate range for a corporation of the
size and complexity of the Company. The Board as presently
constituted brings together a mix of skills and backgrounds that
the Board considers appropriate to the stewardship of the
Company.
8. Review compensation of directors in Yes. The Board, through its Compensation Committee, has reviewed
light of risks and responsibilities. the adequacy and form of compensation of directors.
9. a) Committees should generally be Yes. All members of the Audit, Corporate Governance and
composed of non-management directors; Compensation Committees are non-management directors.
and
b) A majority of committee members Yes. All the members of the Compensation Committee, Audit
should be unrelated. Committee and the Corporate Governance Committee are
unrelated.
10. Appoint a Committee responsible for Yes. The Board has appointed the Corporate Governance Committee
approach to corporate governance issues. with this mandate, however to date the Committee has not met
separately.
11. a) Define limits to management's
12
TSE Corporate Governance Committee Does Delano Comments
Guideline align with this
Guideline?
responsibilities by developing mandates
for:
(i) the Board; and No. There is no specific mandate for the Board, since the Board has
plenary power. Any responsibility which is not delegated to
senior management or a Board Committee remains with the full
Board.
(ii) the CEO. Yes The scope and extent of the CEO's mandate has evolved through
interaction with the Board and an ongoing consultative
process with the Board. The general mandate of the CEO is to
maximize shareholder value.
b) The Board should approve the CEO's Yes. The Board annually approves the key results for which the CEO
corporate objectives. is responsible and periodically reviews key results and
objectives.
12. Establish procedures to enable the Yes. The Board has functioned, and is of the opinion that it can
Board to function independently of continue to function, independently as required. The Chairman
management. of the Board is an outside director.
13. a) Establish an Audit Committee Yes. The Company has established an audit committee which is
with a specifically defined mandate. mandated to: serve as an independent and objective party to
monitor the Corporation's financial reporting process and
internal control system; review and appraise the audit
efforts of the Corporation's independent accountants and
internal auditing department; and provide an open avenue of
communication among the independent accountants,
financial and senior management, the internal auditing
department and the Board of Directors.
b) All members should be non- Yes. The members of the Audit Committee are all non-management
management directors. directors.
14. Implement a system to enable Yes. Individual directors can engage outside advisers for advice
individual directors to engage outside respecting the performance of their duties as Board members
advisers, at the corporation's expense. with the authorization of the Audit Committee.
APPOINTMENT OF INDEPENDENT AUDITORS
AND AUTHORIZATION OF DIRECTORS TO FIX THEIR REMUNERATION
The Board of Directors, upon recommendation of the Audit Committee,
recommends the appointment of KPMG LLP, Chartered Accountants, as the Company's
independent auditors for the current year ending March 31, 2002. KPMG LLP,
Chartered Accountants, has served as the Company's auditors since October, 1998.
A proposal will be presented at the Meeting to appoint KPMG LLP, Chartered
Accountants, as the Company's independent auditors. If the shareholders do not
effect such appointment by the affirmative vote of a majority of the shares
present in person or represented by proxy at the Meeting, other independent
auditors may be appointed by the shareholders. Where the shareholders do not
authorize the Board of Directors to fix the remuneration of the auditors, the
shareholders may do so. The Company has been advised that representatives of
KPMG LLP will be present at the Meeting, will be available to respond to
appropriate questions, and will be given an opportunity to make a statement if
they so desire.
13
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF KPMG LLP AS
INDEPENDENT AUDITORS FOR THE COMPANY AND "FOR" AUTHORIZING THE BOARD OF
DIRECTORS TO FIX THE AUDITORS' REMUNERATION.
APPROVAL OF AMENDMENTS TO THE EMPLOYEE STOCK PURCHASE PLAN INCREASING THE
MAXIMUM NUMBER OF SHARES PURCHASABLE THEREUNDER
The Board has authorized an amendment of the Employee Stock Purchase Plan
(the "ESPP") subject to shareholder approval. Under this proposal, an additional
2,000,000 Common Shares are reserved for issuance, which will bring the total
number of Common Shares reserved for issuance under the ESPP to 2,538,177.
The ESPP enables the Company's employees to acquire Common Shares through
payroll deductions. The initial offering period under the ESPP began on February
1, 2000. Purchase periods within each offering period run for six months,
commencing on February 1 and August 1 of each year and ending on January 31 and
July 31. Each offering period last for 24 months, with the purchase price
throughout the offering period being 85% of the fair market value of the Common
Shares on the first day of the period or 85% of the fair market value of the
Common Shares on the last day of any six month purchase period, whichever is
lower. Eligible employees may select a rate of payroll deduction up to 15% of
their compensation up to an aggregate of $25,000 in each calendar year.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS APPROVED THE AMENDMENT TO THE EMPLOYEE STOCK PURCHASE
PLAN, INCREASING THE MAXIMUM NUMBER OF COMMON SHARES ISSUABLE THEREUNDER AND
RECOMMENDS A VOTE "FOR" THIS AMENDMENT.
OTHER MATTERS
The Company knows of no other matters to be submitted to the shareholders
at the Meeting. If any other matters properly come before the Meeting, it is the
intention of the persons named in the enclosed form of proxy to vote the shares
they represent in accordance with their judgment.
GENERAL
Unless otherwise stated, information contained herein is given as of the
date hereof. The contents and the sending of this Management Information
Circular/Proxy Statement has been approved by the Board of Directors of the
Company.
DATED as of the 11th day of June, 2001.
(signed) David L. Lewis
Corporate Secretary
14
ANNEX P
DIVINE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS
HELD ON MAY 22, 2002, AND FILED WITH
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION APRIL 24, 2002
SCHEDULE 14A INFORMATION
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 Under Rule 14a-12
DIVINE, 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):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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.
[ ] 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:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
[divine logo]
1301 N. ELSTON AVENUE, CHICAGO, ILLINOIS 60622
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 2002
You are cordially invited to attend the annual meeting of stockholders of
divine, inc., which will be held at divine's offices located at 1301 N. Elston
Avenue, Chicago, Illinois on Tuesday, May 21, 2002, at 9:30 a.m., Central time,
for the following purposes:
1. To elect directors.
2. To ratify the action of the Board of Directors in appointing KPMG
LLP as your Company's independent auditors for 2002.
3. To approve an amendment to the Company's Third Amended and
Restated Certificate of Incorporation to effect a reverse stock
split of all of the outstanding shares of Class A common stock,
at a ratio between 1-for-10 and 1-for-25 to be determined later
at the discretion of our Board of Directors. A copy of the
proposed amendment is included as EXHIBIT A to the enclosed proxy
statement.
4. To transact any other business that may be presented at the
meeting.
Only stockholders of record at the close of business on March 27, 2002 are
entitled to vote at the meeting. A list of those stockholders will be available
during normal business hours for a period of 10 days prior to the meeting. The
list may be examined by any stockholder, for any purpose relevant to the
meeting, at our offices at 1301 N. Elston Avenue, Chicago, Illinois.
A proxy statement and a proxy card solicited by our Board of Directors are
enclosed with this notice. It is important that your shares be represented at
the meeting regardless of the size of your holdings. Whether or not you intend
to be present at the meeting in person, we urge you to vote and submit your
proxy by phone, by Internet, or by marking, dating, and signing the enclosed
proxy card and returning it in the envelope provided for that purpose, which
does not require postage if mailed in the United States. If you attend the
meeting, you may, if you wish, withdraw your proxy and vote in person.
Jude M. Sullivan
Secretary and General Counsel
Chicago, Illinois
April 22, 2002
YOU ARE URGED TO MARK, DATE, AND SIGN THE ENCLOSED
PROXY AND RETURN IT PROMPTLY, OR SUBMIT YOUR VOTE AND PROXY BY
PHONE OR THE INTERNET. THE PROXY IS REVOCABLE AT ANY
TIME PRIOR TO ITS USE
DIVINE, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 2002
We sent you this Proxy Statement because our Board of Directors is
soliciting your proxy to vote your shares of divine Class A common stock at our
upcoming 2002 Annual Meeting of Stockholders, and at any postponement or
adjournment of that meeting. The meeting is to be held at our offices located at
1301 N. Elston Avenue, Chicago, Illinois on Tuesday, May 21, 2002, at 9:30 a.m.,
Central time. If your proxy is properly submitted by phone, by Internet, or by
an executed proxy card returned in a timely manner, it will be voted at the
meeting according to the directions you provide. If you do not provide any
direction, your proxy will be voted (1) for the election as directors of the
nominees named in this Proxy Statement, (2) to ratify the selection of KPMG LLP
as independent auditors for 2002, and (3) to approve an amendment to our Third
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") to effect a reverse stock split of all of our outstanding shares
of Class A common stock ("Common Stock"), at a ratio between 1-for-10 and
1-for-25, to be determined later at the discretion of our Board of Directors.
Your proxy also will be voted on any other matters presented for a vote in
accordance with the judgment of the persons acting under the proxies. You have
the power to revoke your proxy at any time before it is voted, either in person
at the meeting, by written notice to the Secretary of divine, or by delivery of
a later-dated proxy.
Our principal executive offices are located at 1301 N. Elston Avenue,
Chicago, Illinois 60622 (telephone 773.394.6600). This Proxy Statement is dated
April 22, 2002 and we expect to mail proxy materials to you beginning on or
about that date. In this Proxy Statement, the words "divine," "Company," "we,"
"our," "ours," and "us" refer to divine, inc. and its subsidiaries.
SHARES OUTSTANDING AND VOTING RIGHTS
Only stockholders of record at the close of business on March 27, 2002 are
entitled to vote at the annual meeting of stockholders. The only voting stock of
divine outstanding is our Common Stock, of which 457,145,645 shares were
outstanding as of the close of business on March 27, 2002. Each share of our
common stock is entitled to one vote.
The two nominees who receive the highest number of affirmative votes will
be elected as directors. For this purpose, only the votes from the holders of
the shares of our common stock that are present in person or represented by
proxy and entitled to vote at the meeting will be counted. In general, approval
of any matter by stockholders requires the affirmative vote of the holders of a
majority of the shares of our Common Stock that are present in person or
represented by proxy and entitled to vote at the meeting. Accordingly, the
ratification of our independent auditors for the current year requires the
affirmative vote of the holders of a majority of the shares of our Common Stock
that are present in person or represented by proxy and entitled to vote at the
meeting. However, the amendment to our Certificate of Incorporation to effect
the reverse stock split requires the affirmative vote of the majority of our
issued and outstanding shares of Common Stock. Abstentions, directions to
withhold authority, and broker non-votes are counted as shares present in the
determination of whether the shares of Common Stock represented at the meeting
constitute a quorum. Abstentions are counted in the tabulations of votes cast on
a proposal presented to stockholders. Thus, an abstention from voting on a
matter has the same legal effect as a vote against the matter. Broker non-votes
and directions to withhold authority are counted as present, but are deemed not
entitled to vote on proposals for which brokers do not have discretionary
authority and, therefore, have no effect other than to reduce the affirmative
votes needed to approve a proposal. However, broker non-votes and directions to
withhold authority have the same legal effect as a vote against the proposal to
amend our Certificate of Incorporation to effect a reverse stock split.
PROPOSAL 1. ELECTION OF OUR BOARD OF DIRECTORS
Our Board of Directors is comprised of 10 directors and is divided into
three classes with staggered three-year terms. Two directors are to be elected
at the meeting as Class III directors with terms expiring at our annual meeting
of stockholders in 2005. Our other directors are not up for election this year
and will continue in office for the remainder of their terms or until they
resign. We have designated two persons, named below, as nominees for election as
directors. If elected, they will serve for a term expiring at the annual meeting
of stockholders in 2005. Both of the nominees are serving as directors as of the
date of this Proxy Statement.
Unless you otherwise instruct us, your properly executed proxy, that is
returned in a timely manner or submitted by phone or Internet, will be voted for
election of these two nominees. If, however, either of these nominees should be
unable or should fail to act as a nominee because of an unexpected occurrence,
your proxy will be voted for such other person as the holders of your proxy,
acting in their discretion, may determine. In the alternative, the Board of
Directors may make a reduction in the number of directors to be elected.
Biographical information concerning our two nominees and our continuing
directors is presented below.
DIRECTORS NOMINATED THIS YEAR FOR TERMS EXPIRING IN 2005
Mr. Michael H. Forster, age 59, has served as one of the Senior Partners of
Operations of Internet Capital Group, Inc., a provider of capital and services
to Internet businesses, since June 1998. From March 1996 to March 1998, Mr.
Forster served as Senior Vice President of Worldwide Field Operations for
Sybase, Inc., a database management solutions company. From April 1994 to March
1996, Mr. Forster was Sybase's Senior Vice President and President of Sybase's
Information Connection Division. Mr. Forster has over 30 years of sales,
marketing, and general management experience in the information technology
industry. Mr. Forster is currently a director of several privately-held
technology companies. Mr. Forster is nominated to serve as a Class III director.
Mr. Thomas J. Meredith, age 51, has served as Chief Executive Officer of
MFI Capital, the Meredith family's private investment arm, since August 2001.
MFI specializes in asset management across a broad range of investment classes
in both the public and private sectors. From 1996 through August 2001, Mr.
Meredith served as a Senior Vice President of Dell Computer Corporation, and as
its Chief Financial Officer from 1992 through 2001. Mr. Meredith is currently a
director of FreeMarkets, Inc. and TippingPoint Technologies, Inc. Mr. Meredith
is nominated to serve as a Class III director.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
Mr. Andrew J. Filipowski, age 51, is one of our founders and has been
Chairman of our Board of Directors and our Chief Executive Officer since our
inception. Mr. Filipowski was our President from our inception until October
1999. He is also Chairman and Chief Executive Officer of Platinum Venture
Partners, Inc., the previous general partner of the Platinum Venture Partners
limited partnerships. Mr. Filipowski was a founder of PLATINUM technology
International inc. and served as the Chairman of its Board of Directors, Chief
Executive Officer, and President from its inception in 1987 until it was
acquired by Computer Associates, Inc. in June 1999. Mr. Filipowski is also
currently a director of Blue Rhino Corporation. Mr. Filipowski serves as a Class
I director.
Mr. Tommy Bennett, age 46, is a Senior Vice President of Computer
Associates, where he has been since 1988. Mr. Bennett is responsible for merger
and acquisitions, joint ventures, and other corporate development efforts of
Computer Associates on a global basis. Mr. Bennett currently serves on our
2
Board as a representative of CBW/SK divine Investments, pursuant to board
designation rights we had granted to CBW/SK divine Investments. He also serves
as a director of Viewpoint Corporation and I-Storm, Inc. Mr. Bennett serves as a
Class I director.
Mr. John Cooper, age 42, has been the Managing General Partner of Think
Tank Holdings, LLC since November 2001, serving as a business and financial
advisor to current and future Think Tank companies. Prior to joining Think Tank,
Mr. Cooper served as a Managing Director of Corporate Development for Microsoft
Corporation since October 1999. He also served as the Senior Vice President of
Corporate Development of Avio International from May 1997 to March 1999. In
addition, he served as the Vice President of Corporate Development of First Data
Corporation from June 1992 to April 1997, and at American Express Corporation
prior thereto. Mr. Cooper serves as a Class I director.
Mr. James E. Cowie, age 47, has been a General Partner of Frontenac
Company, a Chicago-based private equity investment firm, since February 1989.
Mr. Cowie is currently a director of Lante Corporation. Mr. Cowie currently
serves on our Board as Frontenac's representative, pursuant to board designation
rights we had granted to Frontenac. Mr. Cowie serves as a Class I director.
DIRECTORS WHOSE TERMS EXPIRE IN 2004
Mr. Michael P. Cullinane, age 52, is one of our founders and has been our
Chief Financial Officer and Treasurer since our inception and one of our
Executive Vice Presidents since August 1999. He is also a principal officer of
Platinum Venture Partners, Inc. Mr. Cullinane served as Executive Vice President
and Chief Financial Officer of PLATINUM from 1988 until it was acquired in June
1999. Mr. Cullinane is currently a director of Made2Manage Systems, Inc. and
Vasco Data Security International, Inc. Mr. Cullinane serves as a Class II
director.
Mr. Paul L. Humenansky, age 44, is one of our founders, was one of our
Executive Vice Presidents from August 1999 until October 2000, and has been our
President and Chief Operating Officer since October 2000. He is also a principal
officer of Platinum Venture Partners, Inc. Mr. Humenansky was a founder of
PLATINUM and served as its Executive Vice President - Product Development from
its inception in 1987 until its acquisition in June 1999. Mr. Humenansky also
served as Chief Operations Officer of PLATINUM from January 1993 until its
acquisition. Mr. Humenansky serves as a Class II director.
Mr. Arthur W. Hahn, age 57, has been a partner with the law firm of Katten
Muchin Zavis Rosenman since 1984 and is a member of the firm's executive
committee. Mr. Hahn was Chairman of the faculty of the Illinois Institute of
Technology Chicago-Kent College of Law Graduate School of Financial Services Law
from its inception in 1985 through 1999. Mr. Hahn serves as a Class II director.
Mr. J. Kevin Nater, age 38, has served as Vice President and Treasurer of
Dell Computer Corporation since March 1999. From February 1997 through the
assumption of his current position, Mr. Nater held various positions at Dell,
including, Vice President and Assistant Treasurer, Vice President of Corporate
Finance and Risk Management, and Director of Corporate Finance. Prior to joining
Dell in 1997, Mr. Nater held various positions over a 12-year period at
Citicorp. Mr. Nater currently serves on our Board as Dell's representative,
pursuant to board designation rights we had granted to Dell. Mr. Nater serves as
a Class II director.
WE RECOMMEND THAT YOU VOTE "FOR" THE ELECTION OF
EACH OF THE NOMINEES FOR DIRECTOR.
3
MEETINGS AND COMMITTEES OF THE BOARD
Our Board of Directors has three standing committees. They are the Audit
Committee, the Compensation Committee, and the Investment Company Act Compliance
Committee. The functions and membership of each Committee are described below.
The Board does not have a standing nominating committee.
Our Audit Committee recommends the independent public accountants to be
engaged by us, considering independence and effectiveness. It also reviews the
plan, scope, and results of our annual audit, reviews our accounting and
financial controls, and reviews our accounting principles and financial
disclosure practices with our independent public accountants. Our audit
committee consists solely of non-employee directors. The current members of the
Audit Committee are Messrs. Bennett (chairman), Cowie, and Meredith.
Our Compensation Committee reviews, monitors, administers, and establishes
or recommends to our full Board of Directors compensation arrangements for our
Chief Executive Officer and other members of our senior management. Our
Compensation Committee also administers our incentive compensation plans and
determines the number of shares covered by, and terms of, options to be granted
to executive officers and other key employees under these plans. Our
Compensation Committee consists solely of non-employee directors. The current
members of the Compensation Committee are Messrs. Cowie (chairman), Forster, and
Meredith.
Our Investment Company Act Compliance Committee has the responsibility for
ensuring that we do not become required to register as an investment company and
subject to regulation under the Investment Company Act, including, specifically,
responsibility for determining the value of our securities holdings, total
assets, and net income (loss) after taxes, as required from time to time but not
less frequently than the end of each of our fiscal quarters. The current members
of our Investment Company Act Compliance Committee are Messrs. Hahn (chairman)
and Forster.
During 2001, the Board of Directors held seventeen meetings, the Audit
Committee held four meetings, the Compensation Committee held five meetings, and
the Investment Company Act Compliance Committee held no meetings. In 2001, no
director participated in less than 75% of the aggregate of all actions of the
Board and all actions of committees of the Board on which such director served.
In accordance with rules promulgated by the Securities and Exchange
Commission, the information included under the captions "Report of the Audit
Committee", "Report of the Compensation Committee", and "Performance Graph" will
not be deemed to be filed or to be proxy soliciting material or incorporated by
reference in any prior or future filings by us under the Securities Act of 1933,
as amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
REPORT OF THE AUDIT COMMITTEE
The Audit Committee operates under a written charter adopted by the Board
of Directors. All members of the Audit Committee meet the independence standards
established by the New York Stock Exchange. Mr. Cowie was elected to the Audit
Committee to fill the vacancy created by the resignation of John Rau from our
Board on April 2, 2002.
The Audit Committee assists the Board of Directors in fulfilling its
responsibility to oversee management's implementation of divine's financial
reporting process. In discharging its oversight role, the Audit Committee
reviewed and discussed with management and KPMG LLP, the independent auditor,
the audited financial statements of divine, inc. as of and for the year ended
December 31, 2001. Management of divine is responsible for those financial
statements and the reporting process, including the system of internal controls.
The independent auditor is responsible for expressing an
4
opinion on the conformity of those financial statements with accounting
principles generally accepted in the United States.
The Audit Committee met privately with KPMG, and discussed issues deemed
significant by the auditor, including those required by Statements on Auditing
Standards No. 61 and No. 90 (Communications with Audit Committees), as amended.
In addition, the Audit Committee received from KPMG the written disclosures and
the letter required by Independence Standards Board Standard No. 1, and the
Audit Committee has discussed with KPMG its independence from divine and its
management. The Audit Committee also considered whether the provision of
non-audit services by KPMG was compatible with maintaining its independence.
Based upon the foregoing review and discussions, the Audit Committee
recommended to the Board of Directors that the audited financial statements
referred to above be filed with divine's Annual Report on Form 10-K for the year
ended December 31, 2001.
BY THE AUDIT COMMITTEE:
Tommy Bennett
James E. Cowie
Thomas J. Meredith
5
ARRANGEMENTS FOR NOMINATION AS DIRECTOR AND COMMITTEE MEMBER
Nominations for election of directors are made by the Board of Directors.
Nominations also may be made by a committee appointed by the Board or by any
stockholder entitled to vote in the election of directors. See "Submitting Your
Proposals for the 2003 Annual Meeting" at the end of this Proxy Statement for a
description of the procedures you need to follow if you want to nominate someone
as a director.
Under the stockholders agreement that we entered into with the holders of
our series D and D-1 preferred stock, (1) we, (2) Messrs. Filipowski, Cullinane,
and Humenansky, and certain other persons, and their respective affiliates, and
(3) the purchasers of our series D and D-1 preferred stock, have agreed to take
all necessary actions so that:
o one member of our Board of Directors can be designated by each of: (1)
CBW/SK divine Investments, (2) First Chicago Investment Corporation and
Cross Creek Capital Partners X, LLC, which we together refer to as First
Chicago Equity Capital, (3) Frontenac VII Limited Partnership and
Frontenac Masters VII Limited Partnership, which we together refer to as
Frontenac, and (4) Microsoft Corporation; and
o two members of our Board of Directors can be designated by Dell USA L.P.,
which also held our series D preferred stock.
Additionally, we have agreed under that stockholders agreement to take all
actions necessary so that one of the directors designated by each of Frontenac
and Dell is designated as a member of our executive committee in the event that
our Board of Directors has an executive committee. However, none of CBW/SK
divine Investments, First Chicago Equity Capital, Frontenac, Microsoft, or Dell
will have any of these rights if it does not continue to own at least 25% of the
capital stock originally purchased by it. First Chicago Equity Capital and
Microsoft Corporation have elected not to exercise their board designation
rights, and Dell has elected to designate only one director.
In connection with the purchase of 5,555,555 shares of our class C
convertible common stock, which were subsequently converted to 5,555,555 shares
of Common Stock, for $50,000,000 in a private placement concurrent with our
initial public offering in July 2000, we agreed to take all action necessary to
elect a nominee of Compaq to our Board of Directors. Compaq will have this right
to nominate a director so long as it continues to own at least 25% of the shares
originally purchased by it in the private placement. Compaq has elected not to
exercise its board designation rights.
As of March 27, 2002, the number of shares owned, the number of shares
needed to maintain board designation rights, and the members of our Board of
Directors designated by each of the entities with board designation rights are
shown across from their names below:
SHARES NEEDED TO DESIGNATED
INVESTOR SHARES OWNED DESIGNATE DIRECTOR(S) BOARD MEMBER(S)
- -------- ------------ --------------------- ---------------
CBW/SK divine Investments.................. 3,839,225* 1,041,667 Tommy Bennett
Compaq Computer Corporation................ 5,555,555 1,388,889 None
Dell....................................... 17,744,964 4,166,667 J. Kevin Nater
First Chicago Equity Capital............... 2,474,998 618,750 None
Frontenac.................................. 2,662,532 623,958 James E. Cowie
Microsoft.................................. 17,918,944 1,041,667 None
- -------------
* Determined on an aggregate basis including shares owned by the affiliates
of CBW/SK divine Investments, as last reported to us by these affiliates.
6
PROPOSAL 2. APPOINTMENT OF OUR INDEPENDENT AUDITORS
Subject to your ratification, the Audit Committee of the Board of Directors
has selected, and our Board of Directors has approved, the accounting firm of
KPMG LLP to serve as our independent auditors for 2002. KPMG LLP has served as
our independent auditors since our formation in May 1999 and also has provided
non-audit services from time to time.
AUDIT FEES
The aggregate fees and expenses of KPMG LLP for professional services
provided to us for the audit of our annual consolidated financial statements for
2001 and the review of the consolidated financial statements included in our
Reports on Form 10-Q for 2001 were approximately $909,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
We did not incur any fees or expenses of KPMG LLP for financial information
system design and implementation services during 2001.
ALL OTHER FEES
The aggregate fees and expenses for all other services provided to us by
KPMG LLP during 2001 were approximately $2,550,000. These services primarily
related to the review of our financial statements and the financial statements
of a number of other companies we acquired. They also included tax services and
acquisition due diligence services.
All audit and non-audit services provided by KPMG LLP are approved by the
Audit Committee, which considers whether the provision of non-audit services is
compatible with maintaining the auditor's independence.
Representatives of KPMG LLP will be available at the annual meeting to
respond to your questions. They have advised us that they do not presently
intend to make a statement at the annual meeting, although they will have the
opportunity to do so.
WE RECOMMEND THAT YOU VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS FOR 2002.
PROPOSAL 3. APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT A
REVERSE STOCK SPLIT
Our Board of Directors has unanimously adopted a resolution approving, and
recommending to our stockholders for approval, a proposal to amend Article IV of
our Certificate of Incorporation authorizing a reverse stock split of the shares
of Common Stock at a ratio ranging from 1-for-10 to 1-for-25, as determined by
the Board to be in our best interests (the "Reverse Stock Split"), or to abandon
the Reverse Stock Split. The form of the proposed amendment is attached to this
proxy statement as EXHIBIT A (the "Reverse Stock Split Amendment"). We believe
that approval of a range of reverse split ratios, rather than approval of a
specific reverse split ratio, provides the Board with maximum flexibility to
achieve the purposes of the Reverse Stock Split. The Reverse Stock Split
Amendment will effect the Reverse Stock Split by reducing the number of
outstanding shares of Common Stock by the ratio determined by the Board to be in
our best interests, but will not increase the par value of our Common Stock, and
will not change the number of authorized shares of Common Stock.
7
REASONS FOR THE REVERSE STOCK SPLIT AMENDMENT
Since our initial public offering in July 2000, our Common Stock has been
listed on the Nasdaq National Market. The continued listing criteria of the
Nasdaq National Market require, among other things, that our Common Stock
maintain a closing bid price in excess of $1.00 per share. On February 14, 2002,
we received a letter from Nasdaq informing us that, for the prior 30 consecutive
trading days, the price of our Common Stock had closed below the $1.00 per share
requirement for continued listing in the Nasdaq National Market. In addition,
the letter notified us that if the minimum bid price for our Common Stock had
not closed above $1.00 for at least 10 consecutive trading days before May 15,
2002, our Common Stock would be delisted from the Nasdaq National Market,
pending any appeals to Nasdaq that we may make. In the event that our Common
Stock has not regained compliance with this minimum bid price by May 15, 2002,
we intend to appeal any delisting procedure. We expect to request a hearing
before a Nasdaq Listing Qualifications Panel, at which we expect to present our
plan to effect a reverse stock split, pending approval by our stockholders, to
increase the minimum bid price of our Common Stock to above $1.00.
The Board has determined that the continued listing of our Common Stock on
the Nasdaq National Market is in the best interests of our stockholders. If our
Common Stock was delisted from the Nasdaq National Market, we believe that the
liquidity in the trading market for our Common Stock would be significantly
decreased, which would likely reduce the trading price and increase the
transaction costs of trading shares of our Common Stock. In addition, the
continued listing of our Common Stock on the Nasdaq National Market is a
condition to our ability to close our pending acquisitions of Delano Technology
Corporation and Viant Corporation, and if our Common Stock was delisted from the
Nasdaq National Market, we may not be able to complete those acquisitions.
The purpose of the Reverse Stock Split is to increase the market price of
our Common Stock. We intend to effect a reverse split only if the Board believes
that a decrease in the number of shares outstanding is likely to improve the
trading price for our Common Stock and improve the likelihood that we will be
allowed to maintain our listing on the Nasdaq National Market. The Reverse Stock
Split will be effectuated at a ratio ranging from 1-for-10 to 1-for-25,
determined in the Board's sole discretion. In determining the ratio of the
Reverse Stock Split, the Board will assess numerous factors, including an
analysis of our most recent financial and operating performance and general
economic conditions, and will place emphasis on the closing price of our Common
Stock on the days immediately preceding the day on which the Reverse Stock Split
Amendment is filed. The judgment of the Board as to the ratio will be
conclusive.
If our stockholders authorize the Reverse Stock Split proposal, the Board
will have the discretion to implement a Reverse Stock Split once before the
first anniversary of this Annual Meeting, or effect no Reverse Stock Split at
all. If the trading price of our Common Stock increases without a Reverse Stock
Split, the Reverse Stock Split may not be necessary. We cannot assure you,
however, that the market price of our Common Stock will rise in proportion to
the reduction in the number of outstanding shares resulting from the Reverse
Stock Split, that the market price of the post-split Common Stock can be
maintained above $1.00, or that our Common Stock will not be delisted from the
Nasdaq National Market for other reasons.
If our stockholders approve the Reverse Stock Split at this Annual Meeting,
the Reverse Stock Split will be effected, if at all, only if the Board
determines that the Reverse Stock Split (in a ratio determined by the Board
within the limits we have described) is in the best interests of us and our
stockholders at that time. No further action on your part will be required to
either effect or abandon the Reverse Stock Split. If no Reverse Stock Split is
effected by the first anniversary of this Annual Meeting, the Board's authority
to effect the Reverse Stock Split will terminate, and approval of our
stockholders again would be required before we could implement any reverse stock
split.
8
POTENTIAL EFFECTS OF THE REVERSE STOCK SPLIT
Pursuant to the Reverse Stock Split, each holder of Common Stock, par value
$.001 per share ("Old Common Stock"), immediately prior to the effectiveness of
the Reverse Stock Split will become the holder of fewer shares of Common Stock,
par value $.001 per share ("New Common Stock"), after consummation of the
Reverse Stock Split.
Although the Reverse Stock Split will not, by itself, impact our assets or
prospects, the Reverse Stock Split could result in a decrease in the aggregate
market value of our Common Stock. The Board believes that this risk is
outweighed by the benefits of the continued listing of our Common Stock on the
Nasdaq National Market.
If approved, the Reverse Stock Split will result in some stockholders
owning "odd-lots" of less than 100 shares of Common Stock. Brokerage commissions
and other costs of transactions in odd-lots are generally higher than the costs
of transactions in "round-lots" of even multiples of 100 shares.
Based on 457,145,645 shares of Common Stock outstanding as of March 27,
2002, the following table reflects the approximate percentage reduction in the
outstanding shares of Common Stock and the approximate number of shares of
Common Stock that would be outstanding as a result of the Reverse Stock Split:
PROPOSED REVERSE SPLIT RATIO
-------------------------------------------------------------
SHARES OUTSTANDING 1-FOR-10 1-FOR-15 1-FOR-20 1-FOR-25
- ------------------ ----------- ----------- ----------- -----------
Before Reverse Stock Split........ 457,145,645 457,145,645 457,145,645 457,145,645
After Reverse Stock Split......... 45,714,565 30,476,376 22,857,282 18,285,826
All outstanding options, warrants, rights, and convertible securities will
be appropriately adjusted for the Reverse Stock Split, as required by their
terms, automatically on the Effective Date (as defined below). The Reverse Stock
Split will affect all stockholders equally and will not affect any stockholder's
proportionate equity interest in us except for those stockholders who would
receive an additional share of Common Stock in lieu of a fractional share. None
of the rights currently accruing to holders of the Common Stock, options or
warrants to purchase Common Stock, or securities convertible into Common Stock
will be affected by the Reverse Stock Split. Following the Reverse Stock Split,
each share of New Common Stock will entitle the holder thereof to one vote per
share and will otherwise be identical to the Old Common Stock. The Reverse Stock
Split also will have no effect on the number of authorized shares of Common
Stock or the par value of the Common Stock.
We are currently authorized to issue a maximum of 2,500,000,000 shares of
Common Stock. As of March 27, 2002, there were 457,145,645 shares of Common
Stock issued and outstanding. Although the number of authorized shares of Common
Stock will not change as a result of the Reverse Stock Split, the number of
shares of Common Stock issued and outstanding will be reduced to a number that
will be approximately equal to the number of shares of Common Stock issued and
outstanding immediately prior to the effectiveness of the Reverse Stock Split,
divided by the denominator of the ratio of the Reverse Stock Split. Thus, the
Reverse Stock Split will increase the number of authorized and unissued shares
of Common Stock available for a future issuance by the amount by which the
outstanding Common Stock is reduced. Following the Reverse Stock Split, the
Board would have the authority, subject to applicable corporation law and Nasdaq
requirements, to issue these authorized and unissued shares without further
stockholder approval, upon terms and conditions the Board deems appropriate.
Although the Board has no intention of doing so, the Common Stock could be
issued in this manner, and pursuant to terms and conditions, that would make a
change of control of us or removal of our management more difficult. Except for
our pending acquisitions of Delano Technology Corporation and Viant Corporation,
we do not have any plans, proposals, or understandings to issue a portion of the
additional shares that would be available if the reverse stock split is approved
and implemented.
9
RIGHTS AND PREFERENCES OF OUR COMMON STOCK
With the exception of the number of shares issued and outstanding, the
rights and preferences of the shares of Common Stock prior and subsequent to the
Reverse Stock Split will remain the same. After the effectiveness of the Reverse
Stock Split, we do not anticipate that our financial condition, the percentage
ownership of management, the number of our stockholders, or any aspect of our
business would materially change as a result of the Reverse Stock Split.
Our Common Stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as a
result, we are subject to the periodic reporting and other requirements of the
Exchange Act. The proposed Reverse Stock Split will not affect the registration
of our Common Stock under the Exchange Act.
INCREASE OF SHARES OF COMMON STOCK AVAILABLE FOR FUTURE ISSUANCE
As a result of the Reverse Stock Split, there will be a reduction in the
number of shares of Common Stock issued and outstanding, and an associated
increase in the number of authorized shares that would be unissued and available
for future issuance after the Reverse Stock Split. The increase in these
available shares could be used for any proper corporate purpose approved by the
Board.
Holders of our Common Stock have no preemptive or other subscription
rights. Preemptive rights would give holders a right to purchase a pro rata
portion of new securities issued by us. Preemptive rights protect these holders
from dilution to some extent by allowing holders to purchase shares according to
their percentage ownership in each issuance of new securities. Therefore, we may
issue our shares in a manner that dilutes our current stockholders.
EFFECTIVENESS OF THE REVERSE STOCK SPLIT
The Reverse Stock Split, if approved by our stockholders, will become
effective (the "Effective Date") upon our filing with the Delaware Secretary of
State of a Certificate of Amendment to our Certificate of Incorporation, in
substantially the form of the Reverse Stock Split Amendment attached to this
Proxy Statement as EXHIBIT A, with the exact split ratio to be determined by our
Board. We expect that this filing will take place on or shortly after the date
of our Annual Meeting, assuming that our stockholders approve the Reverse Stock
Split. However, the Board will determine the exact timing of the filing of the
Certificate of Amendment, based upon its evaluation as to when this action will
be most advantageous to us and our stockholders, and the Board reserves the
right, notwithstanding stockholder approval and without further action by the
stockholders, to elect not to proceed with the Reverse Stock Split if, at any
time before filing the Reverse Stock Split Amendment, the Board, in its sole
discretion, determines that it is no longer in the best interests of us and our
stockholders.
Beginning on the Effective Date, each certificate representing shares of
Old Common Stock will be deemed for all corporate purposes to evidence ownership
of the reduced number of shares of Common Stock resulting from the Reverse Stock
Split. As soon as practicable after the Effective Date, stockholders will be
notified by a press release as to the effectiveness of the Reverse Stock Split,
and instructed as to how and when to surrender their certificates representing
shares of Old Common Stock in exchange for certificates or other evidence
representing shares of New Common Stock. We intend to use Computershare Trust
Company of New York as our exchange agent to effect the exchange of certificates
following the Reverse Stock Split. No service charges will be payable by you in
connection with the exchange of certificates. All of these expenses will be
borne by us. YOU SHOULD NOT DESTROY ANY STOCK CERTIFICATES AND YOU SHOULD NOT
SUBMIT TO US ANY CERTIFICATES UNTIL WE REQUEST THAT YOU DO SO.
10
FRACTIONAL SHARES
We will not issue fractional shares of Common Stock in connection with the
Reverse Stock Split. Instead, any fractional share that results from the Reverse
Stock Split will be rounded up to the next whole share of our Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of New Common Stock, including whole shares issued in lieu of
fractional shares, solely in exchange for Old Common Stock generally will not
result in recognition of gain or loss to you. The adjusted tax basis of your New
Common Stock will be the same as the adjusted tax basis of the shares of your
Old Common Stock, and your holding period of the New Common Stock will include
the holding period of your Old Common Stock. We will not recognize any gain or
loss as a result of the Reverse Stock Split. This summary of certain federal
income tax consequences is based on the Internal Revenue Code of 1986, as
amended, the applicable Treasury Regulations promulgated thereunder, judicial
authority, and current administrative rulings and practices in effect on the
date of this proxy statement and is for general information only. It does not
address consequences that may apply to special classes of taxpayers (e.g.,
non-resident aliens, broker-dealers, or insurance companies). You are urged to
consult your own tax advisor to determine the particular consequences to you.
ACCOUNTING EFFECTS OF THE REVERSE STOCK SPLIT
Following the Reverse Stock Split, the par value of our Common Stock will
remain the same. As a result, our stated capital will be reduced and capital in
excess of par value (additional paid-in capital) increased accordingly.
Stockholders' equity will remain unchanged. Our per share loss or income will be
increased because there will be fewer shares of Common Stock outstanding.
APPRAISAL RIGHTS
No appraisal rights are available, under Delaware law or under our
Certificate of Incorporation or Bylaws, if you dissent from or vote against the
proposal to approve the Reverse Stock Split Amendment. There may exist other
rights or actions under state law for stockholders who are aggrieved by reverse
stock splits generally. Although the nature and extent of these rights or
actions are uncertain and may vary depending upon the facts or circumstances,
stockholder challenges to corporate action in general are related to the
fiduciary responsibilities of corporate officers and directors and to the
fairness of corporate transactions.
REQUIRED VOTE
The affirmative vote of a majority of all of our outstanding Common Stock
entitled to vote at the Annual Meeting is required to approve the Reverse Stock
Split proposal.
WE RECOMMEND THAT YOU VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE
CERTIFICATE OF INCORPORATION EFFECTING A REVERSE STOCK SPLIT.
OTHER MATTERS
We know of no matters to be brought before the annual meeting other than
those described above. If any other business should come before the meeting, we
expect that the persons named in the enclosed proxy will vote your shares in
accordance with their best judgment on that matter.
11
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 27, 2002, certain information
regarding the beneficial ownership of the Common Stock by:
o each person known by us to be the beneficial owner of 5% or more of the
outstanding Common Stock;
o each of our directors and executive officers; and
o all of our directors and executive officers as a group.
There were approximately 2,250 record holders and approximately 61,000
beneficial holders of Common Stock and 457,145,645 shares of Common Stock
outstanding on March 27, 2002.
SHARES BENEFICIALLY
OWNED
-------------------------
NAME(1) NUMBER(2) PERCENT
---------- -------
Aleksander Szlam (3).......................................................... 35,002,390 7.7%
Andrew J. Filipowski (4)...................................................... 16,798,686 3.7
Michael P. Cullinane (5)...................................................... 2,033,137 *
Paul L. Humenansky............................................................ 1,907,661 *
Tommy Bennett................................................................. 161,666 *
James E. Cowie (6)............................................................ 2,832,531 *
John Cooper................................................................... 120,000 *
Michael H. Forster............................................................ 160,999 *
Arthur W. Hahn (7)............................................................ 242,644 *
Thomas J. Meredith (8)........................................................ 100,000 *
Kenneth A. Mueller............................................................ 349,844 *
J. Kevin Nater (8)............................................................ 0 *
John Rau (9).................................................................. 337,665 *
Jude M. Sullivan.............................................................. 27,438 *
Edward V. Szofer.............................................................. 0 *
All directors and executive officers
as a group (14 persons) (4)(5)(6)(7)(8)(9).................................. 25,072,271 5.5%
- ------------
* Represents less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated, the address of such person is c/o divine, inc.,
1301 N. Elston Avenue, Chicago, Illinois 60622.
(2) The numbers and percentages of shares owned by the directors, the Named
Executive Officers, and by all officers and directors as a group assume in
each case that currently outstanding stock options covering shares of
Common Stock that were exercisable within 60 days of March 27, 2002 had
been exercised by that person or group as follows: (i) Andrew J. Filipowski
-- 1,832,392; (ii) Michael P. Cullinane -- 1,000,000; (iii) Paul L.
Humenansky -- 1,043,614; (iv) Tommy Bennett -- 120,000; (v) James E. Cowie
-- 120,000; (vi) John Cooper -- 120,000; (vii) Michael H. Forster --
120,000; (viii) Arthur W. Hahn -- 64,166; (ix) Thomas J. Meredith -- 0; (x)
Kenneth A. Mueller -- 95,833; (xi) J. Kevin Nater -- 0; (xii) John Rau --
120,000; (xiii) Jude M. Sullivan -- 22,292; (xiv) Edward V. Szofer -- 0;
and (xv) all directors and executive officers as a group -- 4,658,297.
(3) Includes 34,934,058 shares of Common Stock beneficially owned by Szlam
Partners, L.P., a partnership controlled by Mr. Szlam.
(4) Includes 11,491,152 shares of Common Stock beneficially owned by AJF-1999
Trust U/A/D 5/20/99, a trust for which Mr. Filipowski is co-trustee,
113,845 shares of Common Stock beneficially owned by Robinwood Investment
Company L.P., a limited partnership controlled by Mr. Filipowski, and
33,333 shares of Common Stock beneficially owned by Platinum Construction
Corp, a corporation controlled by Mr. Filipowski.
(5) Excludes 38,333 shares of Common Stock held by trusts for which Mr.
Cullinane serves as trustee.
(6) Includes 2,535,585 shares held by Frontenac VII Limited Partnership and
126,947 shares held by Frontenac VII Masters Limited Partnership, of which
Mr. Cowie is a general partner.
(7) Includes 53,333 shares held in a trust for the benefit of Mr. Filipowski's
children, of which Mr. Hahn is the trustee. One-half of options granted to
Mr. Hahn under our Stock Incentive Plans were transferred to Katten Muchin
Zavis Rosenman, Mr. Hahn's law firm, immediately upon grant.
(8) Options to purchase Common Stock that were granted under our Stock
Incentive Plans for periods when serving as a Board designee of Dell
Computer Corporation were transferred to Dell immediately upon grant.
(9) Mr. Rau resigned as one of our directors on April 2, 2002.
12
EXECUTIVE COMPENSATION
The following table sets forth, on an annualized basis with respect to
salary information, information regarding the compensation we paid to our Chief
Executive Officer and each of our other executive officers (hereinafter, the
"Named Executive Officers") for all services they rendered to us for the fiscal
year ended December 31, 2001.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($)(1) (#) ($)(2)
- ------------------------------------ ---- ------ ------- ------------ ------------ ------------
Andrew J. Filipowski (3)............ 2001 - 400,000 67,100 1,666,666 111,065
Chairman of the Board and 2000 - 36,200 - 47,532
Chief Executive Officer 1999 - - 15,300 229,166 -
Michael P. Cullinane (4)............ 2001 487,500 - - 1,000,000 48,790
Executive Vice President, 2000 336,000 - - - 20,453
Chief Financial Officer, and 1999 - - - 104,666 -
Treasurer
Paul L. Humenansky (4).............. 2001 487,500 - - 1,000,000 60,861
President and Chief Operating 2000 336,000 - - 41,666 14,603
Officer 1999 - - - 125,000 -
Kenneth A. Mueller (5).............. 2001 373,995 - - 300,000 -
Senior Vice President and
Controller
Edward V. Szofer (6)................ 2001 277,500 75,000 - 450,000 -
President of Professional
Services Division
- -----------
(1) Represents taxable income attributed to personal use of corporate aircraft
in accordance with Internal Revenue Service requirements.
(2) Represents the portion of premiums we paid for life and disability
insurance benefits for the named individual and the forgiveness of interest
on his stock option loan calculated in accordance with Internal Revenue
Service requirements.
(3) Mr. Filipowski has agreed to waive his base salary through June 15, 2004.
(4) Each of Mr. Cullinane and Mr. Humenansky waived his base salary through
June 30, 2000.
(5) Mr. Mueller became an executive officer of divine in October 2001.
(6) Mr. Szofer was hired in April 2001. Prior to joining us, Mr. Szofer served
as chief development officer and director of marchFIRST, Inc. On April 12,
2001 marchFIRST filed for relief under Chapter 11 of the Federal Bankruptcy
Code.
13
The following table sets forth individual grants of stock options made to
the Named Executive Officers during 2001.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
PER CENT VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
OF SHARES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)(4)
OPTIONS EMPLOYEES IN OR BASE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PRICE(2) DATE 5% 10%
- ---- ------------ ------------ --------- ---------- ---------- ----------
Andrew J. Filipowski............ 1,666,666(1) 3.48% $1.25 3/22/11 $1,310,197 $3,320,295
Michael P. Cullinane............ 1,000,000(1) 2.09% 1.25 3/22/11 786,118 $1,992,178
Paul L. Humenansky.............. 1,000,000(1) 2.09% 1.25 3/22/11 786,118 $1,992,178
Kenneth A. Mueller.............. 300,000(3) 0.63% 1.36 8/2/11 256,589 $ 650,247
Edward V. Szofer................ 450,000(3) 0.94% 1.36 8/2/11 384,884 $ 975,370
- -----------
(1) These options granted are immediately exercisable, but vest in full one
year from the grant date if the executive continues to be employed by us on
that date. The shares of our Common Stock issuable upon exercise of these
options are subject to restrictions on transfer and a right of repurchase
by us at a price per share equal to the lower of the option exercise price
and the fair market value per share of our Common Stock. These restrictions
and repurchase right expire based on the option vesting schedule.
(2) The exercise price of each of these options equaled the fair market value
per share of our Common Stock on the grant date, as determined by the
Compensation Committee of our Board of Directors.
(3) These options granted are immediately exercisable, but vest in equal annual
installments on the first four anniversaries of the grant date if the
executive continues to be employed by us on each of these anniversaries.
The shares of our Common Stock issuable upon exercise of these options are
subject to restrictions on transfer and a right of repurchase by us at a
price per share equal to the lower of the option exercise price and the
fair market value per share of our Common Stock. These restrictions and
repurchase right expire based on the option vesting schedule.
(4) These amounts represent certain assumed annual rates of appreciation
calculated from the exercise price, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings depend on the future performance of our
Common Stock. We cannot assure you that the amounts reflected in this table
will be achieved.
14
The following table provides information about the value of shares of
Common Stock acquired upon exercise of options and the value of unexercised
options to purchase our Common Stock for the Named Executive Officers.
AGGREGATE 2001 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/01 AT 12/31/01*
ACQUIRED ---------------------------- ---------------------------
UPON VALUE VESTED AND UNVESTED OR VESTED AND UNVESTED OR
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ---- -------- -------- ----------- ------------- ----------- -------------
Andrew J. Filipowski........ - - 165,727 1,701,506 85,010 8,013
Michael P. Cullinane........ - - - 1,000,000 - -
Paul L. Humenansky.......... - - 43,614 1,000,000 28,523 -
Kenneth A. Mueller.......... - - 115,278 401,388 - -
Edward V. Szofer............ - - - 450,000 - -
- -----------
* This column indicates the aggregate amount, if any, by which the market
value of our Common Stock on December 31, 2001 exceeded the options'
exercise price, based on the closing price per share of our Common Stock on
December 31, 2001 of $0.74 on the Nasdaq National Market.
COMPENSATION OF DIRECTORS
Our directors do not currently receive any cash compensation for their
service as members of our Board of Directors, although we may decide to provide
them with cash compensation in the future. We reimburse each director who is not
our officer or employee for reasonable out-of-pocket expenses incurred in
attending board and committee meetings. During 2001 we granted each of our
non-employee directors (except Mr. Nater, who joined our board in August 2001)
options to purchase an aggregate of 111,667 shares of our Common Stock. While
serving as Dell's representative on our Board of Directors, Mr. Meredith
transferred these options to Dell USA L.P. After retiring from Dell in August
2001, Mr. Meredith remained on our board and received options to purchase an
aggregate of 120,000 shares of our Common Stock. After his appointment as Dell's
representative on our board, we granted Mr. Nater options to purchase 25,000
shares of our Common Stock. Mr. Nater transferred these options to Dell USA L.P.
Mr. Hahn transferred to his law firm, Katten Muchin Zavis Rosenman, one-half of
all options to purchase shares of our Common Stock that he received during 2001.
In addition, our Stock Incentive Plan provides for the automatic grant on
December 1 of each year of an option to purchase 25,000 shares of Common Stock
to each person who is a non-employee director on the grant date. Directors who
are also our employees receive no additional compensation from us for services
they render in their capacity as directors.
We entered into a three-year consulting agreement with Michael J. Jordan
under which we agreed to use our best efforts to have Mr. Jordan elected to our
Board of Directors, which occurred on March 13, 2000. Under the agreement, Mr.
Jordan agreed to be a co-chairman of the do right committee of our Board of
Directors and to perform promotional activities for us. In connection with the
consulting agreement, we issued Mr. Jordan an option to purchase 166,666 shares
of our Common Stock at a purchase price of $6.00 per share under our Stock
Incentive Plan. The option was exercisable in full upon its grant, but vests as
follows: 83,333 shares on the first anniversary of the grant date and 41,666
shares on each of the second and third anniversaries of the grant date, provided
that Mr. Jordan continued to serve as a director and consultant on each of these
anniversaries. Mr. Jordan exercised the option in full and purchased 166,666
shares of our Common Stock on March 10, 2000. We loaned Mr. Jordan $1,000,000 to
pay the exercise price of the option. These shares were subject to restrictions
on transfer and a right of repurchase by us at a price per share equal to the
lower of the
15
option exercise price and the fair market value per share of our Common Stock.
These restrictions on transfers and repurchase rights expired based on the
option vesting schedule. We waived our repurchase rights when Mr. Jordan
resigned from our Board of Directors in January 2001. On July 18, 2000, we
granted Mr. Jordan an option to purchase an additional 300,000 shares of our
Common Stock at a purchase price of $9.00 per share under our Stock Incentive
Plan. This option was exercisable in full upon its grant, but will vest as
follows: 150,000 shares on the first anniversary of the grant date and 75,000
shares on each of the second and third anniversaries of the grant date.
Advisory Board
We have established an advisory board to assist our management team in
addressing strategic issues in particular industries or geographic markets. We
will seek members for this advisory board who are experienced business leaders
or academics and who can provide high level insight and expert advice regarding
our marketplaces and regions that we target. Our advisory board currently
consists of 23 members, all of whom are our former directors. Each advisor will
be expected to devote up to two days per year to performing his or her duties,
including attending periodic meetings on at least a semi-annual basis. We
granted, and will continue to grant, to each advisory board member, upon joining
the advisory board, an option to purchase 10,000 shares of our Common Stock,
which will be vested immediately and be exercisable at the fair market value on
the date of grant. Subsequent grants will be considered by the Compensation
Committee of our Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee makes all compensation decisions with respect to
our executive officers and administers our incentive compensation programs and
plans. Messrs. Cowie, Forster, and Meredith currently serve as the members of
our Compensation Committee. In addition, Mr. Greg Jones served as a member of
our Compensation Committee during 2001. None of our executive officers currently
serve, or in the past served, on the compensation committee or board of
directors of any other company, the executive officers of which serve on our
Compensation Committee or Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and
directors, and any other person who owns more than 10% of our Common Stock, to
file reports of ownership with the Securities and Exchange Commission. They also
are required to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of copies of the forms we received, we believe that
during 2001 all filing requirements were complied with.
EMPLOYMENT AGREEMENTS
In April 2001, we entered into an employment agreement with Andrew J.
Filipowski, our Chief Executive Officer. Under the terms of his agreement, Mr.
Filipowski will not receive any base salary until June 1, 2004. After June 1,
2004, his annual base compensation will be at least $1,000,000. Under the terms
of his agreement, Mr. Filipowski also is entitled to an annual incentive bonus
of at least $400,000 if his performance meets certain criteria established by
our Compensation Committee. Mr. Filipowski's agreement also provides him with
certain insurance benefits, an automobile allowance, and reimbursement for
memberships in certain clubs and professional associations.
If Mr. Filipowski's employment is terminated by us without cause, if his
employment is constructively terminated by us, or if his employment is
terminated for any reason after a change of control of us, he will be entitled
to receive a lump sum payment equal to 130% of the greatest amount
16
of aggregate incentive compensation and base salary paid to Mr. Filipowski
during any period of 12 consecutive calendar months during the period of 36
consecutive calendar months immediately preceding termination of his employment,
with a minimum amount of $1,400,000, multiplied by three. Subject to certain
limitations, if the severance payable to Mr. Filipowski under the agreement
constitutes an "excess parachute payment" and Mr. Filipowski becomes liable for
any tax penalties on that payment, we will make a cash payment to him in an
amount sufficient to make him whole for those penalties and other taxes
triggered by our reimbursement of that tax.
In the agreement, Mr. Filipowski also agreed that, for a period of six
months after the date of termination of his employment for any reason other than
expiration of the term, he will not own, operate, manage, control, invest in,
participate in, or otherwise assist any entity that is in direct competition
with us on the date of termination. Mr. Filipowski may invest in the stock of a
competitor, but only if he is not involved in the business of the competitor and
if he and his associates do not own more than an aggregate of 5% of the
competitor's stock.
In April 2001, we also entered into employment agreements with Paul L.
Humenansky, our President and Chief Operating Officer and Michael P. Cullinane,
our Executive Vice President and Chief Financial Officer. These agreements with
Mr. Humenansky and Mr. Cullinane are substantially the same as our agreement
with Mr. Filipowski except that the annual base salary is $400,000, payable
currently, the annual incentive bonus is at least $350,000, and the severance
amount is calculated without any minimum amounts. Each of Messrs. Humenansky and
Cullinane reimbursed to us their annual incentive bonus for 2001.
CHANGE OF CONTROL AGREEMENTS FOR CERTAIN OTHER EXECUTIVES
During February 2001, the Compensation Committee authorized us to enter
into change of control agreements with certain of our officers. Under the terms
of the form agreement, an employee who is a party to a change of control
agreement will be entitled to a lump sum payment of 125% of his or her annual
base compensation if the employee's employment with us is terminated (or the
employee terminates for good reason) within two years after a change of control.
As of April 1, 2002, eighteen employees were parties to change of control
agreements, including Edward V. Szofer and Kenneth A. Mueller, our other named
executive officers.
17
EQUITY COMPENSATION PLAN INFORMATION
We have four equity compensation plans (excluding plans assumed by us in
connection with acquisitions) under which we may issue our Common Stock to our
employees, officers, and directors. These plans are our: 1999 Stock Incentive
Plan, 2001 Stock Incentive Plan, eshare/divine 2001 Stock Incentive Plan I, and
eshare/divine 2001 Stock Incentive Plan II. All of these compensation plans
except the eshare/divine 2001 Stock Incentive Plan II have been approved by our
stockholders. The following table provides information about our Common Stock
that may be issued upon the exercise of options under all of our equity
compensation plans as of December 31, 2001.
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY(*) WARRANTS, AND RIGHTS WARRANTS, AND RIGHTS COMPENSATION PLANS
- ---------------- -------------------- -------------------- --------------------
Equity compensation plans
approved by stockholders......... 59,143,073 $1.61 1,259,363
Equity compensation plans
not approved by stockholders..... - - -
- -----------
* This table does not include information regarding equity compensation plans
assumed by us in mergers. A total of 15,704,690 shares of our Common Stock
were issuable at December 31, 2001 upon exercise of options assumed by us in
our acquisitions of Open Market, Inc.; eshare communications, Inc.; and
Eprise Corporation. The weighted-average exercise price per share of those
options was $4.83. No additional options may be granted under these assumed
option plans.
REPORT OF THE COMPENSATION COMMITTEE
The compensation of our executive officers and senior management is
generally determined by the Compensation Committee of our Board of Directors.
The Compensation Committee, which consists of three of our directors who are not
officers or employees, also administers our incentive compensation plans and
determines the number of shares covered by, and terms of, options to be granted
to executive officers and other key employees under these plans. The following
report is about compensation paid or awarded to our executive officers during
2001 and is furnished by our directors who comprise the Compensation Committee.
GENERAL POLICIES
Our compensation program is intended to enable divine to attract, motivate,
reward, and retain the management talent it needs to achieve its corporate
objectives, and thereby increase stockholder value. To attain our goals, our
general policy is to provide a significant portion of executive compensation in
the form of at-risk, incentive-based compensation, like stock options. We
believe that such a policy, which directly aligns the financial interests of
management with your financial interests, provides the proper incentives to
attract, reward, and retain high quality management. In determining the nature
and amounts of compensation for divine's executive officers, we take into
account all factors that we consider relevant, including overall business
conditions and those in divine's general industry, divine's performance in light
of those conditions, the market rates of compensation for executives of similar
backgrounds and experience, and the performance of the specific executive
officer. With respect to Mr. Filipowski, Mr. Humenansky, and Mr. Cullinane, we
also take into consideration the fact that Mr. Filipowski has waived any base
salary through June 15, 2004, and Mr. Humenansky and Mr. Cullinane waived any
cash compensation from formation of divine through June 30, 2000.
Section 162(m) of the Internal Revenue Code limits the deduction for
federal income tax purposes of certain compensation paid by any publicly-held
corporation to its chief executive officer and its four
18
other highest compensated officers to $1 million per executive (the "$1 million
cap"). The $1 million cap does not apply to "performance-based" compensation
plans as defined under Section 162(m). We believe that divine's Stock Incentive
Plan qualifies as a "performance-based" plan that is not subject to the $1
million cap. The other compensation currently paid to divine's executive
officers is not expected to exceed the $1 million cap.
POLICIES FOR CALENDAR YEAR 2001
During the first quarter of 2001, divine's board and management team
determined that divine would focus on building an extended enterprise solution
company through internal growth and complementary acquisitions of third party
software and services companies. In the view of both the Compensation Committee
and the Board of Directors, retention of a motivated senior management team was
essential to effectively implementing our extended enterprise strategy,
particularly at a time when our stock price was declining. We worked with
divine's senior executive officers and outside compensation consultants to
develop a compensation program designed to achieve these goals and we approved a
compensation program that consists of a mix of cash compensation, equity
incentives, and in three instances, restructuring of outstanding loans to
executive officers.
EMPLOYMENT AGREEMENTS
During February and March 2001, we worked with outside compensation
consultants and certain of divine's officers to put into place employment
agreements for Messrs. Filipowski, Humenansky, and Cullinane. The agreements are
summarized under the caption "Employment Agreements" above. Based upon the
recommendations of our outside consultants and a review of market comparables,
we believe these agreements, which are the product of negotiation between the
executive officers and the Compensation Committee, are appropriate and in line
with our stated goal of retaining and motivating our executive management team
through our development as an extended enterprise solution company.
CASH COMPENSATION
As a general matter, cash compensation paid to divine's officers consists
primarily of salary. Base salaries for Mr. Humenansky and Mr. Cullinane are
determined in accordance with their employment agreements. We determine base
salaries for other officers and senior employees through a subjective assessment
of responsibilities and position within divine, individual performance, and our
overall performance. No specific corporate performance measures are considered.
STOCK OPTIONS
We consider incentive compensation in the form of stock options to be an
integral, important, and relatively large part of executive compensation in
particular and employee compensation generally. We grant stock options generally
to executive officers and other employees upon their commencement of employment
and on an annual basis. When making grants, we consider factors specific to each
employee such as salary, position, and responsibilities. We also consider
factors such as the rate of divine's development and growth, revenue growth, and
the market value of the Common Stock. Option grants relating to recruiting and
employment offers and special circumstances are recommended by management.
All of our stock options which were granted prior to January 1, 2001 were
significantly out of the money as of January 1, 2001. In an effort to retain and
motivate our work force, we approved grants of options to purchase in the
aggregate of approximately 28,681,000 shares of Common Stock to divine's
19
employees in 2001 (not including options issued or options rolled over for
employees of entities acquired by divine during 2001).
CHIEF EXECUTIVE OFFICER COMPENSATION
Andrew J. Filipowski founded divine in May 1999 and has been our Chairman
and Chief Executive Officer since that time. Mr. Filipowski's annual
compensation was determined using the same criteria that we used to determine
compensation levels for other corporate officers and was based on our assessment
of Mr. Filipowski's overall performance and on information regarding awards made
by similar companies. We believe that Mr. Filipowski's experience, dedication,
and knowledge have been of vital importance to the successful and ongoing growth
of the administration and operations of divine.
As described above, we believe Mr. Filipowski is critical to divine's
extended enterprise strategy. With this in mind, we worked with our outside
compensation consultants and certain members of our management team to structure
Mr. Filipowski's 2001 compensation program. Because Mr. Filipowski has agreed to
waive his base salary through June 15, 2004, our focus was on providing him
primarily with non-cash compensation. We believe that tying Mr. Filipowski's
remuneration primarily to the performance of our Common Stock will motivate Mr.
Filipowski to maximize stockholder value and is consistent with our policy of
compensating all of our employees significantly through annual stock option
grants. As a result, Mr. Filipowski's 2001 compensation consisted of (1) $0 base
salary, (2) a $400,000 cash bonus, and (3) a grant of options to purchase
1,666,666 shares of our Common Stock. In addition, a promissory note from Mr.
Filipowski to us in the amount of $1,031,247 was terminated in exchange for Mr.
Filipowski transferring to us the 229,166 shares of our Common Stock that were
pledged to secure that promissory note, as described in "Certain Transactions"
below.
BY THE COMPENSATION COMMITTEE:
James E. Cowie
Michael H. Forster
Thomas J. Meredith
20
PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
returns on our Common Stock, the Dow Jones & Co. Internet Services Index, and
the Nasdaq Composite Index (assuming dividend reinvestment, except in our case
because we have never paid cash dividends on the Common Stock) for the period
beginning on July 11, 2000 (the date of our initial public offering) and ending
on December 31, 2001 (which was the last trading day of our 2001 fiscal year).
COMPARISON OF CUMULATIVE RETURN VS. DOW JONES INTERNET
SERVICES AND NASDAQ COMPOSITE INDICES *
[PERFORMANCE GRAPH]
7/11/00 9/29/00 12/29/00 3/30/01 6/29/01 9/28/01 12/31/01
------- ------- -------- ------- ------- ------- --------
divine, inc. ............................ $100.00 $ 41.67 $17.36 $18.00 $23.33 $ 6.89 $ 8.22
Dow Jones Internet Services Index........ 100.00 108.81 53.71 24.43 25.51 10.16 16.62
Nasdaq Composite Index................... 100.00 92.83 62.44 46.51 54.63 37.88 49.30
- ------------
* Assumes $100 invested on July 11, 2000 in our Common Stock, the Dow Jones &
Co. Internet Services Index, and the Nasdaq Composite Index. Historical
results are not necessarily indicative of future performance.
21
CERTAIN TRANSACTIONS
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
Prior to our initial public offering, we offered to loan to each of our
employees, including our executive officers, and our non-employee directors an
amount necessary to pay the exercise price of options we granted to that
employee or director under the divine, inc. 1999 Stock Incentive Plan - Equity
Compensation Loan Program. Under this program, we loaned the following amounts
to our executive officers and directors, and the following amounts were
outstanding at December 31, 2001:
INTEREST
AMOUNT OF RATE
EXECUTIVE OFFICER/DIRECTOR INDEBTEDNESS ($) (%)
- -------------------------- ---------------- --------
Michael J. Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 6.80
Ronald D. Lachman . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 6.21
Timothy Stojka . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 6.21
As of January 1, 2001, we also held 6.21% promissory notes of Messrs.
Filipowski, Humenansky, and Cullinane in the aggregate principal amounts of
$1,031,247, $749,997, and $468,747, respectively. These notes were also issued
under the divine, inc. 1999 Stock Incentive Plan - Equity Compensation Loan
Program in connection with the respective purchases by Messrs. Filipowski,
Humenansky, and Cullinane, of 229,166, 166,666, and 104,166 restricted shares of
our Common Stock, and were secured by a pledge of the restricted shares
purchased. In September 2000, we offered to all of our employees other than our
executive officers the opportunity to restructure and terminate their promissory
notes under that loan program in exchange for their surrender of the shares of
Common Stock. In April 2001, as part of our effort to retain the services of
Messrs. Filipowski, Humenansky, and Cullinane during 2001, we agreed to
restructure their notes if they remained employed by us through 2001. The
restructured notes were terminated in exchange for the executives surrendering
the restricted stock that had been pledged as security for the notes during
2001. In connection with the note restructuring, we waived our right to interest
due of $66,847, $48,074, and $30,385, respectively, from Messrs. Filipowski,
Humenansky, and Cullinane. The interest waived is reflected in the "Other
Compensation" column of the Summary Compensation table.
REAL ESTATE TRANSACTIONS
Andrew J. Filipowski, our Chief Executive Officer, owns 33.3% and is a
manager of Habitat-Kahney, LLC. In January 2000, we entered into a ten-year
facility lease with Habitat-Kahney for additional space in Chicago, Illinois. We
paid rent of $743,465 in 2001 and $730,080 in 2000 under this lease. We are also
responsible for our share of the building's utilities and operating expenses.
VENTURE CAPITAL TRANSACTIONS
Effective August 4, 1999, Platinum Venture Partners, Inc. withdrew, and we
were substituted, as the general partner of each of Platinum Venture Partners I,
L.P. and Platinum Venture Partners II, L.P. Messrs. Filipowski, Humenansky, and
Cullinane are principal shareholders and officers of Platinum Venture Partners,
Inc. Mr. Filipowski beneficially owns approximately 22.5%, and each of Messrs.
Cullinane and Humenansky beneficially owns less than 5%, of the equity of
Platinum Venture Partners, Inc. Platinum Venture Partners, Inc. beneficially
owns a 2.7% limited partnership interest in Platinum Venture Partners I and a
1.0% limited partnership interest in Platinum Venture Partners II. Additionally,
each of Messrs. Filipowski, Humenansky, Cullinane, and James E. Cowie, currently
members of our Board of Directors, and Thomas Danis, Arthur Frigo, Gian Fulgoni,
Jeffrey Jacobs,
22
and Lawrence Levy, some of our former directors, owns a limited partnership
interest in Platinum Venture Partners I and/or Platinum Venture Partners II.
As general partner of Platinum Venture Partners I, we receive an annual
management fee, payable in advance in quarterly installments of 21/2% of the
fair value of the partnership, adjusted annually by the increase in a consumer
price index during the preceding calendar year. As general partner of Platinum
Venture Partners II, we receive an annual management fee, payable in advance in
quarterly installments, of 21/2% of the aggregate partner commitments, adjusted
annually by the percentage increase in a consumer price index during the
preceding calendar year. We received a total of approximately $588,000 and
$815,000 from Platinum Venture Partners I and II management fees during 2001 and
2000, respectively.
OTHER TRANSACTIONS
Tommy Bennett, one of our directors, is a Senior Vice President of Computer
Associates. In connection with our acquisition of eshare communications, Inc.,
we paid Computer Associates $1,000,000 to settle a pending dispute between
eshare and Computer Associates. We also entered into a software licensing
agreement with iCan SP, Inc., a wholly-owned subsidiary of Computer Associates,
pursuant to which we agreed to pay an aggregate of $1,500,000 over the term of
the 5-year license agreement. In 2001, we paid $100,000 to Computer Associates,
representing the first installment due under the license agreement.
Peter Bynoe, who served as one of our directors in 2001, was a partner in
the law firm of Piper Marbury Rudnick & Wolfe (Piper Marbury) while he served on
our board of directors. We paid Piper Marbury $370,000 for legal services in
2001.
Thomas Danis and Teresa Pahl served on our board of directors during
January 2001. Mr. Danis was a Managing Director of Aon Risk Services Mergers and
Acquisitions group, and Ms. Pahl was an Executive Vice President of Aon
Corporation while they served on our Board of Directors. We paid Aon Corporation
$3,325,000 as broker with respect to our directors and officers liability
insurance in 2001.
Arthur Hahn, one of our directors, is a partner in the law firm of Katten
Muchin Zavis Rosenman (KMZR). We paid KMZR approximately $2,189,000 for legal
services in 2001.
Michael Jordan, one of our former directors, entered into a consulting
agreement with us in March 2000. The terms of this agreement are described above
under the "Compensation of Directors" subheading of the section of the Proxy
Statement captioned "Executive Compensation." Mr. Jordan resigned as one of our
directors in January 2001.
John Cooper, one of our directors, served as a Managing Director of
Corporate Development of Microsoft Corporation from October 1999 through
November 2001. We paid Microsoft $248,000 in 2001 for computer software and
various consulting services. Additionally, in conjunction with our acquisition
of HostOne in October 2001, we issued to Microsoft Corporation a total of
8,196,722 shares of our Common Stock in exchange for the cancellation of debt
owed by marchFIRST to Microsoft.
Thomas J. Meredith, one of our directors, served as Senior Vice President,
Dell Ventures of Dell Computer Corporation (Dell) and Dell USA L.P. (Dell USA).
Mr. Meredith retired from Dell and Dell USA in August 2001. J. Kevin Nater, one
of our directors, currently serves as Vice President, Dell Ventures and
Treasurer of Dell and Dell USA. Dell USA is a subsidiary of Dell. We paid Dell
Computer Corporation $1,225,000 in 2001 for computers and servers.
Aleksander Szlam, who served as one of our directors during January 2001,
was the chairman and chief executive officer of eshare communications, Inc.
while he served on our Board of Directors. We acquired eshare in October 2001.
In conjunction with our acquisition of eshare, we entered into two
23
separate stock repurchase arrangements with Mr. Szlam, related to the shares of
our Common Stock that Mr. Szlam received in the acquisition. These arrangements
gave Mr. Szlam the right to sell back a portion of his shares to us at an
agreed-upon price (put option), while also giving us the right to buy back the
same number of shares from Mr. Szlam at the same price (call option). In
December 2001, the first buyback period, which covers 5,428,800 shares, was
extended to be coterminous with the second buyback period. The second buyback
period is effective for the time period beginning six months after the eshare
merger (April 23, 2002) and ending 18 months after the merger (April 23, 2003),
and relates to 5,959,200 shares of our Common Stock. The agreed-upon purchase
price for the related put and call options is $0.53 per share. Accordingly, for
one year beginning on April 23, 2002, Mr. Szlam has the right to sell to us, and
we have a separate right to buy from Mr. Szlam, up to 11,388,000 shares of our
Common Stock at $0.53 per share.
Additionally, Mr. Szlam is affiliated with Szlam Partners, L.P. and Melita
House, Inc., who own the properties on which eshare's U.S. and United Kingdom
headquarters, respectively, are located. In conjunction with our acquisition of
eshare, we purchased real estate options from both Szlam Partners and Melita
House. Upon the closing of the eshare merger, we paid Szlam Partners $3,702,978
for a ten-year option to purchase eshare's property in the U.S. for $14,560,000
and paid Melita House $2,047,022 for a ten-year option to purchase eshare's
property in the U.K. for(pound)5,714,668 ($8,295,000 at December 31, 2001).
Under these real estate option agreements, Szlam Partners and Melita House
agreed not to raise the rental amounts due under, or otherwise adversely modify,
the leases for these properties so long as we are not in default under the
leases.
SOLICITATION OF PROXIES
Our Board of Directors will solicit your proxy by mail. Your proxy may also
be solicited by directors, officers, and a small number by our employees
personally or by mail, telephone, facsimile, or otherwise. These persons will
not be compensated for their services. Brokerage firms, banks, fiduciaries,
voting trustees, or other nominees will be requested to forward our proxy
soliciting material to the beneficial owners of stock held of record by them,
and we have hired our transfer agent, Computershare Investor Services, LLC, to
coordinate that distribution for a fee of approximately $1,500 plus expenses.
The entire cost of the Board of Directors' solicitation will be borne by us.
SUBMITTING YOUR PROPOSALS FOR THE 2003 ANNUAL MEETING
According to the rules of the Securities and Exchange Commission, if you
want to submit a proposal for inclusion in the proxy material to be distributed
by us in connection with our 2003 annual meeting of stockholders, you must do so
no later than December 23, 2002. Your proposal should be submitted in writing to
the Secretary of the Company at our principal executive offices. In addition,
our bylaws require that in order for you properly to bring any business before
any meeting of stockholders, including nominations for the election of
directors, you must provide written notice, delivered to the Secretary of the
Company at our principal executive offices, not less than 45 nor more than 75
days prior to the first anniversary of the date we mailed the proxy material for
our last annual meeting. In the event that the date of our next annual meeting
is moved more than 30 days from the date of our last annual meeting, your notice
must be received by us no later than 90 days before the date of our next annual
meeting or 10 days following our announcement of the date of our next annual
meeting. Your notice must include your name and address as it appears on our
records and the class and number of shares of our capital stock you beneficially
owned on the record date for the meeting. In addition, (1) for proposals other
than nominations for the election of directors, your notice must include a
description of the business you want brought before the meeting, your reasons
for conducting that business at the meeting, and any material interest you have
in that business, (2) for proposals relating to your nominations of directors,
your notice must also include, with respect to each person nominated, the
information required by Regulation 14A under the Securities Exchange Act of
1934, as
24
amended, and (3) for all proposals, your notice must indicate whether you intend
to circulate a proxy statement and form of proxy.
GENERAL
It is important that your proxy be returned promptly, or submitted by phone
or Internet. If you are unable to attend the meeting, you are urged, regardless
of the number of shares owned, to vote and submit your proxy by phone, by
Internet, or by marking, dating, signing, and returning without delay your proxy
card in the enclosed addressed envelope.
By Order of the Board of Directors
Jude M. Sullivan
Secretary and General Counsel
25
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIVINE, INC.
divine, inc. (the "CORPORATION"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"ACT"), DOES HEREBY CERTIFY THAT:
1. The following amendment was duly adopted in accordance with the
provisions of Section 242 of the Act, and approved at an annual meeting of the
stockholders of the Corporation, held upon notice in accordance with Section 222
of the Act, at which meeting the necessary number of shares as required by the
Act were voted in favor of the amendment.
2. Section A of Article IV of the Corporation's Third Amended and Restated
Certificate of Incorporation is hereby amended and restated to read in its
entirety as follows:
A. Capital Stock.
1. Authorized Stock.
Effective upon the filing of this Certificate of Incorporation,
the total number of shares of capital stock of all classes which
the Corporation shall have authority to issue is 2,650,000,000
shares, which shall be divided as follows: (i) 2,500,000,000 shares
of Class A Common Stock, par value $0.001 per share ("CLASS A
COMMON STOCK"), (ii) 100,000,000 shares of Class C Common Stock,
par value $0.001 per share ("CLASS C COMMON STOCK") and (iii)
50,000,000 shares of Preferred Stock, par value $0.001 per share
("PREFERRED STOCK"). "COMMON STOCK," when used herein, shall mean
the Class A Common Stock and the Class C Common Stock together.
2. Conversion of Common Stock.
At the time of the filing of this Certificate of Amendment with
the Secretary of State of the State of Delaware, the Corporation
shall effect a one-for reverse stock split pursuant to which every
shares of the Corporation's Class A Common Stock issued and
outstanding or held in treasury on the date hereof (the "OLD CLASS
A COMMON STOCK") will be automatically converted into one new share
of Class A Common Stock. Upon the occurrence of the
reclassification effected by this Section A.2. (the "CONVERSION"),
each certificate representing shares of Old Class A Common Stock
shall automatically evidence, and shall be deemed to evidence,
ownership of the number of shares of Class A Common Stock into
which the shares previously evidenced by such certificate shall
have been reclassified in accordance with this Section A.2., and
the Conversion shall become effective in accordance with the terms
hereof, whether or not any or all of the certificates evidencing
Old Class A Common Stock shall have been surrendered or new
certificates or other evidence of the numbers of shares of Class A
Common Stock into which such shares have been reclassified have
been issued in accordance with Section A.3. hereof.
3. Subsequent Reissuance of Certificates.
Promptly following the Conversion, the Corporation or its agent
will notify each holder of shares of Old Class A Common Stock of
the Conversion and provide instructions as to how to receive
certificates evidencing New Class A Common Stock. The Corporation
shall issue and deliver to each holder of shares of Old Class A
Common Stock that either (a) surrenders each certificate evidencing
any such shares at the office of the Corporation or (b) notifies
the Corporation that such certificate has been lost,
26
stolen, mutilated, or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from
any loss incurred by it in connection with the reissuance of such
lost, stolen, mutilated, or destroyed certificate, a certificate or
certificates, or other evidence of ownership, in the name shown on
such certificate evidencing Old Class A Common Stock, for the
number of whole shares of Class A Common Stock into which the
shares of Old Class A Common Stock evidenced by the surrendered (or
lost, stolen, mutilated, or destroyed) certificate have been
reclassified, dated as of the date on which the Conversion becomes
effective. The Corporation shall not be obligated to issue any
certificate evidencing shares of Class A Common Stock in connection
with the Conversion except in accordance with this Section A.3.
4. Fractional Shares.
Notwithstanding the foregoing, the Corporation shall not issue,
nor pay any cash for, fractional shares to those stockholders
entitled to a fractional interest in a share of Class A Common
Stock issued pursuant to the Conversion. Instead all fractional
shares held by a stockholder shall be aggregated and each
fractional share that results from such aggregation shall be
rounded up to the to the next whole share of Class A Common Stock.
***[SIGNATURE PAGE FOLLOWS]***
A-2
IN WITNESS WHEREOF, divine, inc. has caused this certificate to be signed
by Andrew J. Filipowski, its Chief Executive Officer, and attested by Jude M.
Sullivan, its Secretary, this day of , 2002.
DIVINE, INC.
By: ----------------------------
Andrew J. Filipowski Chief
Executive Officer
ATTEST:
- --------------------------------------
JUDE M. SULLIVAN
SECRETARY
A-3
ANNEX Q
DIVINE FORM 8-K DATED APRIL 5, 2002, RESPECTING THE
PROPOSED MERGER TRANSACTION WITH VIANT CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: April 5, 2002
(Date of earliest event reported)
DIVINE, INC.
(Exact name of registrant as specified in the charter)
Delaware 0-30043 36-4301991
(State or other jurisdiction of (Commission File No.) (IRS Employer
incorporation) Identification No.)
1301 N. Elston Avenue
Chicago, Illinois 60622
(Address of Principal Executive Offices)
(773) 394-6600
(Registrant's telephone number including area code)
Not Applicable
(Former name or former address, if changed since last report)
ITEM 5. OTHER ITEMS
On April 5, 2002, divine, inc. ("divine") entered into an Agreement and Plan of
Merger and Reorganization, dated as of April 5, 2002 (the "Merger Agreement")
with Viant Corporation ("Viant"), pursuant to which DVC Acquisition Company, a
direct, wholly-owned subsidiary of divine, will be merged with and into Viant
(the "Merger"). Following the Merger, Viant will be a wholly-owned subsidiary of
divine. Upon consummation of the Merger, each of the approximately 49 million
outstanding shares of Viant common stock will be converted into the right to
receive 3.977 shares of divine Class A common stock (the "Exchange Ratio"). The
Merger Agreement also contemplates the payment by Viant of a cash dividend of
$24 million, in the aggregate, to Viant stockholders immediately prior to the
consummation of the Merger (the "Dividend"). The record date for the Dividend
has not yet been set.
In addition, each outstanding option to purchase shares of Viant common stock
under the Viant 1996 Stock Option Plan and the Viant 1999 Option Plan will be
assumed by divine ("Company Options") and will become and represent an option to
purchase that number of whole shares of divine Class A common stock (rounded
down to the nearest full share) determined by multiplying the number of shares
of Viant common stock issuable upon exercise of such option by the Conversion
Ratio, at an exercise price equal to the exercise price of such Company Option
divided by the Conversion Ratio, rounded up to the nearest whole cent. The
Conversion Ratio is equal to the sum of the Exchange Ratio and the quotient of
the per share Dividend paid to each stockholder and $.55. As of April 5, 2002,
there were outstanding options to purchase a total of approximately 7.5 million
shares of Viant common stock, with exercise prices ranging from $.025 to $46.25
per share, with a weighted average exercise price of $2.71 per share.
Consummation of the Merger is subject to a number of conditions, including (1)
approval of the Merger by the stockholders of Viant and (2) approval of the
issuance of the shares of Class A Common Stock of divine in connection with the
Merger by the stockholders of divine.
For information regarding the terms and conditions of the Merger, including the
consideration to be issued to Viant stockholders and the conditions to
consummation of the Merger, reference is made to the Merger Agreement, which is
filed as Exhibit 2.1 hereto and incorporated by reference herein, and the press
release jointly issued by divine and Viant on April 5, 2002, which is filed as
Exhibit 99.1 hereto and incorporated by reference herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) EXHIBITS.
The exhibits to this report are listed in the Exhibit Index set forth elsewhere
herein.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
By: /s/ Michael P. Cullinane
------------------------------------------------
Michael P. Cullinane
Executive Vice President,
Chief Financial Officer and Treasurer
Date: April 5, 2002
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
2.1* Agreement and Plan of Merger and Reorganization, dated as of April 5,
2002, among divine, inc., DVC Acquisition Company and Viant
Corporation, excluding exhibits and schedules thereto.
99.1 Joint Press Release of divine, inc. and Viant Corporation dated April
5, 2002 announcing divine's acquisition of Viant.
* The schedules and exhibits to the Agreement and Plan of Merger and
Reorganization have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
divine agrees to furnish supplementally to the SEC, upon request, a copy of any
omitted schedule or exhibit.
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
divine, inc.,
DVC Acquisition Company
and
Viant Corporation
April 5, 2002
Table of Contents
-----------------
Page
----
ARTICLE I THE MERGER; EFFECTIVE TIME; CLOSING .......................... 2
1.1 The Merger ................................................. 2
1.2 Effective Time ............................................. 2
1.3 Closing .................................................... 2
1.4 Effect of the Merger ....................................... 2
1.5 Appraisal Rights ........................................... 2
ARTICLE II CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING
CORPORATION ............................................................ 2
2.1 Certificate of Incorporation; Name ......................... 2
2.2 Bylaws ..................................................... 3
2.3 Additional Actions ......................................... 3
ARTICLE III DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION ........ 3
3.1 Directors .................................................. 3
3.2 Officers ................................................... 3
ARTICLE IV MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES
IN THE MERGER .......................................................... 3
4.1 Consideration for the Merger; Conversion or Cancellation of
Shares in the Merger ....................................... 3
4.2 Payment for Company Shares in the Merger ................... 5
4.3 Cash In Lieu of Fractional Parent Shares ................... 7
4.4 Transfer of Shares after the Effective Time ................ 7
4.5 Lost, Stolen or Destroyed Certificates ..................... 7
ARTICLE V REPRESENTATIONS AND WARRANTIES ............................... 7
5.1 Representations and Warranties of Parent and Merger Sub .... 7
5.2 Representations and Warranties of the Company .............. 25
ARTICLE VI ADDITIONAL COVENANTS AND AGREEMENTS ......................... 43
6.1 Conduct of Business of the Company ......................... 43
6.2 Conduct of Business of Parent .............................. 47
6.3 No Solicitation ............................................ 49
6.4 Meetings of Stockholders ................................... 51
6.5 Registration Statement ..................................... 52
6.6 Reasonable Efforts ......................................... 53
6.7 Access to Information ...................................... 53
i
Table of Contents
-----------------
(continued)
Page
----
6.8 Publicity .................................................. 55
6.9 Affiliates of the Company .................................. 55
6.10 Maintenance of Insurance .................................. 55
6.11 Filings; Other Action ..................................... 55
6.12 Tax Free Reorganization Treatment ......................... 56
6.13 Indemnification ........................................... 56
6.14 Company ESPP .............................................. 57
6.15 Exemption from Liability Under Section 16(b) .............. 57
6.16 Form S-8 .................................................. 58
6.17 NNM Listing ............................................... 58
6.18 Company Rights Agreement .................................. 58
6.19 Parent Rights Agreement ................................... 59
6.20 Granting of Additional Parent Options ..................... 59
6.21 Employee Benefit Plans .................................... 59
6.22 Additional Company Covenant ............................... 60
6.23 Additional Parent Covenant ................................ 60
ARTICLE VII CONDITIONS ................................................. 60
7.1 Conditions to Each Party's Obligations ..................... 60
7.2 Conditions to the Obligations of the Company ............... 61
7.3 Conditions to the Obligations of Parent .................... 62
ARTICLE VIII TERMINATION ............................................... 63
8.1 Termination by Mutual Consent .............................. 63
8.2 Termination by either the Company or Parent ................ 63
8.3 Termination by the Company ................................. 64
8.4 Termination by Parent ...................................... 65
8.5 Effect of Termination; Termination Fee ..................... 65
ARTICLE IX MISCELLANEOUS AND GENERAL ................................... 68
9.1 Payment of Expenses ........................................ 68
9.2 Non-Survival of Representations and Warranties ............. 68
9.3 Modification or Amendment .................................. 68
9.4 Waiver of Conditions ....................................... 69
9.5 Counterparts ............................................... 69
9.6 Governing Law; Jurisdiction ................................ 69
9.7 Notices .................................................... 69
9.8 Entire Agreement; Assignment ............................... 70
9.9 Parties in Interest ........................................ 70
9.10 Certain Definitions ....................................... 70
9.11 Severability .............................................. 73
ii
Table of Contents
-----------------
(continued)
Page
----
9.12 Specific Performance ...................................... 73
9.13 Recovery of Attorney's Fees ............................... 73
9.14 Captions .................................................. 73
9.15 No Strict Construction .................................... 73
iii
TABLE OF DEFINED TERMS
Acquisition ........................... Section 8.5(b)
Additional Parent Options ............. Section 6.21
Agreement ............................. Introduction
Assumed Option ........................ Section 4.1
Authorized Representatives ............ Section 6.7
Base Termination Fee .................. Section 8.5(b)
Certificate of Merger ................. Section 1.2
Certificates .......................... Section 4.2(b)
Closing ............................... Section 1.3
Closing Date .......................... Section 1.3
Code .................................. Recitals
Commercial Software ................... Section 5.1(p)(vii) & 5.2(o)(viii)
Company ............................... Introduction
Company Acquisition Proposal .......... Section 6.3(a)
Company Affiliate ..................... Section 6.9
Company Affiliate Letter .............. Section 6.9
Company Contract ...................... Section 5.2(p)(ii)
Company Disclosure Schedule ........... Section 5.2
Company ESPP .......................... Section 5.2(b)(ii)
Company Embedded Products ............. Section 5.2(o)(viii)
Company Equivalents ................... Section 5.2(b)(ii)
Company Financial Statements .......... Section 5.2(h)(ii)
Company Insiders ...................... Section 6.15(c)
Company Insurance Policies ............ Section 5.2(t)
Company Key Employees ................. Section 5.2(p)(i)(2)
Company Options ....................... Section 9.10(a)
Company Option Plans .................. Section 5.2(b)(ii)
Company Participant ................... Section 6.21
Company Plan Affiliate ................ Section 5.2(n)(i)
Company Rights ........................ Section 9.10(b)
Company Rights Agent .................. Section 9.10(c)
Company Rights Agreement .............. Section 9.10(d)
Company Proprietary Rights ............ Section 5.2(o)(i)
Company Scheduled Plans ............... Section 5.2(n)(i)
Company SEC Reports ................... Section 5.2(h)(i)
Company Shares ........................ Section 4.1(a)
Company Significant Tax Agreement ..... Section 9.10(e)
Company Software ...................... Section 5.2(o)(vii)
Company Software Authors .............. Section 5.2(o)(vii)
Company Stockholders .................. Recitals
Company Stockholders Meeting .......... Section 6.4(a)
Company Superior Proposal ............. Section 6.3(a)
Company Voting Agreement .............. Recitals
iv
Confidentiality Agreement ..................... Section 6.7
Continuing Employees .......................... Section 6.21
Conversion Ratio .............................. Section 4.1(c)
DGCL .......................................... Section 1.1
Dividend Amount ............................... Section 6.1(h)(ii)
EDGAR ......................................... Section 5.1(i)(i)
Effective Time ................................ Section 1.2
Encumbrance ................................... Section 9.10(f)
Environmental Laws ............................ Section 5.1(s) & 5.2(r)
ERISA ......................................... Section 9.10(g)
Exchange Act .................................. Section 5.1(g)
Exchange Agent ................................ Section 4.2(a)
Fees and Expenses ............................. Section 8.5(b)
Fractional Securities Fund .................... Section 4.3
GAAP .......................................... Section 5.1(i)(ii)
Governmental Entity ........................... Section 9.10(h)
Hazardous Material ............................ Section 5.1(s) & 5.2(r)
HSR Act ....................................... Section 5.1(g)
Indemnified Personnel ......................... Section 6.13(a)
Knowledge and Knowing ......................... Section 9.10(i)
Material Adverse Effect ....................... Section 9.10(j)
Merger ........................................ Recitals
Merger Sub .................................... Introduction
NNM ........................................... Section 4.3
Parent ........................................ Introduction
Parent Acquisition Proposal ................... Section 8.5(c)
Parent Common Stock ........................... Section 4.1(a)
Parent Contract ............................... Section 5.1(q)(ii)
Parent Disclosure Schedule .................... Section 5.1
Parent ESPP ................................... Section 5.1(c)(ii)
Parent Embedded Products ...................... Section 5.1(p)(vii)
Parent Equivalents ............................ Section 5.1(c)(ii)
Parent Financial Statements ................... Section 5.1(i)(ii)
Parent Insurance Policies ..................... Section 5.1(u)
Parent Option Plan ............................ Section 5.1(c)(ii)
Parent Plan Affiliate ......................... Section 5.1(o)(i)
Parent Proprietary Rights ..................... Section 5.1(p)(i)
Parent Rights ................................. Section 4.1(a)
Parent Rights Agreement ....................... Section 9.10(k)
Parent SEC Reports ............................ Section 5.1(i)(i)
Parent Scheduled Plans ........................ Section 5.1(o)(i)
Parent Significant Tax Agreement .............. Section 9.10(l)
Parent Software ............................... Section 5.1(n)(vi)(p)
Parent Software Authors ....................... Section 5.1(n)(vi)(p)
Parent Shares ................................. Section 4.1(a)
v
Parent Stock Price .................. Section 4.3
Parent Stockholders ................. Recitals
Parent Stockholders Meeting ......... Section 6.4(b)
Parent Voting Agreement ............. Recitals
Parties ............................. Introduction
Per Share Consideration ............. Section 4.1(a)
Per Share Dividend Amount ........... Section 6.1(h)(ii)
Person .............................. Section 9.10(m)
Price Per Share ..................... Section 4.1(c)
Proprietary Rights .................. Section 5.1(p)(vii) & 5.2(o)(viii)
Proxy Statement ..................... Section 6.5
Representatives ..................... Section 6.3
Restraints .......................... Section 7.1(c)
Returns ............................. Section 9.10(l)
S-4 Effective Date .................. Section 6.5
S-4 Registration Statement .......... Section 6.5
SEC ................................. Section 5.1(i)(i)
Section 16 Information .............. Section 6.15(b)
Securities Act ...................... Section 5.1(c)(iv)
Share Consideration ................. Section 4.2(a)
Stock Market Exchange Fund .......... Section 4.2(a)
Stock Payment ....................... Section 4.1(a)
Subsidiary .......................... Section 9.10(o)
Surviving Corporation ............... Section 1.1
Tax ................................. Section 9.10(p)
Termination Fee ..................... Section 8.5(b)
Transaction ......................... Section 6.2(c)
Transaction Expenses ................ Section 9.1
1996 Option Plan .................... Section 4.1(c)
1999 Option Plan .................... Section 4.1(c)
EXHIBITS
Form of Company Voting Agreement ....................... Exhibit A-1
Form of Parent Voting Agreement ........................ Exhibit A-2
Form of Company Affiliate Letter ....................... Exhibit B
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "AGREEMENT") is made
and entered into as of April 5, 2002, by and among DIVINE, INC., a Delaware
corporation ("PARENT"), DVC ACQUISITION COMPANY, a Delaware corporation and a
direct wholly owned Subsidiary of Parent ("MERGER SUB"), and VIANT CORPORATION,
a Delaware corporation (the "COMPANY"). Parent, Merger Sub and the Company are
referred to collectively herein as the "PARTIES." Capitalized terms used herein
are defined as referenced in the Table of Defined Terms contained herein.
RECITALS
WHEREAS, the Board of Directors of each of Parent, Merger Sub 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 business
combination through the merger of Merger Sub with and into the Company (the
"MERGER") and, in furtherance thereof, have approved the Merger and declared the
Merger advisable to their respective stockholders;
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 set
forth herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "CODE") and that this Agreement shall be a
plan of reorganization within the meaning of Treasury Regulations Section
1.368-2(g);
WHEREAS, concurrently with the execution of this Agreement, as a condition and
inducement to Parent's willingness to enter into this Agreement, all officers
and directors of the Company and their respective affiliates and certain other
principal stockholders of the Company (the "COMPANY STOCKHOLDERS") are entering
into Company Voting Agreements in substantially the form attached hereto as
Exhibit A-1 (the "COMPANY VOTING AGREEMENT"); and
WHEREAS, concurrently with the execution of this Agreement, as a condition and
inducement to the Company's willingness to enter into this Agreement, all
executive officers and directors of Parent and certain affiliates of such
officers and directors (the "PARENT STOCKHOLDERS") are entering into Parent
Voting Agreements in substantially the form attached hereto as Exhibit A-2 (the
"PARENT VOTING 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 be the successor or surviving corporation and shall
continue its existence under the laws of the state of Delaware. The Company, as
the surviving corporation after the consummation of the Merger, shall be
sometimes hereinafter referred to as the "SURVIVING CORPORATION."
1.2 EFFECTIVE TIME. Subject to the provisions of this Agreement, the Parties
shall cause the Merger to be consummated by filing the duly executed certificate
of merger of Merger Sub and the Company (the "CERTIFICATE OF MERGER") with the
Office of 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 the Closing Date, and shall take all other
action required by law to effect the Merger. The Merger shall become effective
upon such filing or at such time thereafter as shall be agreed by the Parties
and provided in the Certificate of Merger (the "EFFECTIVE TIME").
1.3 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Article
VIII, the closing of the Merger (the "CLOSING") shall take place at 10:00 a.m.,
local time, at the offices of counsel for Parent, on the second business day
after all of the conditions to the obligations of the Parties to consummate the
Merger as set forth in Article VII have been satisfied or waived (other than
those conditions that, by their terms, are to be satisfied or waived on the
Closing Date), or such other date, time or place as shall be agreed to in
writing by the Parties (the "CLOSING DATE").
1.4 EFFECT OF THE MERGER. At 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 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
1
Corporation.
1.5 APPRAISAL RIGHTS. In accordance with Section 262 of the DGCL, no appraisal
rights shall be available to the holders of Company Shares in connection with
the Merger.
ARTICLE II
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION; NAME. At the Effective Time, subject to the
provisions of SECTION 6.11 hereof, the certificate of incorporation of the
Surviving Corporation shall be amended and restated in its entirety to be
identical to the certificate of incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, and such certificate of incorporation,
as so amended and restated, shall be the certificate of incorporation of the
Surviving Corporation until thereafter amended in accordance with the DGCL and
such certificate of incorporation (except that the name of the Surviving
Corporation shall be "Viant Corporation").
2.2 BYLAWS. At the Effective Time, the bylaws of Merger Sub in effect
immediately prior to the Effective Time shall be the bylaws of the Surviving
Corporation, until thereafter amended as provided therein and by applicable law.
2.3 ADDITIONAL ACTIONS. If, at any time after the Effective Time, the Surviving
Corporation shall consider or be advised that any further deeds, assignments or
assurances in law or any other acts are necessary or desirable to (a) vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation its
right, title or interest in, to or under any of the rights, properties or assets
of the Company, or (b) otherwise carry out the provisions of this Agreement, the
officers and directors of the Surviving Corporation are authorized to take, and
will take, any and all such lawful actions.
ARTICLE III
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 DIRECTORS. The directors of Merger Sub shall be the initial directors of the
Surviving Corporation, until their respective successors have been duly elected
or appointed and qualified or until their earlier death, resignation or removal
in accordance with the Surviving Corporation's certificate of incorporation and
bylaws.
3.2 OFFICERS. The officers of Merger Sub shall be the initial officers of the
Surviving Corporation, until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's certificate of incorporation and
bylaws.
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
4.1 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 Merger Sub shall be as follows:
(a) Conversion of Company Stock. Subject to the provisions of
SECTION 4.3 hereof, each share of common stock, par value $0.001 per share of
the Company ("COMPANY SHARES") (including the associated Company Rights) issued
and outstanding immediately prior to the Effective Time (excluding any Company
Shares described in SECTION 4.1(d)), 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 an amount per share equal to 3.977 shares (the "STOCK
PAYMENT") of Parent's Class A common stock, par value $0.001 per share (the
"PARENT COMMON STOCK") (and associated rights to purchase Parent's Series A
Junior Participating Preferred Stock, par value $0.001 per share (the "PARENT
RIGHTS")) (rounded down to the nearest full share). The shares of Parent Common
Stock issuable in connection with the Merger and the transactions contemplated
thereby are referred to herein as the "PARENT SHARES," and the Stock Payment,
together with the applicable amount of cash in lieu of fractional shares, are
referred to as the "PER SHARE CONSIDERATION." All Company Shares, together with
the associated Company Rights, to be converted into the Per Share Consideration
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 and the associated Company Rights, except the right to receive
for each of the Company Shares, together with the associated Company Rights,
upon the surrender of such certificate in accordance with Section 4.2, the Per
Share Consideration, as specified above (rounded down to the nearest full
share).
(b) Stock of Merger Sub. Each share of common stock, par value $0.001 per share,
of Merger Sub issued and outstanding immediately
2
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, par value $0.001 per share, 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 Company Options. At the Effective Time, each Company Option,
whether vested or unvested, that is then outstanding and unexercised pursuant to
the Company's 1996 Stock Option Plan (the "1996 OPTION PLAN") and the Company's
1999 Stock Option Plan as amended and restated (the "1999 OPTION PLAN") shall be
assumed by Parent and shall become and represent an option to purchase (an
"ASSUMED OPTION") that number of whole shares of Parent Common Stock (rounded
down to the nearest full share), determined by multiplying (A) the number of
Company Shares subject to such Company Option immediately prior to the Effective
Time by (B) the Conversion Ratio, at a per share exercise price equal to the
exercise price of such Company Option divided the Conversion Ratio rounded up to
the nearest whole cent. Parent shall pay cash to holders of Company Options in
lieu of issuing fractional shares of Parent Common Stock upon the exercise of
Assumed Options for Parent Common Stock. Parent shall reserve a sufficient
number of shares of Parent Common Stock for issuance upon exercise of such
Assumed Options. For purposes hereof, the "CONVERSION RATIO" shall be equal to
the sum of (i) Stock Payment and (ii) the quotient of (A) the Per Share Dividend
Amount and (B) $.55.
(d) Cancellation of Parent Owned and Treasury Stock. Immediately prior to the
Effective Time, all of the Company Shares, together with the associated Company
Rights, that are owned by Parent, any direct or indirect wholly-owned Subsidiary
of Parent or by the Company as treasury stock shall automatically cease to be
outstanding, shall be canceled and shall cease to exist and no Parent Shares
shall be delivered in exchange therefor.
(e) Adjustment for Organic Changes. In the event of any reclassification, stock
split, distribution, stock dividend, reorganization, reclassification,
combination, exchange of shares or other like change with respect to Parent
Common Stock, any change or conversion of Parent Common Stock into other
securities or any other dividend or distribution in Parent Common Stock with
respect to outstanding Parent Common Stock (or if a record date with respect to
any of the foregoing should occur) prior to the Effective Time, appropriate and
proportionate adjustments, if any, shall be made to the number of Parent Shares,
the Stock Payment and the Conversion Ratio, and all references to the number of
Parent Shares, the Stock Payment and the Conversion Ratio in this Agreement
shall be deemed to be to the number of Parent Shares, the Stock Payment and the
Conversion Ratio as so adjusted.
4.2 PAYMENT FOR COMPANY SHARES IN THE MERGER. The manner of making payment for
Company Shares in the Merger shall be as follows:
(a) Exchange Agent. On or prior to the Closing Date, Parent shall make available
to Computershare Investor Services, LLC, or another entity mutually agreed upon
by the Parties (the "EXCHANGE AGENT"), 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 Securities Fund (as defined in SECTION 4.3)
(collectively, the "SHARE CONSIDERATION" and the certificates representing the
Parent Shares comprising such Share Consideration being referred to hereinafter
as the "STOCK MERGER EXCHANGE FUND"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the Per Share Consideration out of the Stock
Merger Exchange Fund and the Fractional Securities Fund, as the case may be. The
Stock Merger Exchange Fund and the Fractional Securities Fund shall not be used
for any purpose other than as set forth in this Agreement.
(b) Exchange Procedures. Promptly after the Effective Time, the Exchange Agent
shall mail to each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding Company Shares
and associated Company Rights (the "CERTIFICATES") (i) a form of letter of
transmittal, in a form reasonably satisfactory to the Parties (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent) and (ii) instructions for use in effecting the surrender of the
Certificates for payment therefor. Subject to SECTION 4.5, upon surrender of
Certificates for cancellation to the Exchange Agent, together with such letter
of transmittal, each duly executed, and any other reasonably required documents,
the holder of such Certificates shall be entitled to receive for each of the
Company Shares and associated Company Rights represented by such Certificates,
the Per Share Consideration, without interest, allocable to such Certificates
and the Certificates so surrendered shall forthwith be canceled. Until so
surrendered, such Certificates shall represent solely the right to receive the
Per Share Consideration allocable to such Certificates.
(c) Distributions with respect to Unexchanged Shares. No dividends or other
distributions on Parent Common Stock having a record date after the Effective
Time and payable to the holders of record thereof after the Effective Time will
be paid to Persons entitled by reason of the Merger to receive Parent Shares
until such Persons surrender their Certificates as provided in SECTION 4.2(b)
above. Upon such surrender, there shall be paid to the Person in whose name the
Parent Shares are issued any dividends or other distributions having a record
date after the Effective Time and payable with respect to such Parent Shares
between the Effective Time and the time of such surrender. After such surrender
there shall be paid to the Person in whose name the Parent Shares are issued any
dividends or other distributions on such Parent Shares which shall have a record
date after the date of such surrender. In no event shall the Persons entitled to
receive such dividends or other distributions be entitled to receive interest on
such dividends or other distributions.
3
(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
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 Per Share Consideration or any
dividend to which the holders thereof are entitled, that are delivered to a
public official pursuant to applicable escheat 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 or the Fractional Securities Fund that 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 Per Share Consideration for their Company Shares.
4.3 CASH IN LIEU OF FRACTIONAL PARENT SHARES. No fractional Parent Shares shall
be issued in the Merger. Each holder of Company Shares and associated Company
Rights shall be entitled to receive in lieu of any fractional Parent Shares to
which such holder otherwise would have been entitled pursuant to SECTION 4.2
(after taking into account all Company Shares and associated Company Rights then
held of record by such holder) a cash payment 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 and (ii) the closing sale price of Parent Common Stock
on the Nasdaq National Market ("NNM") on the trading day immediately prior to
the Effective Time (the "PARENT STOCK PRICE") (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. All Per Share Consideration
issued upon the surrender for exchange of Company Shares and associated Company
Rights in accordance with the terms hereof (including any cash paid in respect
thereof) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such Company Shares and associated Company Rights, and no further
registration of transfers shall be made. If, after the Effective Time,
Certificates are presented to Parent or the Surviving Corporation for any
reason, they shall be canceled and exchanged for the Per Share Consideration as
provided in this Article IV.
4.5 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates
evidencing Company Shares and associated Company Rights shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, the Per Share Consideration with respect thereto, and any
dividends or other distributions to which the holders thereof are entitled;
provided, however, that Parent may, in its reasonable discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates to deliver a customary bond in such sum as it
may reasonably direct as indemnity against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
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 (i) set forth on the
disclosure schedule delivered contemporaneously with this Agreement by Parent to
the Company (the "PARENT DISCLOSURE SCHEDULE"), which statements shall be deemed
to be representations and warranties as if made hereunder, or (ii) set forth in
Parent's SEC Reports (as defined herein) filed as of the date hereof. The Parent
Disclosure Schedule shall be arranged in sections and paragraphs corresponding
to the lettered and numbered paragraphs contained in this SECTION 5.1, and the
disclosure in any paragraph shall qualify any paragraph in this SECTION 5.1 and
other paragraphs or sections to which it is reasonably apparent (from a plain
reading of the disclosure) that such disclosure relates.
(a) Corporate Organization and Qualification. Each of Parent and its
Subsidiaries is an entity duly organized, validly existing and in good standing
under the laws of its jurisdiction of formation and is qualified and in good
standing as a foreign entity in each jurisdiction where the properties owned,
leased or operated, or the business conducted, by it require such qualification,
except where failure to be so qualified or in good standing as a foreign entity
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Parent. Parent and each of its Subsidiaries have all
requisite power and authority (corporate or otherwise) to own their respective
properties and to carry on their respective businesses as they are now being
conducted. Set forth in
4
SECTION 5.1(a) of the Parent Disclosure Schedule is a listing of each of the
Subsidiaries of the Parent and the jurisdiction of formation of each such
subsidiary. Each of Parent and Merger Sub has heretofore delivered or made
available to the Company complete and correct copies of its charter documents
and bylaws, each as amended to date.
(b) Operations of Merger Sub. 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.
(c) Capitalization.
(i) The authorized capital stock of Parent consists of (i) 2,500,000,000 shares
of Parent Common Stock, of which 462,667,911 shares were issued and outstanding
on April 3, 2002, (ii) 100,000,000 shares of Class C common stock, par value
$0.001 per share, none of which were issued and outstanding on the date hereof,
and (iii) 50,000,000 shares of preferred stock, par value $0.001 per share,
500,000 shares of which have been designated Series A Junior Participating
Preferred Stock for issuance in connection with Parents Shareholders Rights
Plan, as amended. No shares of preferred stock are issued and outstanding as of
the date hereof. All of the outstanding shares of capital stock of Parent have
been duly authorized and validly issued and are fully paid and nonassessable.
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 Encumbrances of any nature. The
authorized capital stock of Merger Sub consists of 1,000 shares of common stock,
par value $0.001 per share, 1,000 shares of which are issued and outstanding and
held by Parent.
(ii) The Parent has no outstanding stock appreciation rights, phantom stock or
similar rights. As of the date of this Agreement, except for (A) the Parent
Rights and (B) options to purchase 62,712,899 Parent Shares issued pursuant to
the Parent's 1999 Option Plan, options to purchase 26,914,142 Parent Shares
issued pursuant to the Parent's 2001 Option Plan and 1,342,613 Parent Shares
reserved for issuance pursuant to the Parent's 2000 Employee Stock Purchase Plan
("PARENT ESPP" and collectively with the Parent's 1999 Stock Option and 2001
Stock Option Plans the "PARENT OPTION PLANS"), there are no outstanding or
authorized options, warrants, calls, rights (including preemptive rights),
commitments or any other agreements of any character which the Parent or any of
its Subsidiaries is a party to, or may be bound by, allowing it or 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 Parent or any of its Subsidiaries (the "PARENT EQUIVALENTS"). Set forth in
SECTION 5.1(c)(ii) of the Parent Disclosure Schedule is a list, as of the date
hereof, of the outstanding Parent Equivalents, the name of the holder of such
Parent Equivalents and the plan or agreement pursuant to which such Parent
Equivalent is outstanding. Pursuant to the Parent Option Plans and the Parent
Equivalents, Parent has reserved for issuance a sufficient number of Parent
Common Stock for delivery upon exercise of the Parent Options or Parent
Equivalents and all of the Parent Common Stock to be issued upon exercise of the
Parent Options have been registered under the Securities Act pursuant to a
registration statement on Form S-8 which registration statement has been
declared and remains effective. Since December 31, 2001, no Parent Options or
Parent Equivalents have been accelerated or had their terms materially modified.
(iii) Except as contemplated by this Agreement, there are no stockholder
agreements, voting trusts or other agreements or understandings to which the
Parent is a party or to which it is bound relating to the voting of any shares
of the capital stock of the Parent.
(iv) There are no existing rights with respect to the registration of Parent
Common Stock under the Securities Act of 1933, as amended and the rules and
regulations promulgated thereunder (the "SECURITIES ACT"), whose holders may
request Parent register their shares of Parent Common Stock contemporaneously
with the registration of Parent Shares issued pursuant to the transactions
contemplated by this Agreement.
(d) Listings. Parent's securities are not listed, or quoted, for trading on any
U.S. domestic or foreign securities exchange or quotation service, other than
the NNM. Parent has not received any communications (whether written or oral)
from the NASD that it does not meet the listing qualifications of the NNM.
(e) Authority Relative to this Agreement. The Board of Directors of Merger Sub
has approved this Agreement and declared it, the Merger and the transactions
contemplated hereby advisable, and Merger Sub has duly and validly authorized
this Agreement and the consummation by it of the transactions contemplated
hereby 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 approved
this Agreement and declared it, the Merger and the transactions contemplated
hereby and the related issuance of Parent Shares advisable, has duly and validly
authorized this Agreement and the consummation by Parent of the transactions
contemplated hereby and Parent has the requisite corporate power and authority
to approve, authorize, execute and deliver this Agreement and, upon adoption of
this Agreement by the stockholders of Parent, to consummate the transactions
contemplated hereby. No other corporate proceedings on the part of Parent or
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby, other than the approval of this Agreement and
the Merger by the stockholders of Parent in accordance with the DGCL and the
rules of the NNM. This Agreement and the consummation by Parent and Merger Sub
of
5
the transactions contemplated hereby have been duly and validly authorized by
the Boards of Directors of Parent and Merger Sub and by Parent as the sole
stockholder of Merger Sub. 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 each entity 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.
(f) Present Compliance with Obligations and Laws. Neither Parent nor any of its
Subsidiaries is: (i) in violation of its certificate of incorporation, bylaws or
similar charter 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 (A)
accelerate any indebtedness, (B) place an Encumbrance upon any of the material
assets of Parent or any Subsidiary, (C) terminate any material right existing
under any such obligation, agreement condition or debt instrument, or (D) seize
or sell (through any means) any of the material assets of Parent or any of its
Subsidiaries; (iii) in default under or breach of (with or without the passage
of time or the giving of notice, or both) 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) (other than laws relating to employment matters) applicable to it or
its business or assets, except where any violation, default or breach under
items (ii), (iii), or (iv) could not reasonably be expected to, individually or
in the aggregate, have a Material Adverse Effect on Parent.
(g) Consents and Approvals; No Violation. Neither the execution and delivery of
this Agreement by Parent and Merger Sub nor the consummation by Parent and
Merger Sub 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 charter 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 or regulatory authority, in each case, by or
on behalf of Parent or any of its Subsidiaries, 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, the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"EXCHANGE ACT"), and the NNM, (C) the filing of the Certificate of Merger
pursuant to the DGCL and appropriate documents with the relevant authorities of
other states in which Parent is authorized to do business, (D) as may be
required by any applicable state securities laws, (E) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under the antitrust or competition laws of any foreign country, or (F)
where the failure to obtain such consent, approval, authorization or permit, or
to make such registration, filing or notification, could not reasonably be
expected to, individually or in the aggregate, have a Material Adverse Effect on
Parent or adversely affect the ability of Parent 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) which, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on Parent or adversely affect the
ability of Parent to consummate the transactions contemplated hereby; (iv) cause
the suspension or revocation of any authorizations, consents, approvals or
licenses currently in effect which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Parent; or (v)
assuming the consents, approvals, authorizations or permits and registrations,
filings or notifications referred to in SECTION 5.1(g)(ii) are duly and timely
obtained or made, 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, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect on
Parent or adversely affect the ability of Parent to consummate the transactions
contemplated hereby.
(h) 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 individually or in the aggregate, (i) could
reasonably be expected to have a Material Adverse Effect on Parent, or (ii)
materially and adversely affects Parent's ability to consummate the transactions
contemplated by this Agreement. Neither Parent nor any of its Subsidiaries is
subject to any outstanding judgment, order, writ, injunction or decree which (A)
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 ability to perform its
obligations under this Agreement or (B), individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Parent. SECTION
5.1(h) of the Parent Disclosure Schedule lists each action, suit, claim,
investigation or proceeding of which (i) Parent has Knowledge and (ii) is for an
amount greater than $50,000.
(i) SEC Reports; Financial Statements.
(i) Except for documents related to the transactions contemplated hereby, Parent
has filed all forms, reports and documents and all amendments thereto 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 in effect as of the time of such filing or amendment, all of which
when filed complied as to form in all material respects with all applicable
requirements of the Securities Act and the Exchange Act (collectively, the
"PARENT SEC REPORTS"), and all of which are available through the SEC's
Electronic Data Gathering and
6
Retrieval System ("EDGAR"). None of the Parent SEC Reports, including, without
limitation, any financial statements or schedules included therein, at the time
filed (or if amended, supplemented 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) When filed with the SEC, 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") compiled as to form in all
material respects with U.S. generally accepted accounting principles ("GAAP")
and the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with GAAP applied on a consistent basis throughout, or
for, the periods stated therein (except in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act), and presented fairly, in all material respects, 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, except that the unaudited interim
financial statements do not include footnote disclosure of the type associated
with audited financial statements and were or are subject to normal and
recurring year-end adjustments that were not or are not expected to be material
in amount, type or effect.
(iii) Since December 31, 2001, there has not been any material change, by Parent
or any of its Subsidiaries, in accounting principles, methods or policies,
except as required by GAAP. There are no material amendments or modifications to
agreements, documents or other instruments, which previously had been filed by
Parent with the SEC pursuant to the Securities Act or the Exchange Act, which
have not been filed with the SEC but which are required to be filed.
(j) No Liabilities. Neither Parent nor any of its Subsidiaries has any
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
or contingent, and whether due or to become due or asserted or unasserted), and,
to the Knowledge of Parent, there is no reasonable basis for the assertion of
any claim with respect to any indebtedness, obligation or liability of any
nature against the Parent or any of its Subsidiaries, except for indebtedness,
obligations and liabilities (i) which are fully reflected in, adequately
reserved against or otherwise described in the most recent Parent Financial
Statements, (ii) which have been incurred after the most recent Parent Financial
Statements in the ordinary course of business consistent with past practice,
(iii) which are obligations to perform under executory contracts in the ordinary
course of business (none of which is a liability resulting from a breach of
contract or warranty, tort, infringement or legal action), or (iv) except as
otherwise required to be disclosed pursuant to (i)-(iii) above which,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect on Parent.
(k) Absence of Certain Changes of Events. Except for actions expressly
contemplated by this Agreement since December 31, 2001, Parent and each
Subsidiary has conducted its business only in the ordinary course and, since
such date, there has not been (i) any Material Adverse Effect on Parent, (ii)
any damage, destruction or loss of assets of the Parent or any of its
Subsidiaries (whether or not covered by insurance) that has had or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent, (iii) any material revaluation by Parent or any of its
Subsidiaries of any of their respective assets, including, without limitation,
writing down the value of capitalized software or inventory or deferred tax
assets or writing off notes or accounts receivable except in the ordinary course
of business consistent with past practice; or (iv) any other action or event
that would have required the consent of the Company pursuant to SECTION 6.2 had
such action or event occurred after the date of this Agreement.
(l) Brokers and Finders. Neither Parent 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.
(m) S-4 Registration Statement and Proxy Statement. None of the information
supplied or to be supplied by Parent for inclusion or incorporation by reference
in the S-4 Registration Statement or the 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 Proxy
Statement, at the time of the mailing of the Proxy Statement, at the time of the
Company Stockholders Meeting and Parent Stockholders Meeting and 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, 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, its Subsidiaries, or any of their respective affiliates,
officers and directors should occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4 Registration
Statement, Parent shall promptly inform the Company so that such event may be so
described and such amendment or supplement promptly filed with the SEC and, as
required by law, disseminated to the stockholders of the Company and Parent, if
necessary. The S-4 Registration Statement will (with respect to Parent (on a
consolidated basis) and Merger Sub) comply as to form in all material respects
with the requirements of the Securities Act. The Proxy Statement will (with
respect to Parent (on a consolidated basis) and Merger Sub) comply as to form
with the requirements of the Exchange Act. Notwithstanding the foregoing, Parent
and Merger Sub make no representation or warranty with respect to any
information supplied by, or related to, the Company or any of its affiliates or
advisors, which is contained in any of the foregoing, documents.
7
(n) Taxes.
(i) Parent and each of its Subsidiaries have timely filed (after taking into
account any extensions to file) all material federal, state, local and foreign
Returns required by applicable Tax law to be filed by Parent and each of its
Subsidiaries. All such Returns are true and correct in all material respects and
have been completed in accordance with applicable law. All Taxes owed by Parent
or any of its Subsidiaries have been paid other than Taxes that in an aggregate
amount would not be material to (i) Parent and its Subsidiaries, taken as a
whole or (ii) Parent's software business or management hosting business. Other
than any reserve for deferred Taxes established to reflect timing differences
between book and Tax treatment, Parent has made accruals for Taxes on the Parent
Financial Statements that are adequate to cover any Tax liability of Parent and
each of its Subsidiaries determined in accordance with GAAP through the date of
the most recent Parent Financial Statements, other than accruals for Taxes in an
aggregate amount that would not be material to (i) Parent and its Subsidiaries,
taken as a whole or (ii) Parent's software business or management hosting
business, and has not incurred any Tax liability since the date of the most
recent Parent Financial Statements other than in the ordinary course of
business. To Parent's Knowledge, there is no reasonable basis for the assertion
of any claims for Taxes that if adversely determined would be material, either
individually or in the aggregate, to (i) Parent and its Subsidiaries, taken as a
whole, or (ii) Parent's software business or managed hosting business.
(ii) Parent and each of its Subsidiaries have withheld with respect to its
employees, creditors, independent contractors, stockholders or other parties all
Taxes required to be withheld and has timely paid over such Taxes to the
appropriate Governmental Authority.
(iii) There is no Tax deficiency outstanding, assessed, or to Parent's
Knowledge, proposed against Parent or any of its Subsidiaries other than Tax
deficiencies (A) that are not material to (x) Parent and its Subsidiaries, taken
as a whole and (y) Parent's software business and management hosting business or
(B) with recent to which a reserve has been established in the Parent Financial
Statement for the period ending December 31, 2001. 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 Tax that is
still in effect. There are no liens for Taxes on the assets of Parent or of any
of its Subsidiaries other than with respect to Taxes not yet due and payable.
(iv) To Parent's Knowledge, no claim has ever been made by a Governmental Entity
in a jurisdiction where any of Parent and its Subsidiaries do not file Tax
Returns that Parent or any of its Subsidiaries is or may be subject to taxation
by that jurisdiction.
(v) No 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
either in writing or orally of any request for any such Tax audit or other
examination.
(vi) 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 the Parent.
(vii) 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 the Parent or any Subsidiary or (B) any Parent Significant Tax
Agreement other than any Parent Significant Tax Agreement described in (A).
(viii) Except for the group of which Parent and its Subsidiaries are now
presently members, neither the 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. None of Parent or any of its Subsidiaries has any liability
for the Taxes of any person (other than the Parent or any of its Subsidiaries)
under Treasury Regulationss. 1.1502-6 (or any similar provision of state, local,
or foreign law), as a transferee or successor, by contract, or otherwise. There
is no excess loss account, deferred intercompany gain or loss, or intercompany
items as such terms are defined in the regulations promulgated under the Code,
that exist with respect to Parent or any of its Subsidiaries.
(ix) Neither Parent nor any of its Subsidiaries is a party to any joint venture,
partnership or, to Parent's Knowledge, any other arrangement or contract that
could be treated as a partnership for federal income tax purposes.
(x) None of Parent or its Subsidiaries will be required to include any item of
income in, or exclude any item of deduction from, taxable income for any taxable
period (or portion thereof) ending after the Closing Date as a result of any:
(A) change in method of accounting for a taxable period ending on or prior to
the Closing Date under Section 481 of the Code (or any corresponding or similar
provision of state, local or foreign income Tax law); or (B) "closing agreement"
as described in Section 7121 of the Code (or any corresponding or similar
provision of state, local or foreign income Tax law) executed on or prior to the
Closing Date.
(xi) There are no outstanding rulings of, or requests for rulings with any Tax
authority expressly addressed to Parent or its Subsidiaries that are, or if
issued would be, binding on Parent or any of its Subsidiaries.
(xii) In the past five (5) years, none of Parent or its Subsidiaries has
distributed a corporation in a transaction that is reported to qualify
8
under Section 355 of the Code, or been distributed in a transaction that is
reported to qualify under Section 355 of the Code.
(o) Employee Benefits.
(i) For purposes hereof, the term "PARENT SCHEDULED PLANS" means 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 or material fringe benefit,
severance agreement or plan or any pension benefit plan, excess benefit plan,
bonus, stock option, stock purchase or other incentive plan, tuition
reimbursement, automobile use, club membership, parental or family leave, top
hat plan or deferred compensation plan, salary reduction agreement,
change-of-control agreement, employment 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 currently maintained, sponsored, adopted or
administered by Parent or any Subsidiary or any current or former Parent Plan
Affiliate or to which Parent or any current or former Parent Plan Affiliate has
made contributions to, obligated itself or has any liability (whether accrued,
absolute, contingent or otherwise, and whether due or to become due or asserted
or unasserted) with respect thereto. A "PARENT PLAN AFFILIATE" is each entity
that is, or has ever been, treated as a single employer with Parent pursuant to
Section 4001 of ERISA or Section 414 of the Code. Parent has provided or made
available to the Company or its counsel current copies of all employee manuals
of Parent and its Subsidiaries that include personnel policies applicable to any
of their respective employees.
(ii) Parent has made available to the Company or its counsel 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 three (3)
most recent plan years, 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 current summary plan description and summary of material
modifications thereto with respect to each such plan and Form 5310. SECTION
5.1(o) of the Parent Disclosure Schedule contains a description of the material
terms of any material unwritten Parent Scheduled Plan as currently in effect as
of the date hereof.
(iii) To Parent's Knowledge as of the date hereof, each Parent Scheduled Plan
(1) has been in material compliance in form and in operation with the material,
applicable requirements of ERISA and the Code, and any other material legal
requirements; and (2) has been and is operated and administered in compliance
with its terms (except as otherwise required by law). Each Parent Scheduled Plan
which is intended to be qualified under Section 401(a) of the Code has received,
or has remaining a period of time to comply for a favorable determination letter
or other recognition of exemption from the Internal Revenue Service on which
Parent can rely.
(iv) 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).
(v) None of the Parent or any current or former Parent Plan Affiliate has at any
time participated in, made contributions to or had any other liability,
including contingent liability, with respect to any Parent Scheduled Plan which
is a "multi-employer plan" as defined in Section 4001 of ERISA, a
"multi-employer 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.
(vi) No Parent Scheduled Plan provides, or reflects or represents any liability
to provide retiree health coverage to any person for any reason, except as may
be required by COBRA or applicable state insurance laws, and neither Parent nor
any Parent Plan Affiliate has any liability (whether accrued, absolute,
contingent or otherwise, and whether due or to become due to asserted or
unasserted) to any current or former employee, or director (either individually
or as a group) to provide retiree health coverage, except to the extent required
by applicable continuation coverage statutes, laws or ordinances.
(vii) With respect to any Parent Scheduled Plan which is a welfare plan as
defined in Section 3(1) of ERISA, there is no disqualified benefit (as such term
is defined in Code Section 4976(b)) which would subject Parent or any Parent
Plan Affiliate to a tax under Code Section 4976(a).
(viii) Other than by reason of actions taken following the Closing, neither the
execution of this Agreement nor the consummation of the transactions
contemplated by this Agreement will (1) entitle any current or former employee
of Parent to a material amount of (i) severance pay, (ii) unemployment
compensation or (iii) any other payment, (2) 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 (3) give rise to the payment of
any amount that would not be deductible pursuant to the terms of Section 280G of
the Code.
(p) Parent Intangible Property.
9
(i) Parent and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, sell or license, as applicable, all
Proprietary Rights (excluding in each case Proprietary Rights in Commercial
Software) used, sold, distributed or licensed in or as a part of the business of
the Parent or its Subsidiaries as currently conducted (the "PARENT PROPRIETARY
RIGHTS").
(ii) Except for Commercial Software and Parent Embedded Products for which
Parent has valid licenses which are adequate for the conduct of Parent's
business as conducted as of the date hereof, Parent or one of its Subsidiaries
either (1) is the sole and exclusive owner of the Parent Proprietary Rights
(free and clear of any Encumbrances), and has sole and exclusive rights therein;
or (2) has a valid, effective written license for the use and/or distribution of
the material covered thereby in connection with the services and/or products in
respect of which such Parent Proprietary Rights are currently being used
including without limitation any licenses with other Subsidiaries that are
necessary or appropriate therefor.
(iii) To Parent's Knowledge, Parent and its Subsidiaries have not infringed or
otherwise violated any Proprietary Rights of any third Persons and none of the
products or services marketed, developed or sold by Parent or its Subsidiaries
infringes or otherwise violates any Proprietary Rights of any third Persons.
(iv) No actions, suits, claims, investigations or proceedings with respect to
the Parent Proprietary Rights are pending or, to the Knowledge of the Parent,
threatened by any Person (A) alleging that the manufacture, sale, licensing,
distributing or use of any product or service of Parent or its Subsidiaries as
now manufactured, sold, licensed, distributed or used by the Parent and its
Subsidiaries infringes or otherwise violates any Proprietary Rights of any third
Persons or (B) challenging the ownership by the Parent, validity or
effectiveness of any such Parent Proprietary Rights.
(v) Parent has taken reasonable security measures to safeguard and maintain its
rights in the trade secrets included in Parent Proprietary Rights. To Parent's
Knowledge, Parent or any Subsidiary trade secrets and all copies of the source
code to Parent Software are physically in the control of an escrow agent or
Parent at Parent's facilities. All officers, employees, contractors and
consultants of Parent or its Subsidiaries who have access to proprietary
information have executed and delivered to Parent an agreement regarding the
protection of proprietary information. All officers, employees, contractors and
consultants of Parent or its Subsidiaries have executed and delivered to Parent
an agreement regarding the assignment to or ownership by Parent of all Parent
Proprietary Rights arising from the services performed for Parent by such
Persons. To the Knowledge of Parent, no current or prior officers, employees or
consultants of Parent claim, and Parent is not aware of any reasonable grounds
to assert a claim to, any ownership interest in any Parent Proprietary Right as
a result of any services performed for Parent or its Subsidiaries, including,
but not limited to, involvement in the development of any property embodying any
Parent Proprietary Rights, while employed by or consulting to Parent or
otherwise.
(vi) All authors of the software, programs and applications included in Parent
Proprietary Rights, other than Parent Embedded Products (the "PARENT SOFTWARE")
and any other Person who participated in the development of Parent Software or
any portion thereof (such authors and other persons or entities are collectively
referred to as the "PARENT SOFTWARE AUTHORS") made his or her contribution to
Parent Software (a) within the scope of employment with Parent or any
Subsidiary, as a "work made for hire", or (b) as a consultant who assigned all
rights to such Parent Software to Parent or any Subsidiary.
(vii) For the purpose of this SECTION 5.1(P), the following terms have the
following definitions: (A) the term "COMMERCIAL SOFTWARE" means packaged
commercially available software programs generally available to the public which
have been licensed to Parent or a Subsidiary pursuant to end-user licenses that
permit the use of such programs without a right to modify, distribute or
sublicense the same; (B) the term "PARENT EMBEDDED PRODUCTS" means third-party
software incorporated in any existing product or service of Parent or a
Subsidiary; and (C) the term "PROPRIETARY RIGHTS" means (1) patents and patent
applications (including all reissuances, continuations, continuations-in-part,
revisions, extensions and reexaminations thereof), patent disclosures and rights
in inventions (whether patentable or unpatentable), (2) trademarks, service
marks, trade dress, trade names, rights in Internet domain names and corporate
names, registrations and applications for registration thereof, and all goodwill
symbolized by and associated therewith, (3) copyrights and registrations and
applications for registration thereof, (4) rights in computer software, data and
documentation (in both source code and object code form) (including Parent
Embedded Products), (5) rights in trade secrets and other confidential and
proprietary information, catalogs, product designs, specifications, business
plans, processes, formulae, methods, schematics, know-how, sales data, marketing
data, lists of customers, suppliers and potential customers and suppliers and
copyrightable works, (6) other confidential and proprietary intellectual
property rights, and (7) all renewals, extensions, revivals and resuscitations
thereof.
(q) Agreements, Contracts and Commitments; Material Contracts.
(i) Neither Parent nor any of its Subsidiaries is a party to or is bound by:
(1) any contract relating to the borrowing of money or the guaranty of another
Person's borrowing of money other than (A) indebtedness arising in connection
with trade payables incurred in the ordinary course of business consistent with
past practice or (B) as reflected on the most recent Parent Financial
Statements;
10
(2) any purchase requirement contract or other similar agreement with
obligations due on or before September 30, 2002, which obligations,
individually, are greater than or equal to $1,000,000.
(3) any contract for capital expenditures in excess of $1,000,000;
(4) any agreement, contract or commitment currently in force relating to the
disposition or acquisition of material assets not in the ordinary course of
business;
(5) any agreement of indemnification or guaranty by the Parent or any of its
Subsidiaries (excluding those agreements required to be disclosed pursuant to
(1) above) other than indemnification agreements between Parent or any of its
Subsidiaries and any of its officers or directors in standard forms previously
provided to the Company or its counsel;
(6) any agreement, contract or commitment containing any covenant limiting the
freedom of the 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 or materially limiting Parent's
use or exploitation of the Parent Proprietary Rights;
(7) any agreement, contract or commitment for the purchase of any ownership
interest in any corporation, partnership, joint venture or other business
enterprise; or
(8) any joint venture, partnership, and other contract involving a sharing of
profits or losses by the Parent or any of its Subsidiaries with any other
Person.
(ii) A true, accurate and complete copy (including all material amendments
thereto) of each agreement, contract, obligation, promise or undertaking set
forth in SECTION 5.1(Q) of the Parent Disclosure Schedule and to which the
Parent or any Subsidiary is a party or by which Parent or any Subsidiary or
their respective assets is or may become bound (a "PARENT CONTRACT"), or a
summary of each oral contract, has been made available to the Company or its
counsel. Each Parent Contract is in full force and effect as to Parent or any
Subsidiary and to Parent's or Subsidiaries' Knowledge as to the other
contracting parties. No condition exists or event has occurred that, (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 to terminate, any Parent Contract, except as could not, individually
or in the aggregate, be reasonably expected to result in a Material Adverse
Effect on Parent.
(r) Unlawful Payments and Contributions. To the Knowledge of Parent, neither
Parent, any Subsidiary of Parent nor any of their respective directors,
officers, employees or agents has, with respect to the businesses of Parent or
its Subsidiaries, (i) used any funds for any unlawful contribution, endorsement,
gift, entertainment or other unlawful expense relating to political activity;
(ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee; (iii) violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made
any bribe, rebate, payoff, influence payment, kickback or other unlawful payment
to any Person or entity.
(s) Environmental Matters. (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 the Parent alleging the violation of any
Environmental Law and neither the Parent nor any Subsidiary of the Parent has
received written 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 a Material Adverse Effect on the
Parent; (iii) to the Knowledge of Parent, there are no facts or circumstances
which could result in any environmental liability which could reasonably be
expected to result in a Material Adverse Effect on Parent; (iv) neither the
Parent nor any of its Subsidiaries has ever generated, transported, treated,
stored, handled or disposed of any Hazardous Material in a manner which,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect on the Parent; (v) except in compliance with
Environmental Laws and in a manner that could not reasonably be expected to
subject the Parent or any Subsidiary to material liability, to the Knowledge of
the Parent, no Hazardous Materials are present on, in, at or under any real
property currently owned or leased by the Parent or any of its Subsidiaries or
were present on, in, at or under any other real property at the time it ceased
to be owned or leased by the Parent or any of its Subsidiaries (including
without limitation, containment by means of any underground or aboveground
storage tank); (vi) except as set forth in section 5.1(s) of the Parent
Disclosure Schedule, to the Knowledge of Parent, there are no underground
storage tanks, asbestos which is friable or likely to become friable or PCBs
present on any real property currently owned or leased by the Parent or any of
its Subsidiaries or as a consequence of the acts of the Parents, its
Subsidiaries, or their agents. For the purpose of this SECTION 5.1(S) the
following terms have the following definitions: (X) "ENVIRONMENTAL LAWS" means
any applicable federal, state, local or foreign law (including common law),
statute, code, ordinance, rule, regulation or other requirement relating to the
environment, natural resources, or public or employee health and safety as
amended to date; and (Y) "HAZARDOUS 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, other than substances contained in
janitorial supplies or office products.
11
(t) Title to Properties; Liens; Condition of Properties. Parent and its
Subsidiaries have good title to, or a valid leasehold interest in, the real and
personal property, shown on the most recent Parent Financial Statements or
acquired after the date thereof. None of the property owned, leased or used by
Parent or any of its Subsidiaries is subject to any mortgage, pledge, deed of
trust, lien, conditional sale agreement, security title, encumbrance, or other
adverse claim or interest of any kind (other than any of the foregoing with
respect to (i) taxes not yet due and payable, (ii) matters which do not
materially and adversely affect the use, value or operation of such property,
and (iii) liens or encumbrances against any landlord's or owner's interest in
any leased property). Since December 31, 2001, 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 course of
business consistent with past practices.
(u) Insurance. All insurance policies (including "self-insurance" programs) now
maintained by Parent or any Subsidiary (the "PARENT INSURANCE POLICIES") are in
full force and effect as to Parent or its Subsidiaries, neither Parent nor any
Subsidiary is in default under any of the Parent Insurance Policies, and no
claim for coverage under any of the Parent Insurance Policies has been denied.
Parent has not received any written notice of cancellation or intent to cancel
or increase or intent to increase premiums with respect to such insurance
policies nor, to the Knowledge of Parent, is there any reasonable basis for any
such action.
(v) Labor and Employee Relations.
(i) 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;
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 to the
Knowledge of Parent, there is no active or current union organization activity
involving the employees of Parent or any Subsidiary, nor has there ever been
union representation involving employees of Parent or any of its Subsidiaries.
(ii) Parent and each Subsidiary have made available to the Company or its
counsel a description of all written employment policies under which the Parent
or any of its Subsidiaries currently operates.
(iii) To Parent's Knowledge, Parent and each of its Subsidiaries is in
compliance with all Federal, foreign (as applicable), state, or other applicable
laws regarding employment practices, including laws relating to workers' safety,
sexual harassment or discrimination, except where the failure to so be in
compliance, individually or in the aggregate, would not have a Material Adverse
Effect on Parent.
(iv) To the Knowledge of Parent, no employee who is one of the twenty (20) most
highly compensated employees of Parent and its Subsidiaries, including base
salary but excluding commissions and bonuses based on 2001 base salary, has any
plans to terminate his or her employment with Parent or any of its Subsidiaries.
(w) Transactions with Affiliates. Since the date of Parent's last proxy
statement to its stockholders filed pursuant to Section 14 of the Exchange Act
(and the rules and regulations thereunder) for the sole purpose of convening
Parent's annual meeting of stockholders, no event or transaction has occurred
that would be required to be reported by the Parent pursuant to Item 404 of
Regulation S -K promulgated by the SEC.
(x) Permits. Parent and each of its Subsidiaries hold all licenses, permits,
registrations, orders, authorizations, approvals and franchises that 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 could not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on Parent. All
such licenses, permits, registrations, orders, authorizations, approvals and
franchises are now, and will be immediately after the Effective Time, valid and
in full force and effect, 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 could not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on Parent.
Neither Parent nor any of its Subsidiaries has received any written 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 failure could not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on Parent.
(y) Investment Company Act. Neither Parent nor any of its Subsidiaries (when
taken together as a whole) has been or currently is an "investment company"
within the meaning of that term as used in the Investment Company Act of 1940,
as amended.
(z) Board Recommendation. The Board of Directors of Parent, at a meeting duly
called and held on April 4, 2002, has approved this Agreement and (i) determined
that this Agreement and the transactions contemplated hereby, including the
Merger, taken together are fair to and in the best interests of Parent and the
stockholders of Parent and declared the Merger to be advisable; (ii) approved
this Agreement; and (iii) resolved to recommend that the stockholders of Parent
approve the issuance of Parent Shares in connection with the Merger and the
transactions contemplated hereby.
12
(aa) Tax Treatment. Neither Parent nor any of its affiliates has taken any
action or knows of any fact, agreement, plan or other circumstance that is
reasonably likely to prevent the Merger from qualifying as a reorganization
under the provisions of Section 368(a) of the Code.
(bb) Opinion of Parent Financial Advisor. Parent has received the opinion of US
Bancorp Piper Jaffray, dated the date of this Agreement, to the effect that, as
of such date, the consideration to be paid in the Merger by Parent is fair to
Parent from a financial point of view, a signed copy of which opinion has been
delivered to the Company, and such opinion has not been amended, modified or
revoked in a manner adverse to the Company. Parent has been authorized by US
Bancorp Piper Jaffray to permit the inclusion of such fairness opinion (and,
subject to prior review and consent by US Bancorp Piper Jaffray, a reference
thereto) in the Proxy Statement.
(cc) Parent Rights Agreement. Parent has made available to Company or its
counsel a complete and correct copy of the Parent Rights Agreement, including
all exhibits and amendments thereto. Parent has taken, and as soon as
practicable after the date hereof, Parent will use commercial reasonable efforts
to cause the Parent Rights Agent to take, all actions reasonably necessary or
appropriate to amend the Rights Agreement to ensure that the execution of this
Agreement, the Merger and the other transactions contemplated in this Agreement
will not cause (i) Company or any of its Affiliates to be considered an
Acquiring Person (as defined in the Parent Rights Agreement), (ii) the
occurrence of the Distribution Date or Stock Acquisition Date (each as defined
in the Parent Rights Agreement) or (iii) the separation of the Parent Rights
from the underlying Parent Shares, and will not give the holders thereof the
right to acquire securities of any party thereto.
(dd) Change of Control. No change-of-control or other similar provision of any
agreement to which Parent or any Subsidiary is a party (i) has been triggered by
prior issuances of Parent Common Stock or (ii) will be triggered by the
transactions contemplated by this Agreement.
(ee) Future Operations. The operation of the business of Parent or any of its
Subsidiaries (individually or taken as a whole) as currently conducted or as
proposed to be conducted do not and will not violate the Consulting and
Non-Compete Agreements by and between Computer Associates and (i) Andrew
Filipkowski, (ii) Michael Cullinane or (iii) Paul Humanansky.
(ff) WARN Obligation. All reductions in force performed by the Parent or any
Subsidiary (individually or taken as a whole) have been in compliance with the
Worker Adjustment Retraining and Notification Act.
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 (i) set forth on the
disclosure schedule delivered contemporaneously with this Agreement by Parent to
the Company (the "COMPANY DISCLOSURE SCHEDULE"), which statements shall be
deemed to be representations and warranties as if made hereunder, or (ii) set
forth in Company's SEC Reports (as defined herein) filed as of the date hereof.
The Company Disclosure Schedule shall be arranged in sections and paragraphs
corresponding to the lettered and numbered paragraphs contained in this SECTION
5.2, and the disclosure in any paragraph shall qualify any paragraph in this
SECTION 5.2 and other paragraphs or sections to which it is reasonably apparent
(from a plain reading of the disclosure) that such disclosure relates.
(a) Corporate Organization and Qualification. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and is 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 the failure to be so qualified or in good
standing as a foreign corporation could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on Company. Each of the
Company and its Subsidiaries has all requisite power and authority (corporate or
otherwise) to own its properties and to carry on its business as it is now being
conducted. Set forth in SECTION 5.2(a) of the Company Disclosure Schedule is a
listing of each of the Subsidiaries of the Company, the jurisdiction of
formation of each such subsidiary, and a listing of the foreign jurisdictions in
which each such Subsidiary is qualified. The Company has heretofore delivered or
made available to Parent complete and correct copies of its certificate of
incorporation and bylaws and the charter documents of its Subsidiaries, each as
amended as of the date hereof.
(b) Capitalization.
(i) The authorized capital stock of the Company consists of (A) 200,000,000
shares of common stock, par value $0.001 per share, of which 48,997,092 shares
were issued and outstanding on April 2, 2002, and (B) 5,000,000 shares of
preferred stock, par value $0.001 per share, 1,000,000 of which have been
designated Series A Participating Preferred Stock for issuance in connection
with the Company Rights. No shares of preferred stock are issued and outstanding
on the date hereof. All of the outstanding shares of capital stock of the
Company and its Subsidiaries have been duly authorized and validly issued and
are fully paid and nonassessable. 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 Encumbrances of any nature.
(ii) The Company has no outstanding stock appreciation rights, phantom stock or
similar rights. As of the date of this Agreement,
13
except for (A) the Company Rights and (B) options to purchase 316,792 Company
Shares issued pursuant to the Company's 1996 Option Plan, options to purchase
7,196,116 Company Shares issued pursuant to the Company's 1999 Option Plan and
254,900 Company Shares reserved for issuance pursuant to the Company's 1999
Employee Stock Purchase Plan ("COMPANY ESPP" and collectively with the Company's
1996 Stock Option and 1999 Stock Option Plan the "COMPANY OPTION PLANS"), 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,
allowing it or 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 (the
"COMPANY EQUIVALENTS"). Set forth in SECTION 5.2(b)(ii) of the Company
Disclosure Schedule is a list, as of April 1, 2002, of the outstanding Company
Options, the name of the holder of such option, the plan or agreement pursuant
to which such option was issued, the exercise price of such option, the number
of shares as to which such option will have vested at such date and whether the
exercisability of such option will be accelerated in any way by the transactions
contemplated by this Agreement and the extent of acceleration, if any, and any
adjustments to such options resulting from the consummation of the transactions
contemplated by this Agreement. Pursuant to the Company Option Plans and the
Company Equivalents, the Company has reserved for issuance a sufficient number
of Company Shares for delivery upon exercise of the Company Options or Company
Equivalents and all of the Company Shares to be issued upon exercise of the
Company Options have been registered under the Securities Act pursuant to a
registration statement on Form S-8, which registration statement has been
declared and remains effective. Since December 31, 2001, no Company Options or
Company Equivalents have been issued (except as to Company Options issued in the
ordinary course of business), accelerated or had their terms materially
modified.
(iii) Except as contemplated by this Agreement, there are no 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.
(iv) There are 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.
(c) Listings. The Company's securities are not listed, or quoted, for trading on
any U.S. domestic or foreign securities exchange or quotation service, other
than the NNM.
(d) Authority Relative to this Agreement. The Board of Directors of the Company
has approved this Agreement and declared the Merger and the transactions
contemplated hereby advisable, and the Company has the requisite corporate power
and authority to approve, authorize, execute and deliver this Agreement and,
upon adoption of this Agreement by the stockholders of the Company, 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 this Agreement and 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 charter 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 (A) accelerate any
indebtedness, (B) place an Encumbrance upon any of the material assets of the
Company or any Subsidiary, (C) terminate any material right existing under any
such obligation, agreement condition or debt instrument, or (D) seize or sell
(through any means) any of the material assets of the Company or any of its
Subsidiaries ;
(iii) in default under or breach of (with or without the passage of time or the
giving of notice, or both) 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)
(other than laws related to employment matters) applicable to it or its business
or assets, except where any violation, default or breach under items (ii),
(iii), or (iv) could not reasonably be expected to, 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 of the Company or
any of its Subsidiaries; (ii) require any consent, approval, authorization or
permit of, or registration or filing with or notification to, any governmental
or regulatory authority, in each case, by or on behalf of the Company or any of
its Subsidiaries, except (A) in connection with the applicable requirements, if
any, of the HSR Act, (B) pursuant to the applicable requirements of the
Securities Act, the Exchange Act and the NNM, (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
14
authorized to do business, (D) as may be required by any applicable state
securities laws, (E) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under the antitrust
or competition laws of any foreign country or (F) where the failure to obtain
such consent, approval, authorization or permit, or to make such registration,
filing or notification, could not reasonably be expected to, individually or 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) which, individually or in the aggregate, could not reasonably be
expected to 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, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect on the
Company, or (v) assuming the consents, approvals, authorizations or permits and
registrations, filings or notifications referred to in SECTION 5.2(f)(ii) are
duly and timely obtained or made, 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 could not
reasonably be expected to, individually or 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.
(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, individually or in the aggregate, (i)
could reasonably be expected to have a Material Adverse Effect on the Company,
or (ii) materially and adversely affect the Company's ability to consummate the
transactions contemplated by this Agreement. Neither the Company nor any of its
Subsidiaries is subject to any outstanding judgment, order, writ, injunction or
decree which (A) 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 (B), individually or
in the aggregate, could reasonably be expected to have a Material Adverse Effect
on the Company. SECTION 5.2(g) of the Company Disclosure Schedule lists each
action, suit, claim, investigation or proceeding of which (i) the Company has
Knowledge and (ii) is for an amount greater than $50,000.
(h) SEC Reports; Financial Statements.
(i) Except for documents related to the transactions contemplated hereby, the
Company has filed all forms, reports and documents and all amendments thereto
with the SEC required to be filed by it pursuant to the federal securities laws
and the SEC rules and regulations thereunder in effect as of the time of such
filing or amendment, all of which when filed complied as to form in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act (collectively, the "COMPANY SEC REPORTS") and all of which are available
through EDGAR. None of the Company SEC Reports, including, without limitation,
any financial statements or schedules included therein, at the time filed (or if
amended, supplemented 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) When filed with the SEC, the consolidated balance sheets and the related
consolidated statements of income, stockholders' equity (deficit) and cash flow
(including the related notes thereto) of the Company included in the Company SEC
Reports (collectively, the "COMPANY FINANCIAL STATEMENTS") complied as to form
in all material respects with GAAP and the published rules and regulations of
the SEC with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis throughout, or for, the periods set forth therein (except in
the case of unaudited interim financial statements, as may be permitted by the
SEC on Form 10-Q under the Exchange Act), and presented fairly, in all material
respects, the consolidated financial position of the Company and its
consolidated Subsidiaries as of their respective dates, and the consolidated
results of their operations and their cash flow for the periods presented
therein, except that the unaudited interim financial statements do not include
footnote disclosure of the type associated with audited financial statements and
were or are subject to normal and recurring year-end adjustments which were not
or are not expected to be material in amount, type or effect.
(iii) Since December 31, 2001, there has not been any material change, by the
Company or any of its Subsidiaries in accounting principles, methods or
policies, except as required by GAAP. There are no material amendments or
modifications to agreements, documents or other instruments which previously had
been filed by the Company with the SEC pursuant to the Securities Act or the
Exchange Act, which have not been filed with the SEC but which are required to
be filed.
(i) No Liabilities. Neither the Company nor any of its Subsidiaries has any
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
or contingent, 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 claim with respect to any indebtedness, obligation or liability of any
nature against the Company or any of its Subsidiaries, except for indebtedness,
obligations and liabilities (i) which are fully reflected in, adequately
15
reserved against or otherwise described in the most recent Company Financial
Statements, (ii) which have been incurred after the most recent Company
Financial Statements in the ordinary course of business consistent with past
practice, (iii) which are obligations to perform under executory contracts in
the ordinary course of business (none of which is a liability resulting from a
breach of contract or warranty, tort, infringement or legal action) or (iv)
except as otherwise required to be disclosed pursuant to (i)-(iii) above which,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect on the Company.
(j) Absence of Certain Changes of Events. Except for actions expressly
contemplated by this Agreement, since December 31, 2001, the Company and each
Subsidiary has conducted its business only in the ordinary course and, since
such date, there has not been (i) any Material Adverse Effect on the Company;
(ii) any damage, destruction or loss of assets of the Company or any of its
Subsidiaries (whether or not covered by insurance) that has had or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Company; (iii) any material revaluation by the Company or
any of its Subsidiaries of any of its assets, including, without limitation,
writing down the value of capitalized software or inventory or deferred tax
assets or writing off notes or accounts receivable other than in the ordinary
course of business consistent with past practice; or (iv) or other action or
event that would have required the consent of Parent pursuant to SECTION 6.1 had
such action or event occurred after the date of this Agreement.
(k) Brokers and Finders. Except for the fees and expenses payable to Robertson
Stephens, Inc., which fees and expenses are determined pursuant to its agreement
with the Company, dated December 7, 2001, 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.
(l) S-4 Registration Statement and Proxy Statement. 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 Proxy Statement will in the
case of the Proxy Statement, at the time of the mailing of the Proxy Statement,
at the time of the Company Stockholders Meeting and Parent Stockholders Meeting,
and 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, 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 Subsidiaries, or any of their respective
affiliates, officers and directors should occur which is required to be
described in an amendment of, or a supplement to, the Proxy Statement, the
Company shall promptly inform Parent, so that such event may be so described and
such amendment or supplement promptly filed with the SEC and, as required by
law, disseminated to the stockholders of the Company and Parent, if necessary.
The Proxy Statement will (with respect to the Company and its Subsidiaries)
comply as to form in all material respects with the requirements of the Exchange
Act. Notwithstanding the foregoing, the Company makes no representation or
warranty with respect to any information supplied by, or related to, Parent or
Merger Sub or any of their affiliates or advisors which is contained in any of
the foregoing documents.
(m) Taxes.
(i) The Company and each of its Subsidiaries have timely filed (after taking
into account any extensions to file) all material federal, state, local and
foreign Returns required by applicable Tax law to be filed by the Company and
each of its Subsidiaries. All such Returns are true and correct in all material
respects and have been completed in accordance with applicable law. All Taxes
owed by the Company or any of its Subsidiaries have been paid other than Taxes
in an aggregate amount that would not be material to Company and its
Subsidiaries, taken as a whole. Other than any reserve for deferred Taxes
established to reflect timing differences between book and Tax treatment, 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 GAAP through the date of the most
recent of Company Financial Statements other than accruals for Taxes in an
aggregate amount that would not be material to Company and its Subsidiaries,
taken as a whole, and has not incurred any Tax liability since the date of the
most recent Company Financial Statements other than in the ordinary course of
business. To the Company's Knowledge, there is no reasonable basis for the
assertion of any claims for Taxes that if adversely determined would be
material, either individually or in the aggregate, to the Company and its
Subsidiaries, taken as a whole.
(ii) The Company and each of its Subsidiaries have withheld with respect to its
employees, creditors, independent contractors, stockholders or other parties all
Taxes required to be withheld and has timely paid over such Taxes to the
appropriate Governmental Authority.
(iii) There is no Tax deficiency outstanding, assessed, or to the Company's
Knowledge, proposed against the Company or any of its Subsidiaries. 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 Tax that is still in effect. There are no liens for Taxes on
the assets of Company or of any of its Subsidiaries other than with respect to
Taxes not yet due and payable.
(iv) To the Company's Knowledge, no claim has ever been made by a Governmental
Entity in a jurisdiction where any of the Company or its Subsidiaries do not
file Tax Returns that the Company or any of its Subsidiaries is or may be
subject to taxation by
16
that jurisdiction.
(v) No 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 either in writing or orally of any request for any such Tax audit or
other examination.
(vi) 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.
(vii) 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 Company
Significant Tax Agreement other than any Company Significant Tax Agreement
described in (A).
(viii) 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. None of the Company or any of its Subsidiaries has any
liability for the Taxes of any person (other than the Company or any of its
Subsidiaries) under Treasury Regulationss. 1.1502-6 (or any similar provision of
state, local, or foreign law), as a transferee or successor, by contract, or
otherwise. There is no excess loss account, deferred intercompany gain or loss,
or intercompany items as such terms are defined in the regulations promulgated
under the Code, that exist with respect to the Company or any of its
Subsidiaries.
(ix) Neither the Company nor any of its Subsidiaries is a party to any joint
venture, partnership or, to the Company's Knowledge, any other arrangement or
contract, that could be treated as a partnership for federal income tax
purposes.
(x) None of the Company or its Subsidiaries will be required to include any item
of income in, or exclude any item of deduction from, taxable income for any
taxable period (or portion thereof) ending after the Closing Date as a result of
any: (A) change in method of accounting for a taxable period ending on or prior
to the Closing Date under Section 481 of the Code (or any corresponding or
similar provision of state, local or foreign income Tax law); or (B) "closing
agreement" as described in Section 7121 of the Code (or any corresponding or
similar provision of state, local or foreign income Tax law) executed on or
prior to the Closing Date.
(xi) There is no contract, agreement, plan or arrangement covering any
individual or entity treated as an individual included in the business or assets
of the Company or its Subsidiaries that, individually or collectively, could
give rise to the payment of any "excess parachute payments" within the meaning
of Section 280G of the Code, by the Company, a Subsidiary, Merger Sub or Parent
or any payment that would not be deductible by reason of Section 162(m) of the
Code or similar provisions of Tax law.
(xii) Neither the Company nor any of its Subsidiaries is currently or has at any
time been, a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the Code. None of the Company or any of its
Subsidiaries has or has ever had a permanent establishment in a foreign country.
(xiii) There are no outstanding rulings of, or requests for rulings with any Tax
authority expressly addressed to the Company or its Subsidiaries that are, or if
issued would be, binding on the Company or any of its Subsidiaries.
(xiv) In the past five (5) years, none of the Company or its Subsidiaries has
distributed a corporation in a transaction that is reported to qualify under
Section 355 of the Code, or been distributed in a transaction that is reported
to qualify under Section 355 of the Code.
(n) Employee Benefits.
(i) For purposes hereof, the term "COMPANY SCHEDULED PLANS" means 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 or material fringe benefit,
severance agreement or plan or any pension benefit plan, excess benefit plan,
bonus, stock option, stock purchase or other incentive plan, tuition
reimbursement, automobile use, club membership, parental or family leave, top
hat plan or deferred compensation plan, salary reduction agreement, change-of
control agreement, employment 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 currently maintained, sponsored, adopted or administered by
the Company or any Subsidiary or any current or former Company Plan Affiliate or
to which the Company or any current or former Parent Plan Affiliate has made
contributions to, obligated itself or has any liability (whether accrued,
absolute, contingent or otherwise, and whether due or to become due or asserted
or unasserted) with respect thereto. A "COMPANY PLAN AFFILIATE" is each entity
that is, or has ever been, treated as a single employer with the Company
pursuant to Section 4001 of ERISA or Section 414 of the Code. The Company has
provided or made available to Parent or its counsel current copies of all
employee manuals of the Company and its Subsidiaries
17
that include personnel policies applicable to any of their respective employees.
(ii) The Company has made available to Parent or its counsel 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 three (3)
most recent plan years, 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 current summary plan description and summary of material
modifications thereto with respect to each such plan and Form 5310. Section
5.2(m) of the Company Disclosure Schedule contains a description of the material
terms of any material unwritten Company Scheduled Plan as currently in effect as
of the date hereof.
(iii) To the Company's Knowledge, as of the date hereof, each Company Scheduled
Plan (1) has been in material compliance in form and in operation with the
material, applicable requirements of ERISA and the Code, and any other material
legal requirements; and (2) has been and is operated and administered in
compliance with its terms (except as otherwise required by law). Each Company
Scheduled Plan which is intended to be qualified under Section 401(a) of the
Code has received, or has remaining a period of time to apply for, a favorable
determination letter or other recognition of exemption from the Internal Revenue
Service on which the Company can rely.
(iv) 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).
(v) To the Company's Knowledge, each Company Scheduled Plan (other than any
stock option plan) may be amended, terminated, modified or otherwise revised by
the Company or Parent, on and after the Closing, without further liability to
the Company or Parent (other than ordinary administrative expenses or routine
claims for benefit plans).
(vi) 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,
including contingent liability, with respect to any Company Scheduled Plan which
is a "multi-employer plan" as defined in Section 4001 of ERISA, a
"multi-employer 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.
(vii) No Company Scheduled Plan provides, or reflects or represents any
liability to provide retiree health coverage to any person for any reason,
except as may be required by COBRA or applicable state insurance laws, and
neither the Company nor any Company Plan Affiliate has any liability (whether
accrued, absolute, contingent or otherwise, and whether due or to become due to
asserted or unasserted) to any current or former employee, or director (either
individually or as a group) to provide retiree health coverage, except to the
extent required by applicable continuation coverage statutes, laws or
ordinances.
(viii) With respect to any Company Scheduled Plan which is a welfare plan as
defined in Section 3(1) of ERISA, there is no disqualified benefit (as such term
is defined in Code Section 4976(b)) which would subject the Company or any
Company Plan Affiliate to a tax under Code Section 4976(a).
(ix) Other than by reason of actions taken following the Closing, neither the
execution of this Agreement nor the consummation of the transactions
contemplated by this Agreement will (1) entitle any current or former employee
of the Company to a material amount of (i) severance pay, (ii) unemployment
compensation or (iii) any other payment, (2) 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 (3) give rise to the payment of
any amount that would not be deductible pursuant to the terms of Section 280G of
the Code.
(x) The Company has not entered into any contract, agreement or arrangement
covering any employee that gives rise to the payment of any amount that would
not be deductible pursuant to the terms of Section 162(m) of the Code.
(o) Company Intangible Property.
(i) The Company and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, sell or license, as applicable, all
Proprietary Rights (excluding in each case Proprietary Rights in Commercial
Software) used, sold, distributed or licensed in or as a part of the business of
the Company or its Subsidiaries as currently conducted (the "COMPANY PROPRIETARY
RIGHTS"). The Company has licenses for all copies of Commercial Software used in
its business and the Company does not have any obligation to pay fees, royalties
or other amounts pursuant to any such license at any time, and the Company is
not in material breach of its obligation to do so as of the date hereof.
(ii) Except for Commercial Software and Company Embedded Products for which the
Company has valid licenses which are adequate for the conduct of the Company's
business as conducted as of the date hereof, the Company or one of its
Subsidiaries either (1) is the
18
sole and exclusive owner of the Company Proprietary Rights (free and clear of
any Encumbrances), and has sole and exclusive rights therein; or (2) has a
valid, effective written license for the use and/or distribution of the material
covered thereby in connection with the services and/or products in respect of
which such Company Proprietary Rights are currently being used. The Company is
not contractually obligated to pay any royalties, fees or other amounts at any
time to any third Person with respect to the use or distribution of any Company
Proprietary Rights and the Company is not in material breach of its obligation
to do so as of the date hereof. To Company's Knowledge, all current
registrations of Company Proprietary Rights are in compliance, in all material
respects, with formal legal requirements (including, but not limited to, the
payment of filing, examination and maintenance fees) as of the date hereof and
have not been and are not now involved in any interference or opposition
preceding. To Company's Knowledge as of the date hereof, all products made,
used, or sold under any patents included as Company Proprietary Rights have been
marked with the proper patent notice.
(iii) To the Company's Knowledge, the Company and its Subsidiaries have not
infringed or otherwise violated any Proprietary Rights of any third Persons and
none of the products or services marketed or sold by Company or its Subsidiaries
as of the date hereof infringes or otherwise violates any Proprietary Rights of
any third Persons.
(iv) No actions, suits, claims, investigations or proceedings with respect to
the Company Proprietary Rights are pending or, to the Knowledge of the Company,
threatened by any Person, (A) alleging that the manufacture, sale, licensing,
distributing or use of any product or service or any portion thereof of the
Company or its Subsidiaries as manufactured, sold, licensed, distributed or used
by the Company and its Subsidiaries infringes or otherwise violates any
Proprietary Rights of any third Persons or (B) challenging the ownership by the
Company, validity or effectiveness of any such Company Proprietary Rights.
(v) The Company has taken reasonable security measures to safeguard and maintain
its rights in the trade secrets included in the Company Proprietary Rights. To
the Company's Knowledge, the Company or any Subsidiary trade secrets and all
copies of the source code to Company Software are physically in the control of
an escrow agent or the Company at the Company's facilities. All officers,
employees, contractors and consultants of the Company or its Subsidiaries who
have access to proprietary information have executed and delivered to the
Company an agreement regarding the protection of proprietary information. All
officers, employees, contractors and consultants of the Company or its
Subsidiaries have executed and delivered to the Company an agreement regarding
the assignment to or ownership by the Company of all Company Proprietary Rights
arising from the services performed for the Company by such Persons. To the
Knowledge of the Company, no current or prior officers, employees or consultants
of the Company claim, and the Company is not aware of any reasonable grounds to
assert a claim to, any ownership interest in any Company Proprietary Right as a
result of any services performed for the Company or its Subsidiaries including,
but not limited to, involvement in the development of any property embodying any
Company Proprietary Rights, while employed by or consulting to the Company or
otherwise.
(vi) All authors of the software, programs and applications included in the
Company Proprietary Rights, other than Company Embedded Products (the "COMPANY
SOFTWARE") and any other Person who participated in the development of the
Company Software or any portion thereof (such authors and other persons or
entities are collectively referred to as the "COMPANY SOFTWARE AUTHORS") made
his or her contribution to the Company Software (a) within the scope of
employment with the Company or any Subsidiary, as a "work made for hire", or (b)
as a consultant who assigned all rights to such Company Software to the Company
or any Subsidiary.
(vii) For the purpose of this SECTION 5.1(o), the following terms have the
following definitions: (A) the term "COMMERCIAL SOFTWARE" means packaged
commercially available software programs generally available to the public which
have been licensed to the Company or a Subsidiary pursuant to end-user licenses
that permit the use of such programs without a right to modify, distribute or
sublicense the same; (B) the term "COMPANY EMBEDDED PRODUCTS" means third party
software incorporated in any existing product or service of the Company or a
Subsidiary ; and (C) the term "PROPRIETARY RIGHTS" means (1) patents and patent
applications (including all reissuances, continuations, continuations-in-part,
revisions, extensions and reexaminations thereof), patent disclosures and rights
in inventions (whether patentable or unpatentable), (2) trademarks, service
marks, trade dress, trade names, rights in Internet domain names and corporate
names, registrations and applications for registration thereof, and all goodwill
symbolized by and associated therewith, (3) copyrights and registrations and
applications for registration thereof, (4) rights in computer software, data and
documentation (in both source code and object code form) (including Company
Embedded Products), (5) rights in trade secrets and other confidential and
proprietary information, catalogs, product designs, specifications, business
plans, processes, formulae, methods, schematics, know-how, sales data, marketing
data, lists of customers, suppliers and potential customers and suppliers and
copyrightable works, (6) other confidential and proprietary intellectual
property rights, and (7) all renewals, extensions, revivals and resuscitations
thereof.
(p) Agreements, Contracts and Commitments; Material Contracts.
(i) As of the date hereof, neither the Company nor any of its Subsidiaries is a
party to or is bound by:
(1) 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 $5,000,000;
19
(2) any employment or consulting contract or commitment with any executive
officer or member of the Company's Board of Directors or any other employee who
is one of the five (5) most highly compensated employees, including base salary
but excluding commissions and bonuses, based on 2001 base salary (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 material
liability, financial obligation or benefits, except as 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;
(3) any agreement of indemnification or guaranty by the Company or any of its
Subsidiaries (excluding those agreements required to be disclosed pursuant to
(1) above) other than indemnification agreements between the Company or any of
its Subsidiaries and any of its officers or directors in standard forms;
(4) 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 or materially limiting the
Company's use or exploitation of the Company Proprietary Rights;
(5) any contract for capital expenditures in excess of $500,000;
(6) any agreement, contract or commitment currently in force relating to the
disposition or acquisition of assets material to the operation of the business
as currently conducted;
(7) excluding any arrangements or other contract or commitment for the payment
of royalties by the Company or its Subsidiaries, any arrangement or other
contract or commitment involving a sharing of profits or losses by the Company
or any of its Subsidiaries with any other Person;
(8) any agreement, contract or commitment for the purchase of any ownership
interest in any corporation or other business enterprise;
(9) any material joint marketing or distribution or development agreement or
other material contract of the Company or any of its Subsidiaries; or
(10) any lease, sublease, rental agreement, contract of sale, tenancy or license
related to any real property.
(ii) A true, accurate and complete copy (including all material amendments
thereto) of each agreement, contract, obligation, promise or undertaking set
forth on Schedule 5.2(p) of the Company Disclosure Schedule and to which the
Company or any Subsidiary is a party or by which the Company, any of its
Subsidiaries or its assets is or may become bound (a "COMPANY CONTRACT"), or a
summary of each oral contract, has been made available to Parent or its counsel.
Each Company Contract is in full force and effect as to the Company or any
Subsidiary, and to the Company's Knowledge as to the other contracting parties.
No condition exists or event has occurred that, (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 to terminate, any Company Contract, except as could not, individually or
in the aggregate, be reasonably expected to result in a Material Adverse Effect
on the Company.
(q) Unlawful Payments and Contributions. To the Knowledge of the Company,
neither the Company, any Subsidiary of the Company nor any of their respective
directors, officers, employees or agents has, with respect to the businesses of
the Company or its Subsidiaries, (i) used any funds for any unlawful
contribution, endorsement, gift, entertainment or other unlawful expense
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee; (iii)
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or (iv) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any Person or entity.
(r) Environmental Matters. (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 written 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 a Material Adverse Effect
on the Company; (iii) to the Knowledge of the Company, there are no facts or
circumstances which could result in any environmental liability which could
reasonably be expected to result in a Material Adverse Effect on the Company;
(iv) neither the Company nor any of its Subsidiaries has ever generated,
transported, treated, stored, handled or disposed of any Hazardous Material in a
manner which, individually, or in the aggregate, could reasonably be expected to
result in a Material Adverse Effect on the Company; (v) except in compliance
with Environmental Laws and in a manner that could not reasonably be expected to
subject the Company or any Subsidiary to material liability, to the knowledge of
the Company and any of its Subsidiaries, no Hazardous Materials are present on,
in, at or under any real property currently owned or leased by the Company
20
or any of its Subsidiaries or were present on, in, at or under any other real
property at the time it ceased to be owned or leased by the Company or any of
its Subsidiaries (including without limitation, containment by means of any
underground or aboveground storage tank); (vi) except as set forth in section
5.2(r) of the Company Disclosure Schedule, to the Knowledge of the Company,
there are no underground storage tanks, asbestos which is friable or likely to
become friable or PCBs present on any real property currently owned or leased by
the Company or any of its Subsidiaries or as a consequence of the acts of the
Company, its Subsidiaries, or their agents. For the purpose of this Section
5.2(r), the following terms have the following definitions: (X) "ENVIRONMENTAL
LAWS" means any applicable federal, state, local or foreign law (including
common law), statute, code, ordinance, rule, regulation or other requirement
relating to the environment, natural resources, or public or employee health and
safety as amended to date; and (Y) "HAZARDOUS 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, other than substances contained in
janitorial supplies or office products.
(s) Title to Properties; Liens; Condition of Properties. The Company and its
Subsidiaries have good title to, or a valid leasehold interest in, the real and
personal property, shown on the most recent Company Financial Statements or
acquired after the date thereof. None of the property owned, leased or used by
the Company or any of its Subsidiaries is subject to any mortgage, pledge, deed
of trust, lien, conditional sale agreement, security title, encumbrance, or
other adverse claim or interest of any kind (other than any of the foregoing
with respect to (i) taxes not yet due and payable, (ii) matters which do not
materially and adversely affect the use, value or operation of such property,
and (iii) liens or encumbrances against any landlord's or owner's interest in
any leased property). Since December 31, 2001, 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 material to the Company and its
Subsidiaries, taken as a whole, except transactions in the ordinary course of
business, consistent with past practices.
(t) Insurance. All insurance policies (including "self-insurance" programs) now
maintained by the Company or any of its Subsidiaries (the "COMPANY INSURANCE
POLICIES") are in full force and effect as to the Company or any of its
Subsidiaries, neither the Company nor any of its Subsidiaries is in default
under any of the Company Insurance Policies, and no claim for coverage under any
of the Company Insurance Policies has been denied. The Company has not received
any written notice of cancellation or intent to cancel or increase or intent to
increase premiums with respect to such insurance policies nor, to the Knowledge
of the Company or any of its Subsidiaries, is there any reasonable basis for any
such action.
(u) Labor and Employee Relations.
(i) 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; 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 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) The Company and each of its Subsidiaries have made available to Parent or
its counsel a description of all written employment policies under which the
Company or any of its Subsidiaries currently operates.
(iii) To the Company's Knowledge, the Company and each of its Subsidiaries is in
compliance with all Federal, foreign (as applicable), and state or other
applicable laws regarding employment practices, including laws relating to
workers' safety, sexual harassment or discrimination, except where the failure
to so be in compliance, individually or in the aggregate, would not have a
Material Adverse Effect on the Company.
(iv) To the Knowledge of the Company, none of the Company Key Employees has any
plans to terminate his or her employment with the Company or any of its
Subsidiaries.
(v) Permits. The Company and each of its Subsidiaries hold all licenses,
permits, registrations, orders, authorizations, approvals and franchises that
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 could not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on the Company
or any of its Subsidiaries. All such licenses, permits, registrations, orders,
authorizations, approvals and franchises are now, and will be immediately after
the Effective Time, valid and in full force and effect, 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 could
not reasonably be expected to, 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 written 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 failure could not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect on the Company
or the Surviving Corporation.
21
(w) Transactions with Affiliates. Since the date of Company's last proxy
statement to its stockholders filed pursuant to Section 14 of the Exchange Act
(and the rules and regulations thereunder) for the sole purpose of convening the
Company's annual meeting of stockholders, no event or transaction has occurred
that would be required to be reported by the Company, pursuant to Item 404 of
Regulation S-K promulgated by the SEC.
(x) Board Recommendation. The Board of Directors of the Company, at a meeting
duly called and held on April 4, 2002, has approved this Agreement and (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, taken together are fair to and in the best interests of
the stockholders of the Company and declared the Merger to be advisable; (ii)
approved this Agreement; and (iii) resolved to recommend that the stockholders
of the Company adopt this Agreement, the Merger and the transactions
contemplated hereby.
(y) Tax Treatment. Neither the Company nor any of its affiliates has taken any
action or knows of any fact, agreement, plan or other circumstance that is
reasonably likely to prevent the Merger from qualifying as a reorganization
under the provisions of Section 368(a) of the Code.
(z) Opinion of Company Financial Advisor. The Company has received the opinion
of Robertson Stephens, Inc., dated the date of this Agreement, to the effect
that, as of such date, the Exchange Ratio is fair to the holders of the Company
Shares from a financial point of view, a signed copy of which opinion has been
delivered to Parent, and such opinion has not been amended, modified or revoked
in a manner adverse to Parent. Subject to prior review and consent by Robertson
Stephens, Inc., the Company has been authorized by Robertson Stephens, Inc. to
permit the inclusion of such fairness opinion and a reference thereto in the
Proxy Statement.
(aa) Company Rights Agreement. The Company has made available to Parent or its
counsel a complete and correct copy of the Company Rights Agreement, including
all exhibits and amendments thereto. The Company has taken, and as soon as
practicable after the date hereof the Company will use commercial reasonable
efforts to cause the Company Rights Agent to take, all actions reasonably
necessary or appropriate to amend the Rights Agreement to ensure that the
execution of this Agreement, the Merger and the other transactions contemplated
in this Agreement will not cause (i) Parent, Merger Sub or any of their
affiliates to be considered an Acquiring Person (as defined in the Company
Rights Agreement), (ii) the occurrence of the Distribution Date or Shares
Acquisition Date (each as defined in the Company Rights Agreement) or (iii) the
separation of the Rights from the underlying Company Shares, and will not give
the holders thereof the right to acquire securities of any party thereto.
(bb) WARN Obligation. All reductions in force performed by the Company or any
Subsidiary (individually or taken as a whole) have been in compliance with the
Worker Adjustment Retraining and Notification Act.
ARTICLE VI
ADDITIONAL COVENANTS AND AGREEMENTS
6.1 CONDUCT OF BUSINESS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms and the Effective Time, the Company (which for the
purposes of this SECTION 6.1 shall include the Company and each of its
Subsidiaries, taken as a whole) agrees, except to the extent that Parent shall
otherwise consent in writing (which consent shall not be unreasonably withheld
or delayed) or as set forth in SECTION 6.1 of the Company Disclosure Schedule or
in the Company SEC reports, to carry on its business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted, and to
use its commercially reasonable efforts consistent with past practices and
policies to preserve intact its present business organizations, keep available
the services of its present officers and employees and preserve its
relationships with material customers, suppliers, distributors, licensors,
licensees, and others having material business dealings with the Company, to the
end that the goodwill and ongoing businesses of the Company shall be
substantially unimpaired the Effective Time. Except as expressly provided for by
this Agreement or in the schedules thereto, the Company shall not, prior to the
Effective Time or earlier termination of this Agreement pursuant to its terms,
without the prior written consent of Parent (which consent shall not be
unreasonably withheld or delayed), as set forth in SECTION 6.1 of the Company
Disclosure Schedule or in the Company SEC reports:
(a) Accelerate, amend or change the period of exercisability of options,
restricted stock or warrants to purchase Company Shares, or reprice options
granted under the Company Option Plans or materially amend or modify the terms
of any warrant to purchase Company Shares or authorize cash payments in exchange
for any warrant to purchase Company Shares or in exchange for any options
granted under any of the Company Option Plans;
(b) Enter into any material partnership arrangements or joint development
agreements or strategic alliances which would require fees greater than $50,000
individually or $100,000 in the aggregate;
(c) Enter into any contracts or commitments, containing any exclusivity or
non-competition covenant that binds the Company;
22
(d) Enter into any contract or commitment (excluding contracts or commitments
for capital expenditures) which involves the payment by the Company of $250,000
or more individually, or $1,000,000 in the aggregate, in any calendar year which
is not cancelable without material penalty within ninety days of the date of
notice of cancellation;
(e) Except as required by law, grant or pay any severance or termination
payments to any employee, except (A) payments made in connection with the
termination of employees who are not executive officers in amounts consistent
with the Company's policies and past practices not to exceed $35,000
individually or $200,000 in the aggregate or (B) pursuant to written agreements
outstanding, or benefit plans or policies existing, on the date hereof and as
previously disclosed in writing to Parent or its counsel;
(f) Transfer or license to any person or entity or otherwise extend (other than
automatic extensions or renewals), amend or modify in any material respect any
rights to the Company Proprietary Rights (including rights to resell or
relicense the Company Proprietary Rights) or enter into grants to future patent
rights, other than on (A) standard forms of the Company or (B) standard forms of
the Company's clients entered into in the ordinary course of business; provided,
however, that such standard forms shall provide for a non-exclusive, enterprise
wide, or site license of the Company Proprietary Rights;
(g) Commence or settle any litigation or legal proceeding or settle any dispute,
for an aggregate amount in cash, stock, property or services valued in excess of
$200,000 other than for the routine collection of bills or to protect or enforce
Company Proprietary Rights, provided that the Company may commence a suit if the
Company in good faith determines that failure to commence suit would result in
the material impairment of a valuable asset of the business of the Company, so
long as the Company consults with the Parent prior to the filing of such a suit
and keeps Parent reasonably advised of the status and details of such
litigation; provided further that the Company shall not require the approval of,
and shall not be required to consult with, Parent with respect to, and shall be
permitted to initiate, any claim, suit or proceeding against Parent, Merger Sub,
any other Subsidiary of Parent or any affiliate of any of the foregoing;
(h) Declare or pay any dividends on or make any other distributions (whether in
cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of the Company, other than (i) in connection with
the replacement of lost, stolen or destroyed certificates and (ii) the
declaration and payment of a cash dividend not to exceed $24,000,000, in the
aggregate, to all holders of Company Shares on the record date for such dividend
(the "DIVIDEND AMOUNT" and, if such dividend is declared and paid, the amount of
such dividend payable in respect of each Company Share as of the record date,
shall be referred to as the "PER SHARE DIVIDEND AMOUNT");
(i) Repurchase or otherwise acquire, directly or indirectly, any shares of its
capital stock (other than any purchase, forfeiture or retirement of shares of
Common Stock or Company Options occurring pursuant to the terms (as in effect on
the date hereof) of any existing contract or agreement or any existing benefit
plan or policies, in a manner otherwise consistent with the terms of this
Agreement);
(j) Issue, deliver, sell or authorize or propose the issuance, delivery, grant
or sale of, any shares of its capital stock of any class or securities
convertible into, or any subscriptions, rights, warrants or options to acquire,
or enter into other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities or grant any form of stock
appreciation rights, except for the issuance of (i) Company Options issued in
the ordinary course of business consistent with past practice and in an amount
not to exceed 200,000 shares of Company Common Stock in the aggregate or (ii)
Company Shares pursuant to the exercise of Company Options or pursuant to the
Company ESPP;
(k) Cause or permit any amendments to the Company's certificate of incorporation
or bylaws;
(l) Sell, lease, sublease, license, encumber or otherwise dispose of any of the
properties or assets of the Company material to its business as currently
conducted, except in the ordinary course of business consistent with past
practices;
(m) Incur any material indebtedness for borrowed money (other than trade
payables incurred in the ordinary course of business consistent with past
practices and owed to persons other than affiliates of the Company) or guarantee
any such prohibited indebtedness or issue or sell warrants or rights to acquire
debt securities of the Company or any Subsidiary or guarantee any indebtedness
of others;
(n) Except as required by law, outstanding written agreements, or any Company
Scheduled Plans existing on the date hereof or as previously disclosed to Parent
or its counsel, adopt, materially amend or modify or terminate (other than by
expiration) or extend or renew (other than by automatic renewal or extension)
any Company Scheduled Plan or materially increase the salaries, wage rates,
benefits or perquisites (including, without limitation, travel and entertainment
reimbursement policies) of any of its executive officers or directors (except in
the ordinary course of business consistent with past practice), including but
not limited to (but without limiting the generality of the foregoing), adopting
or materially amending any stock purchase or option plan, employment contract or
any bonus or special remuneration owed to any director or employee, increasing
any commission plans or initiating any sales incentive events involving
increased commission or other material benefits;
23
(o) Revalue any of the material assets of the Company including without
limitation writing down the value of inventory, writing off notes or accounts
receivable, other than in the ordinary course of business or as required by GAAP
or applicable law;
(p) Pay, discharge or satisfy in an amount in excess of $150,000 in any single
instance, or $500,000, in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, or contingent) other than the
payment, discharge or satisfaction in the ordinary course of business consistent
with past practices of liabilities, whether arising prior to, on or after the
date hereof, of the type reflected or reserved against in the Company Financial
Statements (or described in the notes thereto);
(q) Except as required by applicable Tax law, make or change any material
election in respect of Taxes or adopt or change in any material respect any
accounting method in respect of Taxes, enter into any closing agreement, settle
any claim or assessment in respect of Taxes (except settlements effected solely
through payment of immaterial sums of money), or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in respect
of Taxes;
(r) Except for any change which is required by reason of a change in GAAP,
change any material method of accounting or accounting practice used by it;
(s) Release or permit the release of any Person from, or waive or permit the
waiver of any provision of any "standstill" or similar agreement to which the
Company is a party;
(t) Enter into any agreement or arrangement (i) providing that a project is
subject to a limitation on the overall cost or number of hours which can be
billed to the project (so called "fixed fee" or "billing cap" arrangements) or
(ii) to provide products or services at rates where the project margin would not
reasonably be expected to be less than 35%, except for (1) arrangements where
the cost of services to be rendered pursuant to such arrangement could not
reasonably be expected to exceed $150,000 or (2) fixed fee or billing cap
arrangements where: (A) the cost of services to be rendered pursuant to such
arrangements could not reasonably be expected to exceed the fixed fee or billing
cap amount and (B) such arrangements have each been approved in accordance with
the Company's standard approval procedures; provided, however, that if the
Company enters into any fixed fee or billing cap arrangement in an amount in
excess of $750,000, the Company shall apprise Parent in writing of such pending
arrangement; and provided, that if Parent fails to object to any such agreement
or arrangement within twenty-four (24) hours of receipt of Company's written
notice of such pending agreement or arrangement, Parent shall be deemed to have
consented to such agreement or arrangement; provided, further, that if Parent
objects to any such agreement or arrangement, Parent shall provide the Company
with a reasonable basis for such objection and Parent will use its best efforts
to cooperate with the Company to obtain a reasonable solution to such
objection.
(u) Enter into, agree or commit to any capital expenditures, leasehold
improvements or any similar commitments, except in the ordinary course of
business consistent with past practices, reflected or reserved against in the
Company Financial Statements (or described in the notes thereto) or which
expenditures or improvements do not exceed $250,000 in the aggregate;
(v) Enter into, agree or commit to any expenditures for trade shows, conferences
or any similar commitments, except in the ordinary course of business consistent
with past practices, reflected or reserved against in the Company Financial
Statements (or described in the notes thereto) or which committed expenditures
do not exceed $150,000 in the aggregate;
(w) Enter into, agree or commit to any derivative, hedging transactions, any
similar transaction, except for transactions entered into in the ordinary course
of business consistent with past practices, reflected or reserved against in the
Company Financial Statements (or described in the notes thereto) or which
transactions does not exceed $50,000 in the aggregate;
(x) Materially amend or modify, terminate (other than by expiration), extend or
renew (other than by automatic extensions or renewals) any non-client related
Company Contract which involves the payment by the Company of $75,000 or more,
individually, or $250,000, in the aggregate, in any calendar year, including
without limitation, any Company Contract relating to any real property, other
than the termination or buyout of an existing real property lease obligation;
(y) Grant or pay any commissions to any employees, except for commissions paid
on reported revenue or non-recoverable draws pursuant to offer letters
previously provided to Parent or its counsel, provided that such commissions (i)
shall not exceed $20,000, in any single instance, and $80,000, in the aggregate,
to any one employee during any six month period, and (ii) are made pursuant to
the Company's existing commission programs as of the date hereof, and as
previously disclosed to Parent or its counsel;
(z) Hire or commit to hire any employee, except for at-will employees with total
annual base salary not to exceed $100,000 in any single instance, and $250,000,
in the aggregate, except for Sales Representatives whose total annual
compensation shall not exceed $200,000, in any single instance, and $1,000,000,
in the aggregate or Technical Leads whose total annual compensation shall not
exceed $150,000, in any single instance, and $450,000 in the aggregate;
Take, or agree to take, any of the actions described in SECTION 6.1(a) through
(z) above, or any action which would cause or would be reasonably likely to
cause any of the conditions to the Merger set forth in SECTIONS 7.1 or 7.3, not
to be satisfied.
24
6.2 CONDUCT OF BUSINESS OF PARENT. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms and the Effective Time, Parent (which for the purposes of
this SECTION 6.2 shall include Parent and each of its Subsidiaries, taken as a
whole) agrees, except to the extent that Parent shall otherwise consent in
writing (which consent shall not be unreasonably withheld or delayed) or as set
forth in SECTION 6.2 of the Parent Disclosure Schedule or in the Parent SEC
reports, to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and to use its
commercially reasonable efforts consistent with past practices and policies to
preserve intact its present business organizations, keep available the services
of its present officers and employees and preserve its relationships with
material customers, suppliers, distributors, licensors, licensees, and others
having material business dealings with Parent, to the end that the goodwill and
ongoing businesses of Parent shall be substantially unimpaired as of the
Effective Time. Except as expressly provided for by this Agreement or in the
schedules thereto, Parent shall not, prior to the Effective Time or earlier
termination of this Agreement pursuant to its terms, without the prior written
consent of Parent (which consent shall not be unreasonably withheld or delayed),
as set forth in SECTION 6.3 of Parent Disclosure Schedule or in Parent SEC
reports:
(a) Declare or pay any dividends (whether in cash or property) on or make any
other distributions (whether in cash or property) in respect of Parent Common
Stock;
(b) Repurchase or otherwise acquire, directly or indirectly, any shares of its
capital stock (other than any purchase, forfeiture or retirement of shares of
Parent Common Stock or options granted pursuant to the Parent Option Plans
occurring pursuant to the terms of any existing contract or agreement or any
existing benefit plan or policies, in a manner otherwise consistent with the
terms of this Agreement);
(c) Issue, deliver, grant, sell or authorize or propose the issuance, delivery,
grant or sale of, any shares of its capital stock of any class or securities
(debt or otherwise) convertible or exchangeable into any shares of its capital
stock in connection with the acquisition of any ownership interest in another
Person (whether by merger, share exchange or acquisition of assets of such
Person) or enter into any joint venture or similar strategic or collaborative
arrangement (each a "TRANSACTION"), except in connection with any Transaction in
which: (A) the total number of shares of Parent capital stock issued or issuable
(upon conversion or otherwise) will not require the approval of Parent's
stockholders; (B) the fair market value of any assets (excluding Parent capital
stock) delivered or to be delivered (including the aggregate value of any
licensing fees, royalties or other payments due from Parent or any Subsidiary)
under such arrangement will not exceed 10% of the market capitalization of
Parent, as determined on the date of execution of such arrangement; (C) the
combined value of (A) and (B) will not exceed 20% of the market capitalization
of Parent (each value as determined on the date of execution of such
arrangement); (D) the Transaction will not result in the acquisition of a
"significant subsidiary" as such term is defined in Section 1.02(w) of
Regulation S-X; and (E) such arrangement has no less than a cash flow neutral
effect on Parent and its Subsidiaries, taken as a whole, based upon the combined
financial forecasts of Parent and such entity, as of the date of execution of
such arrangement; provided; that the financial projections of Parent must not be
inconsistent with the financial projections provided to the Company as of the
date hereof;
(d) Incur any material indebtedness for borrowed money (other than trade
payables incurred in the ordinary course of business consistent with past
practice and owed to persons other than an Affiliate of Parent or any
Subsidiary) or guarantee any such prohibited indebtedness or issue or sell
warrants or rights to acquire debt securities of Parent or any Subsidiary or
guarantee any indebtedness of others;
(e) Except as required by law, outstanding written agreements, or any Parent
Scheduled Plans existing, on the date hereof and as previously disclosed to the
Company or its counsel, adopt or materially amend or modify any Parent Scheduled
Plan or materially increase the salaries, wage rates or material benefits or
perquisites (including, without limitation, travel and entertainment
reimbursement policies) of any of its executive officers or directors (other
than in the ordinary course of business consistent with past practice),
including but not limited to (but without limiting the generality of the
foregoing), adopting or materially amending any stock purchase or option plan,
entering into any employment contract paying any bonus, commission or special
remuneration increasing any commission plans or initiating any sales incentives
involving increased commission or other material benefits to any director or
officers other than in connection with the hiring of any executive officers
after the date hereof;
(f) Except for any change which is required by reason of a change in GAAP,
change any material method of accounting or accounting practice used by it; or
(g) Settle at less than the full stated value, compromise or discount any
receivables of Parent or any Subsidiary, other than in the ordinary course of
business consistent with past practice;
(h) Other than in the ordinary course of business consistent with past practice,
defer or fail to timely pay any payment obligation of Parent or any Subsidiary;
(i) Take, or agree to take, any of the actions described in
SECTION 6.2(a) through (h) above, or any action which would cause or would be
reasonably likely to cause any of the conditions to
25
the Merger set forth in SECTIONS 7.1 or 7.2, not to be satisfied.
6.3 No Solicitation.
(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
will not, and will not permit any of its Subsidiaries to, and will direct its
and their respective directors, officers, investment bankers, affiliates,
representatives and agents (collectively, the "REPRESENTATIVES") not to, (i)
solicit, initiate, or intentionally encourage (including by way of furnishing
information or affording access to the properties, books or records of the
Company), or take any other action intended to 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. In the event that
(x) the Company receives a Company Acquisition Proposal that the Board of
Directors of the Company determines in good faith is or may reasonably be
expected to lead to a Company Superior Proposal that was not solicited by the
Company or otherwise obtained in violation of this SECTION 6.3, and (y) after
the Company gives Parent written notice of its intention to do so, the Company
may, if the Board of Directors of the Company determines in good faith (after
consultation with its outside legal counsel) that failure to do so would be
inconsistent with the fiduciary duties of the Board of Directors of the Company
under applicable law, provide such non-public information, afford such access
and enter into and engage in negotiations and discussions regarding any Company
Acquisition Proposal. In such event, the Company shall, (i) promptly (and no
less than twenty-four (24) hours prior to providing such non-public information,
affording such access or entering into and engaging in any such negotiations and
discussions) inform Parent of the material terms and conditions of such Company
Acquisition Proposal, including the identity of the Person making such Company
Acquisition Proposal (if not prohibited from doing so under any confidentiality
agreement in effect as of the date hereof) and (ii) thereafter promptly keep
Parent reasonably informed of the status, including any material change to the
terms, of any such Company Acquisition Proposal. As used herein, the term
"COMPANY ACQUISITION PROPOSAL" shall mean any inquiry, proposal or offer
believed by the Company to being bona fide relating to any (i) merger,
consolidation, business combination, or similar transaction involving the
Company, (ii) sale, lease or other disposition, directly or indirectly, of all
or a substantial portion of the assets of the Company and its Subsidiaries,
taken as a whole in one or more transactions, (iii) issuance, sale, or other
disposition of a majority of the voting equity securities (or options, rights or
warrants to purchase such securities, or securities convertible into such
securities) of the Company, (iv) liquidation, dissolution, recapitalization or
other similar type of transaction with respect to the Company, (v) tender offer
or exchange offer for a majority of the voting equity securities of the Company
or (vi) other transaction which is similar in form, substance or purpose to any
of the foregoing transactions; in the case of (i), (ii), (iii), (iv) or (v)
above, which transaction would result in a third party (or its stockholders)
acquiring more than fifty percent (50%) of the voting power of, or economic
interest in, the Company or the assets representing more than fifty percent
(50%) of the net income, net revenue or assets of the Company on a consolidated
basis; provided, however, that the term "COMPANY ACQUISITION PROPOSAL" shall not
include the Merger and the transactions contemplated hereby. For purposes of
this Agreement, "COMPANY SUPERIOR PROPOSAL" means any Company Acquisition
Proposal made by a third party on terms which the Board of Directors of the
Company determines in good faith (after consulting with a financial advisor of
nationally recognized reputation and considering such other 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,
taking into account, in the reasonable good faith judgment of the Board of
Directors of the Company after consultation with its financial advisor, the
availability to the person or entity making such Company Superior Proposal of
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. The Company
shall be responsible for the conduct of its Representatives in accordance with
this SECTION 6.3(a), and any conduct by a Representative that would constitute a
breach of the provisions of this SECTION 6.3(a) if engaged in by the Company
shall be deemed a breach of this SECTION 6.3(a) by the Company.
(b) Except as permitted by this SECTION 6.3, neither the Board of Directors of
the Company nor any committee thereof shall (i) withdraw, or modify in a manner
adverse to Parent, or propose publicly to withdraw, or modify in a manner
adverse to Parent, 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 publicly endorse any Company Acquisition Proposal,(iii)
render the provisions of any anti-takeover statute, rule or regulation
inapplicable to any person or group (other than Parent, Merger Sub or their
affiliates) or to any Company Acquisition Proposal, or (iv) cause the Company to
enter into any letter of intent, agreement in principle, acquisition agreement
or similar agreement with respect to any Company Acquisition Proposal, except in
each case to the extent that the Board of Directors of the Company or any
committee thereof shall determine in good faith (after consultation with its
outside legal counsel), that the failure to do so would be inconsistent with the
fiduciary duties of the Board of Directors of the Company under applicable law.
Nothing contained in this SECTION 6.3 shall prohibit the Company or the Board of
Directors of the Company or any committee thereof 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 the Board of Directors of the Company or any committee thereof
shall determine in good faith (after consultation with its outside legal
counsel), that the failure to do so would be inconsistent with the fiduciary
duties of the Board of Directors of the Company under applicable law, provided,
however, that neither the Company nor its Board of Directors nor any committee
thereof shall withdraw or modify, or propose publicly to withdraw or modify in a
manner adverse to Parent, 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 unless and until the Company shall have complied
with its obligations under this Section 6.3.
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(c) In addition to the obligations of the Company set forth in paragraphs (a)
and (b) of this SECTION 6.3, the Company will promptly (and in any event within
forty-eight (48) hours) advise Parent, orally and in writing, if any Company
Acquisition Proposal is made, or any non-public information or access to the
properties, books or records of the Company is requested in connection with a
Company Acquisition Proposal. Any disclosure by the Company pursuant to the
first sentence of this SECTION 6.3(c) will include a reasonably detailed summary
of the principal terms and conditions of any such Company Acquisition Proposal
and, if not prohibited by any confidentiality agreement in effect as of the date
hereof, will disclose any written materials received by the Company in
connection with such Company Acquisition Proposal and the identity of the party
making such Company Acquisition Proposal, or inquiry. The Company will keep
Parent reasonably advised of the status and details (including amendments and
proposed amendments) of any such request or Company Acquisition Proposal.
6.4 MEETINGS OF STOCKHOLDERS.
(a) Promptly after the date hereof, the Company shall take all action necessary
in accordance with the DGCL and its certificate of incorporation and bylaws to
convene a meeting of stockholders ("COMPANY STOCKHOLDERS MEETING") to be held as
promptly as practicable after the S-4 Registration Statement is declared
effective by the SEC for the purposes of voting upon this Agreement and the
Merger. Nothing herein shall prevent the Company from adjourning or postponing
the Company Stockholders Meeting if there are insufficient Company Shares
necessary to conduct business at the Company Stockholders Meeting. Unless the
Company's Board of Directors or any committee thereof has withdrawn or modified
its recommendation of this Agreement and the Merger in compliance with SECTION
6.3, the Company shall use its reasonable best efforts to solicit from its
stockholders proxies in favor of the adoption of this Agreement and the Merger
and shall take all other action necessary or advisable to secure the vote or
consent of stockholders required by the DGCL or NNM requirements to obtain such
adoption. The Company shall take all other action necessary or advisable to
promptly and expeditiously secure any vote or consent of stockholders required
by applicable law, the NNM and the Company's certificate of incorporation and
bylaws to effect the Merger.
(b) Promptly after the date hereof, Parent shall take all action necessary in
accordance with the DGCL and its certificate of incorporation and bylaws to
convene a meeting of stockholders (the "PARENT STOCKHOLDERS MEETING") to be held
as promptly as practicable after the S-4 Registration Statement is declared
effective by the SEC for the purposes of voting upon the issuance of Parent
Shares in connection with the Merger and the other transactions contemplated
hereby. Nothing herein shall prevent Parent from adjourning or postponing the
Parent Stockholders Meeting if there are insufficient shares of Parent Common
Stock necessary to conduct business at the Parent Stockholders Meeting. Neither
the Board of Directors of Parent nor any committee thereof shall withdraw or
modify, or propose publicly 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 shares of Parent Common Stock pursuant to the
Merger and the other transactions contemplated hereby, except to the extent that
the Board of Directors of Parent or any committee thereof shall determine in
good faith (after consultation with its outside legal counsel), that the failure
to do so would be inconsistent with the fiduciary duties of the Board of
Directors of Parent under applicable law. Nothing contained in this SECTION
6.4(b) shall prohibit Parent or the Board of Directors of Parent from making any
disclosure to Parent's stockholders if the Board of Directors of Parent or any
committee thereof shall determine in good faith (after consultation with its
outside legal counsel), that the failure to do so would be inconsistent with the
fiduciary duties of the Board of Directors of Parent under applicable law.
Unless Parent's Board of Directors or any committee thereof has withdrawn or
modified its recommendation of the issuance of Parent Shares in connection with
the Merger and the other transactions contemplated hereby in compliance with
this SECTION 6.4(b), Parent shall use its reasonable best efforts to solicit
from its stockholders proxies in favor of the issuance of Parent Shares in
connection with the Merger and the other transactions contemplated hereby and
shall take all other action necessary or advisable to secure the vote or consent
of stockholders required by the DGCL or NNM requirements to obtain such
approval. Parent shall take all other action necessary or advisable to promptly
and expeditiously secure any vote or consent of stockholders required by
applicable law, the NNM and Parent's certificate of incorporation and bylaws to
effect the Merger, including the issuance of Parent Shares in connection with
the Merger and the other transactions contemplated hereby.
6.5 REGISTRATION STATEMENT. Parent will, as promptly as practicable after the
date hereof, prepare and file with the SEC a registration statement on Form S-4
(the "S-4 REGISTRATION STATEMENT"), containing a joint proxy
statement/prospectus and forms of proxy, in connection with the registration
under the Securities Act of the Parent Shares issuable in connection with the
Merger and the other transactions contemplated hereby. The Company and Parent
will, as promptly as practicable after the date hereof, prepare and file with
the SEC a joint proxy statement that will be the same joint proxy
statement/prospectus contained in the S-4 Registration Statement and forms of
proxy, in connection with the vote of the Company's and Parent's stockholders
with respect to the Merger or the issuance of Parent Shares in connection
therewith, as applicable (such joint 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 "PROXY
STATEMENT"). Each of the Company and Parent will, and will cause its respective
accountants, lawyers and investment bankers or financial advisors to, use its
commercially reasonable efforts to cause the S-4 Registration Statement to be
declared effective by the SEC (the date the S-4 Registration Statement is
declared effective being referred to as the "S-4 EFFECTIVE DATE") as promptly as
practicable thereafter, including, without limitation, causing its respective
accountants, lawyers and investment bankers or financial advisors to deliver
necessary or required instruments such as opinions, consents and certificates,
and will take or will cause its respective accountants and lawyers to take, any
other action required or
27
necessary to be taken or advisable or customary under federal or state
securities laws or otherwise in connection with the registration process, it
being understood and agreed that each of Wilson Sonsini Goodrich & Rosati
Professional Corporation, counsel to the Company, and Katten Muchin Zavis
Rosenman, counsel to Parent, will render, on the date the preliminary Proxy
Statement is first filed with the SEC or on the date of any amendment thereto so
long as it is rendered prior to the date on which the S-4 Registration Statement
is declared effective, an opinion that the federal income tax consequences
described in the Registration Statement are true and correct in all material
respects. Each of the Company and Parent will use its reasonable efforts to
cause the Proxy Statement and the applicable form of proxy to be mailed to its
stockholders at the earliest practicable date after the S-4 Effective Date and
each of the Company and Parent shall each use its commercially reasonable
efforts to hold the Company Stockholders Meeting and the Parent Stockholders
Meeting, as the case may be, as soon as practicable thereafter (subject to the
requirements of laws and rules and regulations of the SEC). 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 EFFORTS. Each of the Parties shall: (a) promptly make its
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 (b) use its commercially reasonable 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.
(a) Upon reasonable notice, Parent, on the one hand, and the Company, on the
other hand, 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 its 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 compliance with the terms of that certain Confidentiality
Agreement, entered by and between the Company and Parent, dated February 10,
2002 (the "CONFIDENTIALITY AGREEMENT").
(b) Parent and the Company shall keep each other reasonably apprised of the
status of matters relating to the completion of the transactions contemplated
hereby and work cooperatively in connection with obtaining all required
approvals or consents of any governmental authority (whether domestic, foreign
or supranational). In that regard, each Party shall without limitation: (i)
promptly notify the other of, and if in writing, furnish the other with the
copies of (or, in the case of material oral communications, advise the other
orally of) any communications from or with any governmental authority (whether
domestic, foreign or supranational) with respect to the Merger or any of the
other transactions contemplated by this Agreement, (ii) permit the other to
review and discuss in advance, and consider in good faith the views of the other
in connection with, any proposed filings or any written (or any material
proposed oral) communication with any such governmental authority, (iii) not
participate in any meeting with any such governmental authority unless it
consults with the other in advance and to the extent permitted by such
governmental authority gives the other the opportunity to attend and participate
thereat, and (iv) furnish the other with copies of all correspondence, filing
and communications (and memoranda setting forth the substance thereof) between
it and any such governmental authority with respect to this Agreement and the
Merger.
(c) Each of the Company and Parent shall promptly notify the other party in
writing of:
(i) any notice or other communication from any Person alleging that the consent
of such Person is or may be required in connection with the transactions
contemplated by this Agreement if the failure of the Company or Parent, as the
case may be, to obtain such consent would have a Material Adverse Effect on
Company or Parent as applicable or to the consummation of the transactions
contemplated hereby;
(ii) any notice or other communication from any governmental or regulatory
agency or authority in connection with the transactions contemplated by this
Agreement; and
(iii) any notice (written or oral) or Knowledge of the occurrence of any event
which will, or is reasonably likely to, result in the failure to satisfy any of
the conditions specified in ARTICLE VII.
(d) The Company and Parent shall promptly notify the other Party of any actions,
suits, claims, investigations or proceedings commenced or, to its Knowledge,
threatened against, relating to or involving or otherwise affecting such party
or any of its Subsidiaries which relate to the consummation of the transactions
contemplated by this Agreement.
6.8 PUBLICITY. The Parties agree that they will consult with each other
concerning any proposed press release or public
28
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 or delayed, except as may be required by
applicable law or by obligations pursuant to any listing agreement with a
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 reasonable efforts to consult in good faith with the
other Party before issuing any such press release or making any such public
announcement. The Parties will prepare a joint press release for the
announcement of the execution of this Agreement. 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 AFFILIATES OF THE COMPANY. The Company has identified the Persons listed on
SECTION 6.9 of the Company Disclosure Schedule as persons whom the Company
reasonably believes are "affiliates" of the Company for purposes of Rule 145
promulgated under the Securities Act (each, a "COMPANY AFFILIATE"). The Company
will use its reasonable best efforts to obtain as promptly as practicable from
each Company Affiliate a written agreement in the form attached hereto as
Exhibit B (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.
6.10 MAINTENANCE OF INSURANCE. Between the date hereof and through the Effective
Time, the Company will use commercially reasonable efforts to maintain in full
force and effect all presently existing policies of insurance of the Company or
its Subsidiaries or insurance reasonably comparable to the coverage afforded by
such policies.
6.11 FILINGS; OTHER ACTION. Subject to the terms and conditions herein provided,
the Parties shall: (a) promptly after the date hereof make their respective
filings and thereafter make any other required submissions under the HSR Act,
the Securities Act and the Exchange Act, and comparable foreign laws, rules and
regulations, with respect to the Merger; (b) cooperate in the preparation of
such filings or submissions to the extent required under the HSR Act, the
Securities Act and the Exchange Act and comparable foreign laws, rules and
regulations; and (c) use commercially reasonable 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. Each Party shall bear their own costs and expenses as to
the actions set forth in (a)-(c) above. Notwithstanding anything to the contrary
contained herein, nothing in this Agreement will require Parent, whether
pursuant to an order of the Federal Trade Commission or the United States
Department of Justice or otherwise, to dispose of any material assets, lines of
business or equity interests in order to obtain the consent of the Federal Trade
Commission or the United States Department of Justice to the transactions
contemplated by this Agreement.
6.12 TAX FREE REORGANIZATION TREATMENT. The Parties shall use their commercially
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368(a) of the Code 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 the meaning of Section
368(a) of the Code. Each of Parent, Merger Sub, and the Company (i) shall not
file any Return or take any position inconsistent with the treatment of the
Merger as a reorganization described in Section 368(a) of the Code, and (ii)
shall comply with the record keeping and information reporting requirements set
forth in Treasury Regulation ss. 1.368-3. Prior to the Effective Time, each of
the Parties shall use their commercially reasonable efforts to obtain the
opinion of its tax counsel in such form and upon such matters as described in
SECTION 7.2 or 7.3, as applicable.
6.13 INDEMNIFICATION.
(a) From and after the Effective Time, Parent and the Surviving Corporation will
fulfill and honor in all respects the obligations of the Company to indemnify
and hold harmless the Company's and its Subsidiaries' present and former
directors, officers, employees, and agents and their heirs, executors and
assigns (collectively, the "INDEMNIFIED PERSONNEL") against all claims, losses,
liabilities, damages, judgments, fines and fees, costs and expenses, including
attorneys' fees and disbursements and amounts paid in settlement, incurred in
connection with any threatened or pending claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to (i) the fact that the Indemnified Personnel is or was an
officer, director, employee or agent of the Company or any of its Subsidiaries
or (ii) matters existing or occurring at or prior to the Effective Time
(including this Agreement and the transactions and actions contemplated hereby),
whether asserted or claimed prior to, at or after the Effective Time, to the
fullest extent permitted under applicable law.
(b) The certificate of incorporation and bylaws of the Surviving Corporation
will contain provisions with respect to indemnification and elimination of
liability for monetary damages at least as favorable to the Indemnified
Personnel as those set forth in the current certificate of incorporation and
bylaws of the Company, and for a period of six (6) years from the Effective
Time, those provisions will not be repealed or amended or otherwise modified in
any manner that would adversely affect the rights thereunder of the Indemnified
Personnel, except to the extent, if any, that such modification is required by
applicable law.
(c) For a period of six (6) years after the Effective Time, Parent and the
Surviving Corporation will either (i) maintain in effect, if available,
directors' and officers' liability insurance covering those persons who are
currently covered by the Company's directors' and
29
officers' liability insurance policy on terms comparable to those applicable to
the current directors and officers of the Company; provided, however, that in no
event will Parent and the Surviving Corporation be required to expend in excess
of 200% of the annual premium currently paid by the Company for such coverage
(or such coverage as is available for such 200% of such annual premium), or (ii)
if mutually agreed between the Company and Parent prior to the Closing, purchase
a directors' and officers' liability insurance policy on terms comparable to
those applicable to the current directors and officers of the Company covering
all periods prior to the Effective Time.
(d) In the event that Parent or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers all or substantially all of its
properties and assets to any person in a single transaction or a series of
transactions, then, and in each such case, Parent or the Surviving Corporation,
as applicable, shall make or cause to be made proper provision so that the
successors and assigns of Parent or the Surviving Corporation, as applicable,
assume the indemnification obligations of Parent or the Surviving Corporation,
as applicable, under this SECTION 6.13 for the benefit of the Indemnified
Personnel.
(e) The obligations of Parent and the Surviving Corporation under this SECTION
6.13 shall not be terminated or modified in such a manner as to adversely affect
any Indemnified Personnel to whom this SECTION 6.13 applies without the consent
of such affected Indemnified Personnel (it being expressly agreed that the
Indemnified Personnel to whom this SECTION 6.13 applies shall be third party
beneficiaries of this SECTION 6.13) unless such modification or termination is
required by law.
6.14 COMPANY ESPP. Any offering underway as of May 15, 2002 or that is scheduled
to end on such date under the Company ESPP shall, to the extent necessary, be
accelerated such that on May 15, 2002 all offerings under the Company ESPP shall
be determined by treating this date as the last day of such offering periods
(and making such other pro-rata adjustments as may be necessary to reflect the
shortened offering). Outstanding rights to purchase shares of Company Common
Stock shall be exercised in accordance with the terms of the ESPP. The Company
ESPP shall remain in effect until otherwise terminated by the Company's Board of
Directors; provided, however, that, the Company will not permit an offering
period to commence after the date hereof (unless this Agreement is terminated)
and provided further, that, in the event the Merger is consummated, the Company
ESPP shall be terminated effective as of the Effective Time.
6.15 EXEMPTION FROM LIABILITY UNDER SECTION 16(B)
(a) Provided that, prior to the Effective Time, Company delivers to Parent: (i)
a resolution of the Board of Directors of Company, or a committee of
Non-Employee Directors thereof (as such term is defined for purposes of Rule
16b-3(d) under the Exchange Act), providing that the conversion into Parent
Shares or options to purchase Parent Shares by Company Insiders of Company
Shares or options to purchase Company Shares pursuant to the transactions
contemplated hereby are intended to be exempt from liability pursuant to Rule
16b-3 under the Exchange Act and (ii) 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-(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 or options to purchase 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.
6.16 FORM S-8. Parent agrees to file a registration statement on Form S-8 for
the shares of Parent Common Stock issuable with respect to assumed Company
Options to the extent Form S-8 is available within ten (10) business days after
the Effective Time and shall maintain the effectiveness of such registration
statement thereafter for so long as any of such options or rights remain
outstanding.
6.17 NNM LISTING. Parent shall take all actions reasonably necessary to cause
Parent and the Parent Common Stock to become in compliance with the NNM's
listing criteria and shall use its reasonable best efforts to cause the Parent
Shares to be issued in the Merger or upon exercise of Company Options and
Additional Options to be listed for trading on the NNM, subject to notice of
official issuance thereof, prior to the Closing. Parent shall promptly notify
the Company of, and if in writing, furnish the Company with the copies of (or,
in the case of material oral communications, advise the Company orally of) any
communications from or with the NNM with respect to Parent's and the Parent
Common Stock's satisfaction of the NNM's listing criteria.
6.18 COMPANY RIGHTS AGREEMENT. The Board of Directors of the Company shall take
all further action (in addition to that
30
referred to in SECTION 5.2(aa)) reasonably requested in writing by Parent
(including redeeming the Company Rights immediately prior to the Effective Time
of the Merger or amending the Company Rights Agreement) in order to render the
Company Rights inapplicable to the Merger and the other transactions
contemplated by this Agreement. Except as expressly provided in this Agreement
or as reasonably requested in writing by Parent, and subject to SECTION 6.1
hereof, the Board of Directors of the Company shall not: (i) amend the Company
Rights Agreement or (ii) take any action with respect to, or make any
determination under, the Company Rights Agreement (including a redemption of the
Company Rights).
6.19 PARENT RIGHTS AGREEMENT. The Board of Directors of Parent shall take all
further action (in addition to that referred to in SECTION 5.1(cc)) reasonably
requested in writing by the Company (including redeeming the Parents Rights
immediately prior to the Effective Time of the Merger or amending the Parent
Rights Agreement) in order to render the Rights inapplicable to the Merger and
the other transactions contemplated by this Agreement.
6.20 GRANTING OF ADDITIONAL PARENT OPTIONS. At the Effective Time, Parent shall
grant options ("ADDITIONAL PARENT OPTIONS") to purchase 6,000,000 shares of
Parent Common Stock under the Parent Option Plans less the number of shares of
Parent Common Stock issuable as a result of the exercise of options assumed
under the Parent Option Plans as a result of the issuance of Company Options
pursuant to SECTION 6.1(j)(i), any (excluding options that may be or will in the
future be granted under Parent's ESPP) to the individuals and in the amounts as
may be determined by the Company, subject to the approval of Parent (which shall
not be unreasonably withheld). The Additional Parent Options shall be subject to
Parent's standard terms and conditions, including vesting schedules. The
exercise price for the Additional Parent Options shall be the Parent Stock
Price. The number of Additional Parent Options granted hereunder shall be
adjusted to reflect fully the effect of any stock split, reverse stock split,
stock dividend (including any dividend or distribution of securities convertible
into or exchangeable for Parent Common Stock), reorganization, recapitalization
or other like change with respect to Parent Common Stock occurring after the
date hereof and prior to the Effective Time. The Parent Common Stock to be
issued upon the exercise of such Additional Parent Options has been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
Parent's applicable stock option plan, will be duly and validly issued, fully
paid, nonassessable, free of any liens or encumbrances (other than any liens or
encumbrances created by the holder thereof) and free of restrictions on
transfer.
6.21 EMPLOYEE BENEFIT PLANS. Effective as of the Effective Time and until the
date 18 months following such time, Parent shall provide the employees (and
their dependents) of the Company and any employee (and their dependents) of any
Subsidiary of the Company (collectively, "CONTINUING EMPLOYEES") for so long as
such Continuing Employees are employed by the Company or any Subsidiary of the
Company with the types and levels of benefits maintained by Parent for similarly
situated employees (and their dependents) of Parent; provided, however, that
such benefits shall, in the aggregate, be no less favorable than the types and
levels of benefits as were provided by Company to Continuing Employees (and
their dependents) prior to the Effective Time ("COMPANY PARTICIPANT") "and that
any benefits provided to Continuing Employees whose employment is terminated
within 18 months following the Effective Date pursuant to the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA) shall not be less favorable
than such benefits provided to terminating employees of the Company immediately
prior to the Effective Date." Each participant (including without limitation all
dependents) in the health benefit plans of the Company ("COMPANY PARTICIPANT")
who continues to be employed by Parent (or any of its subsidiaries) immediately
following the Effective Time shall, to the extent permitted by law and
applicable tax qualification requirements, and subject to any generally
applicable break in service or similar rule, receive credit for all purposes
(including without limitation) for eligibility to participate and vesting under
any employee benefit plan of Parent for years of service with the Company (and
its subsidiaries and predecessors) prior to the Effective Time, except to the
extent where such credit would result in duplication of benefits. Parent shall
cause any and all pre-existing condition (or actively-at-work or similar)
limitations, eligibility waiting periods and evidence of insurability
requirements under any group health plans to be waived with respect to such
Company Participants and their eligible dependents and shall provide them with
credit for any copayments, deductibles, and offsets (or similar payments) prior
to the Effective Time for purposes of satisfying any applicable deductible,
out-of-pocket, or similar requirements under any Parent Plans in which they are
eligible to participate after the Effective Time. Notwithstanding the foregoing,
immediately following the Effective Time, Continuing Employees shall (i)
continue to participate in the 401(k) plan of the Company or shall be permitted
to participate in the 401(k) plan of Parent and (ii) shall continue to
Participate in the Company ESPP or shall be permitted to Participate in the
Parent ESPP. Parent shall take all actions necessary to ensure such Continuing
Employee's participation in such plans of the Effective Time.
6.22 ADDITIONAL COMPANY COVENANT. If the Closing shall occur on or before June
30, 2002, the Company's cash and cash equivalents shall equal an amount no less
than $98,000,000, provided, however, that if such closing shall occur after June
30, 2002 and on or before August 5, 2002, the Company's cash and cash
equivalents shall equal an amount no less than $98,000,000.
6.23 ADDITIONAL PARENT COVENANT. If the Closing shall occur on or before June
30, 2002, Parent's cash and cash equivalents shall equal an amount no less than
$52,000,000; provided, however, that if such closing shall occur after June 30,
2002 and on or before August 5, 2002, Parent's cash and cash equivalents shall
equal an amount no less than $52,000,000.
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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 been approved and adopted by the
requisite vote under applicable law of the stockholders of the Company and the
issuance of Parent Shares pursuant to the Merger and the transactions
contemplated hereby shall have been approved by the requisite vote of the
stockholders of Parent to the extent required by the rules and regulations of
the NNM;
(b) the SEC shall have declared the S-4 Registration Statement effective; no
stop order suspending the effectiveness of the S-4 Registration Statement shall
have been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened in
writing by the SEC; and all requests for additional information on the part of
the SEC shall have been complied with to the reasonable satisfaction of the
Parties;
(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 reasonable efforts to prevent the entry of such Restraints and to
appeal as promptly as possible any such Restraints that may be entered; and
(d) the waiting period(s) under the HSR Act, if applicable, and all applicable
material foreign antitrust, competition and merger laws shall have expired or
been terminated.
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 and Merger Sub set forth in
SECTION 5.1 hereof shall be true and correct in all respects 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 earlier date),except (i) as otherwise
expressly contemplated by this Agreement and (ii) for such failures to be true
and correct which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect (without for this purpose giving
effect to qualifications or limitations as to materiality or the absence of a
Material Adverse Effect contained in such representations and warranties), it
being understood that for purposes of determining the accuracy of such
representations or warranties any update or modification to the Parent
Disclosure Schedule made or purported to have been made without the Company's
written consent thereto shall be disregarded;
(b) Parent and Merger Sub 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 a duly
authorized 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 has been satisfied in all respects;
(d) if Parent does not otherwise meet the NNM listing criteria at such time as
all other conditions set forth in this Article VII have been satisfied, Parent
shall have obtained the requisite stockholder approval to effect a reverse stock
split such that immediately following Parent's election to effectuate such
approved reverse stock split, the necessity and time of which shall be
determined in Parent's sole discretion, Parent and the Parent Common Stock shall
meet the NNM's listing criteria;
(e) Robert Gett shall have been appointed to Parent's Board of Directors
effective upon and subject to the Effective Time;
(f) the Company shall have received an opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, its tax counsel, in form and substance
reasonably satisfactory to it, dated the Closing Date, to the effect that the
Merger will constitute a reorganization for United States federal income tax
purposes within the meaning of Section 368(a) of the Code; provided, however,
that if Wilson Sonsini Goodrich & Rosati, Professional Corporation, does not
render such opinion, this condition shall nonetheless be deemed to be satisfied
with respect to the Company if Katten Muchin Zavis Rosenman renders such opinion
to the Company. The Company agrees to make such reasonable representations as
may be requested by tax counsel in connection with the opinions referred to
above; and
(g) the Alliance Agreement by and between Parent and Microsoft Corporation,
dated as of January 28, 2000, as amended on March 29, 2000, shall have been
terminated or amended to remove Parent's (i) $50.0 million obligation related to
the creation of an incubator
32
and (ii) $4.0 million obligation related to co-marketing programs, such that the
sole obligation under such agreement shall be a $15.0 million purchase
requirement by Parent and its Subsidiaries;
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 Company set forth in
SECTION 5.2 shall be true and correct in all respects 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 earlier date), except (i) for such
failures to be true and correct which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect (without for this
purpose giving effect to qualifications or limitations as to materiality or the
absence of a Material Adverse Effect contained in such representations and
warranties), PROVIDED, HOWEVER, that such Material Adverse Effect qualifier
shall be inapplicable with respect to the representations and warranties of
Company contained in SECTIONS 5.2(a), (b) AND (d), each of which individually
shall be true and correct in all material respects 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 earlier date), and (ii) as otherwise
expressly contemplated by this Agreement, it being understood that for purposes
of determining the accuracy of such representations and warranties any update or
modification to the Company Disclosure Schedule made or purported to have been
made without Parent's written consent thereto shall be disregarded;
(b) the Company 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) and (b) of this SECTION 7.3 has been satisfied in all respects;
(d) Parent shall have received an opinion of Katten Muchin Zavis Rosenman, its
tax counsel, in form and substance reasonable satisfactory to it, dated the
Closing Date, to the effect that the Merger will constitute a reorganization for
United States federal income tax purposes within the meaning of Section 368(a)
of the Code; provided, however, that if Katten Muchin Zavis Rosenman does not
render such opinion, this condition shall nonetheless be deemed to be satisfied
with respect to Parent and Merger Sub if Wilson Sonsini Goodrich & Rosati,
Professional Corporation, renders such opinion to Parent. Parent agrees to make
such reasonable representations as may be requested by tax counsel in connection
with the opinions referred to above; and
(e) the Company shall have received all written consents, assignments, waivers,
authorizations or other certificates set forth in SECTION 7.3(e) of the Company
Disclosure Schedule.
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
the requisite approval of the stockholders of the Company and, if necessary, the
stockholders of Parent, 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 by action of the Board of Directors
of either the Company or Parent if:
(a) the Merger shall not have been consummated by August 5, 2002; provided,
however, that the right to terminate this Agreement under this SECTION 8.2(a)
shall not be available to any party whose action or 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, that the Party seeking to terminate pursuant to this
subsection (b), if such Party was named party to the action or proceeding
resulting in the Restraint, shall have used reasonable efforts to prevent the
entry of such Restraint and to appeal as promptly as possible any such Restraint
that may be entered;
(c) at the duly held Company Stockholders Meeting (including any adjournments
thereof), the requisite approval of the Company's stockholders shall not have
been obtained; provided, however, that the Company's right to terminate this
Agreement under this SECTION 8.2(c) shall not be available to the Company if the
Company has breached or otherwise not complied with its obligations under
SECTION 6.1 and 6.4(a); or
33
(d) at the duly held Parent Stockholders Meeting (including any adjournments
thereof) the requisite approval of Parent's stockholders shall not have been
obtained; provided, however, that Parent's right to terminate this Agreement
under this SECTION 8.2(D) shall not be available to Parent if Parent has not
complied with its obligations under SECTION 6.4(b).
8.3 TERMINATION BY THE COMPANY. This Agreement may be terminated by the Company
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 the stockholders of the
Company, 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 conditions set forth in SECTION 7.2(a) or (b) would not be satisfied as
of the time of such breach or failure or as of such time as such representation
or warranty shall have become untrue and (ii) such breach or failure to be true
is incapable of being cured or, if capable of being cured, has not been cured
within thirty (30) business days following receipt by Parent of written notice
of such failure or breach;
(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 approval or
recommendation of the issuance of Parent Shares in connection with the Merger
and the other transactions contemplated hereby, or Parent shall have failed to
include in the Proxy Statement the recommendation of the Board of Directors of
Parent in favor of approval of the issuance of Parent Shares in connection with
the Merger and the other transactions contemplated hereby, (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 the issuance of Parent Shares in
connection with the Merger and the other transactions contemplated hereby, or
(iii) the Board of Directors of Parent or any committee thereof shall have
resolved to do any of the foregoing; or
(c) for the purpose of accepting a Company Superior Proposal; provided, that
such termination under this Section 8.2(c) shall not be effective unless (x) the
Company and its Board of Directors shall have complied in all material respects
with their obligations under Section 6.2(b) and the Company shall have paid the
Termination Fee pursuant to Section 8.5; and (y) the Company provides Parent
with at least two (2) business days' prior written notice prior to terminating
this Agreement, which notice shall be accompanied by a copy of the proposed
acquisition agreement with respect to the Company Superior Proposal that the
Company proposes to accept.
8.4 TERMINATION BY PARENT. This Agreement may be terminated by Parent 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 the stockholders of
Parent, 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 conditions set forth in SECTION 7.3(a) or (b)
would not be satisfied as of the time of such breach or failure or as of such
time as such representation or warranty shall have become untrue and (ii) such
breach or failure to be true is incapable of being cured or, if capable of being
cured, or has not been cured within thirty (30) business days following receipt
by the Company of written notice of such failure or breach; 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 of the Merger and this Agreement,
(iii) in connection with a Rule 14d-9 disclosure, the Board of Directors of the
Company shall have taken any action other than a rejection of a Rule 14d-9
proposal, (iv) the Board of Directors of the Company or any committee thereof
shall have recommended to the Company's stockholders any Company Acquisition
Proposal, (v) the Board of Directors of the Company or any committee thereof
shall have resolved to do any of the foregoing or (vi) any Company Acquisition
Proposal is consummated or an agreement with respect to any Company Acquisition
Proposal is executed.
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 6.6, the payment of expenses
pursuant to SECTION 9.1, and Article IX generally, (y) to the extent that such
termination results from a breach of a Party of any of its covenants or
agreements in this Agreement or (z) with respect to any intentional
misrepresentations in connection with or pursuant to this Agreement or the
transactions contemplated hereby.
(b) In the event that this Agreement is terminated (i) by the Company pursuant
to SECTION 8.3(c) or (ii) by Parent pursuant to SECTION 8.4(b), then the Company
shall promptly, but in no event later than the date of such termination by the
Company or the fifth (5th) business day after such termination by Parent, as
applicable, pay Parent a fee equal to $2,680,000 (the "TERMINATION FEE") payable
by wire transfer in immediately available funds. In the event that this
Agreement is terminated by either the Company
34
or Parent (i) pursuant to SECTION 8.2(c), or (ii) pursuant to SECTION 8.2(a) due
to the Company Stockholders Meeting not occurring as a result of a Company
Acquisition Proposal, then the Company shall promptly, but in no event later
than the fifth (5th) business day after the later to occur of such termination
or the receipt of the Parent Fees and Expenses Statement referred to below, pay
to Parent an amount equal to the out-of-pocket fees and expenses incurred by
Parent and Merger Sub in connection with execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
(including, without limitation, reasonable attorney's fees and expenses,
reasonable advisor fees and expenses and printing, mailing and solicitation
costs and expenses) through the date of termination of this Agreement (the
"PARENT FEES AND EXPENSES"), which shall be supported by reasonable
documentation of such fees and expenses provided by Parent to the Company (the
"PARENT FEES AND EXPENSES STATEMENT"); provided, further, that if (i) the
Company shall have received a Company Acquisition Proposal from any Person or
group which shall not have expired or been revoked prior to such termination of
this Agreement and (ii) within twelve (12) months after such termination a
Company Acquisition Proposal is consummated or the Company shall have entered
into an agreement with respect to a Company Acquisition Proposal which is
subsequently consummated, then the Company shall pay to Parent an amount equal
to the Termination Fee less any Parent Fees and Expenses paid previously by the
Company pursuant to this SECTION 8.5 within five (5) business days after the
consummation of such Company Acquisition Proposal, payable by wire transfer of
same day funds. 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 promptly to pay the amount due
pursuant to this SECTION 8.5(b), and, in order to obtain such payment, Parent
commences a suit which results in a judgment against the Company for the fee set
forth in this SECTION 8.5(b), the Company shall pay to Parent its costs and
expenses (including reasonable attorneys' fees and expenses) in connection with
such suit, together with interest on the amount of the fee at the prime rate of
Citibank, N.A. in effect on the date such payment was required to be made.
(c) In the event that (i) this Agreement is terminated by either the Company or
Parent pursuant to SECTION 8.2(d) and at the time of the Parent Stockholders
Meeting there existed a Parent Acquisition Proposal (as defined below), (ii)
this Agreement is terminated by the Company pursuant to SECTION 8.3(b), or (iii)
this Agreement is terminated by the Company pursuant to SECTION 8.2(a) or 8.3(a)
as a result of the condition to the Company's obligation to consummate the
Merger set forth in SECTION 7.2(d) not being satisfied, then Parent shall
promptly, but in no event later than the fifth (5th) business day after the date
of such termination, pay the Company a fee equal to the Termination Fee, payable
by wire transfer of same day funds. In the event that this Agreement is
terminated by either the Company or Parent pursuant to SECTION 8.2(d) and at the
time of the Parent Stockholders Meeting there did not exist a Parent Acquisition
Proposal, then Parent shall promptly, but in no event later than the fifth (5th)
business day after the later to occur of such termination or the receipt of the
Company Fees and Expenses Statement referred to below, pay to the Company an
amount equal to the out-of-pocket fees and expenses incurred by the Company in
connection with execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby (including, without limitation, reasonable
attorney's fees and expenses, reasonable advisor fees and expenses and printing,
mailing and solicitation costs and expenses) through the date of termination of
this Agreement, which shall be supported by reasonable documentation of such
fees and expenses provided by the Company to Parent (the "COMPANY FEES AND
EXPENSES STATEMENT"). 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, and accordingly, if Parent fails promptly to pay the amount due
pursuant to this SECTION 8.5(c), and, in order to obtain such payment, the
Company commences a suit which results in a judgment against Parent for the fee
set forth in this SECTION 8.5(c), Parent shall pay to the Company its costs and
expenses (including reasonable attorneys' fees and expenses) in connection with
such suit, together with interest on the amount of the fee at the prime rate of
Citibank, N.A. in effect on the date such payment was required to be made. As
used herein, the term "PARENT ACQUISITION PROPOSAL" shall mean any inquiry,
proposal or offer relating to any (i) merger, consolidation, business
combination, or similar transaction involving Parent, (ii) sale, lease or other
disposition, directly or indirectly, of all or a substantial portion of the
assets or revenues of Parent and its Subsidiaries, taken as a whole in one or
more transactions, (iii) issuance, sale, or other disposition of a majority of
the voting equity securities (or options, rights or warrants to purchase such
securities, or securities convertible into such securities) of Parent, (iv)
liquidation, dissolution, recapitalization or other similar type of transaction
with respect to Parent, (v) tender offer or exchange offer for a majority of the
voting equity securities of Parent; or (vi) other transaction which is similar
in form, substance or purpose to any of the foregoing transactions in the case
of (i), (ii), (iii), (iv), (v) or (vi) above, which transaction would result in
a third party (or its stockholders) acquiring more than fifty percent (50%) of
the voting power of, or economic interest in, Parent or the assets representing
more than fifty percent (50%) of the net income, net revenue or assets of Parent
on a consolidated basis, provided, however, that the term "PARENT ACQUISITION
PROPOSAL" shall not include the Merger and the transactions contemplated hereby.
(d) In the event both Parent and the Company would otherwise be entitled to
receive the Termination Fee under this SECTION 8.5 in connection with the
termination of this Agreement, neither party shall be required to make any
payment under this SECTION 8.5.
(e) If this Agreement is terminated under circumstances in which Parent or the
Company is entitled to receive the Termination Fee, (i) the obligation to pay
the Termination Fee shall survive the termination of this Agreement and (ii) the
payment of the Termination Fee shall be the sole and exclusive remedy available
to Parent or the Company, as applicable. Notwithstanding anything to the
contrary contained herein, in the event of a willful breach by a Party of any
covenant contained in this Agreement, the other Party hereto shall have all
rights, powers and remedies against the other party that 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
35
any other such right, power or remedy by such Party.
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 (the "TRANSACTION EXPENSES").
9.2 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made in SECTIONS 5.1 and 5.2 hereof 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 or after termination of this
Agreement pursuant to ARTICLE VIII, including the payment of any Termination
Fee.
9.3 MODIFICATION OR AMENDMENT. Subject to the applicable provisions of the DGCL,
at any time prior to the Effective Time, the Parties, 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
stockholders of either the Company or Parent 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, 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; Jurisdiction.
(a) 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.
(b) Each of Parent, Merger Sub and the Company hereby irrevocably submits in any
suit, action or proceeding arising out of or related to this Agreement or any
other instrument, document or agreement executed or delivered in connection
herewith and the transactions contemplated hereby and thereby, whether arising
in contract, tort, equity or otherwise, to the exclusive jurisdiction of any
state or federal court located in the State of Delaware and waives any and all
objections to jurisdiction that it may have under the laws of the United States
or of any state.
(c) Each of Parent, Merger Sub and the Company waives any objection that it may
have (including, without limitation, any objection of the laying of venue or
based on FORUM NON CONVENIENS) to the location of the court in any proceeding
commenced in accordance with this SECTION 9.6.
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:
divine, inc.
1301 N. Elston Avenue
Chicago, Illinois 60622
Attention: Jude M. Sullivan Facsimile: (773) 394-6603
with a copy to:
Katten Muchin Zavis Rosenman
525 West Monroe Street Suite 1600
Chicago, Illinois 60661-3693
Attention: Jeffrey R. Patt Facsimile: (312) 902-1061
(b) if to the Company, to:
36
Viant Corporation
89 South Street
Boston, Massachusetts 02111 Attention: Robert Gett Facsimile: (617) 531-3708
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Issac J. Vaughn Facsimile: (650) 493-6811
or to such other Persons or addresses as may be designated in writing by the
party to receive such notice.
9.8 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, including the Exhibits and
Disclosure Schedules, together with the Confidentiality Agreement, (i)
constitutes the entire agreement among the Parties with respect to the subject
matter hereof and supersedes all other prior or contemporaneous 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 (and any attempt to do so shall be void).
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 and other
than as contemplated in SECTIONS 6.13, 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.
9.10 Certain Definitions. As used herein:
(a) "COMPANY OPTIONS" means each outstanding and unexercised option to purchase
Company Shares under any Company Option Plan or otherwise.
(b) "COMPANY RIGHT" means the right, issued pursuant to the Company Rights
Agreement, to purchase one one-thousandth (0.001) of a share of Series A
Participating Preferred Stock.
(c) "COMPANY RIGHTS AGENT" means Fleet National Bank, as rights agent, under the
Company Rights Agreement.
(d) "COMPANY RIGHTS AGREEMENT" means the Preferred Stock Rights Agreement, dated
as of March 27, 2001, by and between the Company and Fleet National Bank, as
rights agent.
(e) "COMPANY SIGNIFICANT TAX AGREEMENT" is any agreement to which the Company or
any Subsidiary of the Company is a party under which the Company or any
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.
(f) "ENCUMBRANCE" means any claim, lien, pledge, charge, security interest,
equitable interest, option, right of first refusal or preemptive right,
condition, or other restriction of any kind, including any restriction on use,
voting (in the case of any security), transfer, receipt of income, or exercise
of any other attribute of ownership.
(g) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(h) "GOVERNMENTAL ENTITY" means the United States or any state, local or foreign
government, or instrumentality, division, subdivision, agency, department or
authority of any thereof.
(i) "KNOWLEDGE" and "KNOWING" with respect to a party hereto shall mean the
actual knowledge of any of the executive officers and directors of such party,
provided that such persons shall have made due and diligent inquiry of those
officers and other managers of such party and its Subsidiaries who are
responsible for the matters represented.
(j) "MATERIAL ADVERSE EFFECT" shall mean any adverse change in the business,
operations, liabilities (contingent or otherwise), results of operations,
prospects, financial performance or condition of Parent or any of its
Subsidiaries or the Company or any of its Subsidiaries, as the case may be,
which is material to (1) (A) Parent and its Subsidiaries, taken as a whole, or
(B) Parent's software business or managed hosting business or (2) the Company
and its Subsidiaries, taken as a whole, as the case may be; provided, however,
that in no event shall any of the following, in and of themselves, constitute a
Material Adverse Effect: (i) any change in or effect on the business of Parent
or any of its Subsidiaries or the Company or any of its Subsidiaries, as
applicable, to the extent caused by, relating to or resulting from, directly or
indirectly, the transactions contemplated by this Agreement or the announcement
or pendency thereof; (ii) any change in the market price or trading volume of
the Company Shares or Parent Common
37
Stock, as applicable, on or after the date of this Agreement; or (iii) any
change, effect or occurrence attributable to the United States economy as a
whole, the industries in which Parent or the Company, as applicable, compete or
the foreign economies where Parent or the Company, as applicable, have material
operations or sales or (iv) the receipt by any Party of any notice regarding
de-listing of such Party's stock from the NNM.
(k) "PARENT RIGHTS AGREEMENT" the Rights Agreement, dated as of February 12,
2001, by and between Parent and Computershare Investor Services, LLC, as rights
agent, as amended by Amendment No. 1 to Rights Agreement, dated as of July 8,
2001, and Amendment No. 2 to Rights Agreement, dated as of August 15, 2001.
(l) "PARENT SIGNIFICANT TAX AGREEMENT" is any agreement to which the Parent or
any Subsidiary of the Parent is a party under which the Parent or any 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.
(m) "PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated association, corporation, entity or Governmental
Entity.
(n) "RETURNS" means all returns, declarations, reports, statements and other
documents required to be filed in respect of Taxes, and any claims for refund
for Taxes, including any amendments or supplements to any of the foregoing.
(o) "SUBSIDIARY" shall mean (i) any entity of which fifty percent (50%) or more
of the outstanding voting securities or interests are owned directly or
indirectly by a Party; (ii) any entity of which 50% of the economic interests,
in the case of partnerships or limited liability companies, are owned directly
or indirectly by a Party; (iii) any entity as to which a Party (through any
entity or otherwise) directly or indirectly has the power to control, by
contract or otherwise an entity; (iv) any entity in which a Party (A) may
appoint a controlling portion of the board of directors (by contract or
otherwise) of any entity, (B) may appoint or nominate representative(s) to the
board of directors of any entity and such appointees or nominees have a
disproportionate voting power relative to the other directors residing on such
board of directors or (C) controls a block of equity or other interest which
enable such party to approve or disapprove the capitalization, liquidation,
reorganization, merger or sale of all or substantially all of the assets of an
entity; or (v) with respect to Parent, Northern Light Technologies and Delano
Technology Corporation.
(p) "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 without limitation taxes based upon or
measured by gross receipts, income, profits, sales, use and occupation, and
value added, ad valorem, transfer, franchise, net worth, capital stock,
withholding, payroll, social security, recapture, employment, excise,
environmental 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, in any case, whether challenged or not; provided,
however, that the term "TAX" or "TAXES" shall not be deemed to include claims by
any governmental authority under an escheat, unclaimed property, or similar
provision of applicable law.
9.11 SEVERABILITY. If any term or other provision of this Agreement is invalid,
illegal or unenforceable, all other provisions of 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.
9.12 SPECIFIC PERFORMANCE. The Parties 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.
9.13 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.
9.14 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.
9.15 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the Parties hereto to express their mutual intent,
and no rule of strict construction will be used against any party hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.]
38
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.
DIVINE, INC.
By: /s/ Andrew J. Filipowski
------------------------------------
Name: Andrew J. Filipowski
Title: Chairman and Chief
Executive Officer
DVC ACQUISITION COMPANY
By: /s/ Andrew J. Filipowski
------------------------------------
Name: Andrew J. Filipowski
Title: Vice President
VIANT CORPORATION
By: /s/ Robert L. Gett
------------------------------------
Name: Robert L. Gett
Title: Chairman and Chief
Executive Officer
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION]
39
EXHIBIT 99.1
divine TM NEWSRELEASE
WWW.DIVINE.COM NASDAQ : DVIN
DIVINE VIANT
INVESTORS: MEDIA INQUIRIES: MEDIA INQUIRIES: INVESTORS:
- ---------- ---------------- ---------------- ----------
Brenda Lee Johnson Susan Burke/Anne Schmitt Carol Trager Dwayne Nesmith Direct:
773.394.6873 Direct: 773.394.6746/ 6827 Direct: 617.531.3784 Direct: 617.531.3700
brenda.johnson@divine.com susan.burke@divine.com ctrager@viant.com dnesmith@viant.com
anne.schmitt@divine.com
FOR IMMEDIATE RELEASE
DIVINE AND VIANT SIGN DEFINITIVE MERGER AGREEMENT
COMBINED COMPANY TO HAVE EXPANDED GLOBAL 5000 CLIENT BASE, GEOGRAPHIC
REACH, VERTICAL EXPERTISE AND STRONG FINANCIAL FOUNDATION
CHICAGO - APRIL 5, 2002 - divine, inc. (Nasdaq: DVIN), a leading provider of
solutions for the extended enterprise, and Viant Corporation (Nasdaq: VIAN), a
provider of digital business solutions, announced today that they have entered
into a definitive agreement under which divine will acquire Viant in a
stock-for-stock transaction. Under the terms of the agreement, approved by the
Board of Directors of each company, divine will acquire all of the outstanding
shares of Viant common stock for approximately 200 million shares of divine's
Class A common stock. Viant stockholders will receive 3.977 shares of divine
Class A common stock for each Viant share. In addition, the agreement
contemplates the payment by Viant of a cash dividend of $24 million, in the
aggregate, to the Viant stockholders prior to the consummation of the merger.
The record date for such dividend has not yet been set. The deal will be subject
to a number of closing conditions, including approval of divine's and Viant's
stockholders.
"Viant's expertise in deploying collaborative technology solutions that enable
knowledge sharing with customers, partners and employees represents a perfect
strategic fit with divine's solutions for the extended enterprise," said Andrew
"Flip" Filipowski, chairman and chief executive officer of divine. "In addition,
Viant provides divine with a significant new consulting presence in the
Northeast, as well as great talent and a legacy of long-term client
relationships."
divine provides integrated solutions combining software, professional services
and managed services that help organizations drive profitability and competitive
advantage by extending their core business systems, thus enabling collaboration,
interaction, and information-sharing with their customers, partners and
suppliers. Viant, a professional services firm, develops and implements digital
business solutions to help clients utilize their assets for better business
performance, applying expertise in key technologies and industry vertical depth
in financial services, media and entertainment, and health care. The addition of
Viant is expected to expand divine's client base, extend its geographic reach
into the Northeast with offices in Boston and New York, enhance divine's
presence in Los Angeles, and expand divine's services capabilities and market
penetration in key vertical industries.
"We believe that today's announcement is great news for our clients,
shareholders and employees," said Viant Chairman and CEO Bob Gett. "We see this
combination with divine as providing even greater resources and enhancing the
services and solutions we can deliver. In particular, we see great opportunities
to leverage divine's international capabilities and product offerings to better
serve our clients."
Added divine Chief Financial Officer Michael Cullinane: "Through this deal,
divine is expanding our professional services organization with a deep talent
pool, top-flight client base and complementary vertical expertise. In addition,
this acquisition reinforces divine's strong financial position, and is
consistent with our goal to achieve profitability by the fourth quarter of this
year."
Filipowski and Gett will participate in a conference call for reporters and
analysts at 1 p.m. CST today. To participate, call 888.834.5486. The pass code
is "divine." The leader is Susan Burke.
ABOUT VIANT CORPORATION
Viant, a professional services organization providing digital business
solutions, applies industry insight and technology understanding to help clients
leverage assets for better business performance. Founded in 1996, Viant employs
professionals from the creative, technology and strategy disciplines and
maintains a presence in Boston, Los Angeles, and New York. More information
about Viant can be found at www.viant.com.
About divine, inc.
divine, inc., is focused on extended enterprise solutions. Through professional
services, software services and managed services, divine extends business
systems beyond the edge of the enterprise throughout the entire value chain,
including suppliers, partners and customers. divine offers single-point
accountability for end-to-end solutions that enhance profitability through
increased revenue, productivity, and customer loyalty. The company provides
expertise in collaboration, interaction, and knowledge solutions that enlighten,
empower and extend enterprise systems.
Founded in 1999, divine focuses on Global 5000 and high-growth middle market
firms, government agencies, and educational institutions, and currently serves
over 20,000 customers. For more information, visit divine's web site at
www.divine.com.
# # #
DIVINE INTENDS TO FILE A REGISTRATION STATEMENT ON FORM S-4 IN CONNECTION WITH
THE PROPOSED TRANSACTION, AND DIVINE AND VIANT INTEND TO MAIL A JOINT PROXY
STATEMENT/PROSPECTUS TO THEIR RESPECTIVE STOCKHOLDERS IN CONNECTION WITH THE
PROPOSED TRANSACTION. INVESTORS ARE URGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS FOR THE MERGER WHEN IT IS AVAILABLE, AND ANY OTHER RELEVANT
DOCUMENTS FILED WITH THE SEC, BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION ABOUT DIVINE, VIANT AND THE PROPOSED TRANSACTION. After they have
been filed, you may obtain these documents free of charge at the website
maintained by the SEC at http://www.sec.gov. In addition, you may obtain these
documents and the SEC filings that are incorporated by reference into these
documents free of charge by making your request to the respective contacts
listed at the beginning of this news release.
divine, inc. and Viant Corporation, and their respective directors and executive
officers, may be deemed to be participants in the solicitation of proxies from
the stockholders of divine and Viant with respect to the transactions
contemplated by the merger agreement. Information regarding divine's directors
and executive officers is included in divine's proxy statement for its 2001
Annual Meeting, which was filed with the SEC on April 30, 2001, and divine's
proxy statement/prospectus, which was filed with the SEC on September 17, 2001.
Information regarding Viant's directors and executive officers is included in
Viant's proxy statement for its 2001 Annual Meeting, which was filed with the
SEC on April 27, 2001. More recent information regarding the directors and
executive officers of divine and Viant and additional information regarding both
companies and the interests of their directors and executive officers in the
proposed transaction will be included and/or incorporated by reference in the
joint proxy statement/prospectus regarding the proposed transaction to be filed
with the SEC. Each of divine and Viant file annual, quarterly and special
reports, proxy and information statements, and other information with the SEC.
Investors may read and copy any of these reports, statements and other
information at the SEC's public reference rooms located at 450 5th Street, N.W.,
Washington, D.C., 20549, or any of the SEC's other public reference rooms
located in New York and Chicago. Investors should call the SEC at 1-800-SEC-0330
for further information on these public reference rooms. The reports, statements
and other information filed by divine and Viant with the SEC are also available
for free at the SEC's web site at www.sec.gov. A free copy of these reports,
statements and other information may also be obtained from divine or Viant by
making your request to the respective contacts listed at the beginning of this
news release.
IMPORTANT NOTICE
The statements contained in this news release that are forward-looking are based
on current expectations and projections about the Viant transaction, including
the contributions Viant is expected to make to divine, as well as divine's
future results, performance, prospects and opportunities. These forward-looking
statements are based on information currently available to divine and are
subject to a number of risks, uncertainties and other factors that could cause
divine's actual results, performance, prospects or opportunities in 2002 and
beyond to differ materially from these expressed in, or implied by, these
forward-looking statements. The uncertainties and risks include, but are not
limited to: failure of the proposed transaction to close; the risk that the
Viant Corporation business and other acquired businesses will not be integrated
successfully or that divine will incur unanticipated costs of integration;
divine's ability to execute its integrated Web-based technology, professional
services, and managed applications strategy; divine's ability to develop
enterprise Web software and services; the uncertainty of customer demand for
enterprise Web software and services; the combined companies' ability to develop
new products and services and enhance and support existing products and
services; the combined companies' ability to maintain Viant's vendor and
strategic partner relationships and retain key employees; increasing competition
from other providers of software solutions and professional services; divine's
ability to satisfy the continued listing requirements of the Nasdaq National
Market; fluctuations in the trading price and volume of divine's stock; and
other unanticipated events and conditions. For a detailed discussion of these
and other cautionary statements, please refer to the registration statement to
be filed by divine with the SEC relating to this transaction. Further
information about risks and uncertainties relating to the companies and their
respective businesses can be found in their most recent respective Forms 10-K
filed with the SEC. You should not place undue reliance on any forward-looking
statements. Except as required by the federal securities laws, divine undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, changed circumstances or
any other reason after the date of this news release.
ANNEX R
HISTORICAL FINANCIAL STATEMENTS OF VIANT CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Viant Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Viant Corporation and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 13, 2002, except as to Note 18, which is as of March 7, 2002
29
VIANT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Net revenues......................... $ 34,606 $127,162 $61,332
Operating expenses:
Professional services.............. 35,755 57,779 28,509
Sales and marketing................ 7,228 11,217 6,688
General and administrative......... 35,813 53,402 22,837
Research and development........... 1,631 5,229 3,623
Restructuring...................... 31,015 6,028 --
-------- -------- -------
Total operating expenses......... 111,442 133,655 61,657
-------- -------- -------
Loss from operations............. (76,836) (6,493) (325)
Interest income...................... 6,757 11,950 2,197
Interest expense..................... (139) (229) (402)
Other expense, net................... (1,774) (4,243) (2)
-------- -------- -------
Income (loss) before income taxes.. (71,992) 985 1,468
Provision for income taxes........... -- 3,448 57
-------- -------- -------
Net income (loss).................... $(71,992) $ (2,463) $ 1,411
======== ======== =======
Net income (loss) per share:
Basic.............................. $ (1.44) $ (0.05) $ 0.05
Diluted............................ $ (1.44) $ (0.05) $ 0.04
Shares used in computing net income
(loss) per share:
Basic.............................. 49,944 48,049 27,208
Diluted............................ 49,944 48,049 31,904
The accompanying notes are an integral part of these consolidated financial
statements.
30
VIANT CORPORATION CONSOLIDATED BALANCE SHEET (IN
THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 43,601 $141,629
Short-term investments.................................................... 94,158 43,758
Accounts receivable, net.................................................. 2,561 22,366
Prepaid expenses and other current assets................................. 1,462 3,910
Total current assets.................................................... 141,782 211,663
Property and equipment, net................................................. 8,226 15,300
Long-term investments....................................................... 314 1,038
Other assets................................................................ 3,778 3,681
-------- --------
Total assets............................................................ $154,100 $231,682
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............................. $ 741 $ 678
Accounts payable.......................................................... 1,673 6,109
Accrued expenses.......................................................... 5,830 15,503
Restructuring reserve..................................................... 17,885 5,174
Deferred revenues......................................................... 665 5,680
-------- --------
Total current liabilities............................................... 26,794 33,144
Capital lease obligations, net of current portion......................... 114 855
Restructuring reserve, net of current portion............................. 2,937 --
-------- --------
Total liabilities....................................................... 29,845 33,999
-------- --------
Commitments (Note 10 and 18) -- --
Stockholders' equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares;
Issued and outstanding: no shares at December 31, 2001 and 2000......... -- --
Common stock, $0.001 par value; Authorized: 200,000,000 shares;
Issued and outstanding: 51,591,468 and 48,877,468 shares at
December 31, 2001 and 50,977,702 and 49,952,702 shares at
December 31, 2000, respectively......................................... 52 51
Additional paid-in capital................................................ 217,239 219,528
Treasury stock, at cost, 2,714,000 and 1,025,000 shares at December 31,
2001 and 2000, respectively............................................. (7,188) (5,049)
Deferred compensation..................................................... -- (2,958)
Accumulated other comprehensive income.................................... 100 67
Accumulated deficit....................................................... (85,948) (13,956)
-------- --------
Total stockholders' equity.................................................. 124,255 197,683
-------- --------
Total liabilities and stockholders' equity.................................. $154,100 $231,682
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
31
VIANT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (71,992) $ (2,463) $ 1,411
Adjustments to reconcile net (loss) income to net cash........
(used in) provided by operating activities:
Tax benefit from disqualifying dispositions................. -- 2,680 57
Depreciation................................................ 5,640 4,174 1,958
Loss on disposal of fixed assets in restructuring........... 3,748 224 --
Write-down of investments................................... 1,695 3,852 --
Stock-based compensation expense............................ 52 1,386 253
Changes in operating assets and liabilities:
Accounts receivable, net.................................. 19,805 (6,009) (11,455)
Prepaid expenses and other assets......................... 2,351 (5,735) (934)
Accounts payable.......................................... (4,436) 3,232 2,251
Accrued expenses.......................................... (9,673) 2,122 10,474
Restructuring reserve..................................... 16,288 5,174 --
Deferred revenues......................................... (5,015) 2,932 1,696
--------- -------- ---------
Net cash (used in) provided by operating activities..... (41,537) 11,569 5,711
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................... (165,487) (90,996) (126,619)
Maturities of short-term investments.......................... 115,087 168,964 5,495
Purchases of long-term investments............................ (971) (21,946) --
Proceeds from sale of long-term investments................... -- 18,126 --
Proceeds from sale of fixed assets............................ 243 200 --
Purchases of property and equipment........................... (3,197) (13,131) (4,210)
--------- -------- ---------
Net cash (used in) provided by investing activities..... (54,325) 61,217 (125,334)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock, net.... -- -- 75
Proceeds from issuance of common stock, net................... 618 7,978 171,623
Purchases of treasury stock................................... (2,139) (5,049) --
Principal payments on borrowings on lines of credit........... -- -- (3,453)
Principal payments on capital lease obligations............... (678) (608) (376)
--------- -------- ---------
Net cash (used in) provided by financing activities..... (2,199) 2,321 167,869
--------- -------- ---------
Effect of exchange rate changes on cash and cash equivalents.... 33 72 (5)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents............ (98,028) 75,179 48,241
Cash and cash equivalents at beginning of year.................. 141,629 66,450 18,209
--------- -------- ---------
Cash and cash equivalents at end of year........................ $ 43,601 $141,629 $ 66,450
========= ======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.......................................... $ 134 $ 222 $ 402
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations.............. $ -- $ -- $ 467
The accompanying notes are an integral part of these consolidated financial
statements.
32
VIANT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------ ------------------ ------------------- PAID-IN
SHARES VALUE SHARES PAR SHARES AMOUNT CAPITAL
----------- -------- ---------- --- --------- -------- ----------
Balance at January 1,1999.......... 13,166,467 $32,136 7,524,580 $ 8 -- $ -- $ 425
Issuance of common stock upon
exercise of stock options........ 2,599,496 2 1,159
Tax benefit from exercise
of stock options................ 57
Issuance of Series C
preferred stock upon
exercise of warrants............ 5,517 20
Issuance of Series D
preferred stock................... 8,661 55
Conversion of preferred
stock into common stock......... (13,180,645) (32,211) 26,361,290 26 32,185
Initial public offering of
common stock..................... 6,900,000 6 50,150
Secondary public offering
of common stock................. 2,685,920 4 120,302
Compensation related to
grant of nonemployee
common stock options............ 211
Deferred compensation
related to grant of
employee common stock
options and subsequent
amortization.................... 4,000
Cumulative translation
adjustment......................
Net income........................
----------- -------- ---------- --- --------- -------- -------
Balance at December 31, 1999...... -- -- 46,071,286 46 -- -- 208,489
Issuance of common stock upon
exercise of stock options........ 4,064,819 4 3,784
Issuance of common stock under
employee stock purchase plan.... 772,229 1 4,189
Issuance of common stock upon
exercise of warrants............. 69,368
Purchase of treasury stock......... 1,025,000 (5,049)
Compensation related to grant of
nonemployee common stock options 386
Tax benefit from exercise of
stock options................... 2,680
Amortization of deferred
compensation related to
grant of employee common
stock options...................
Cumulative translation adjustment..
Net loss...........................
----------- -------- ---------- --- --------- -------- -------
Balance at December 31, 2000...... -- -- 50,977,702 51 1,025,000 (5,049) 219,528
Issuance of common stock upon
exercise of stock options....... 440,895 1 346
Issuance of common stock under
employee stock purchase plan.... 172,871 -- 271
Purchase of treasury stock........ 1,689,000 (2,139)
Compensation related to grant of
nonemployee common stock options 10
Amortization and cancellation
of deferred compensation
related to grant of employee
common stock options............. (2,916)
Cumulative translation adjustment
Net loss..........................
----------- -------- ---------- --- --------- -------- -------
Balance at December 31, 2001....... -- $ -- 51,591,468 $52 2,714,000 (7,188) $217,239
========== ======== ========== === ========= ======== =======
ACCUMULATED
OTHER TOTAL COMPREHENSIVE
DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS' INCOME
COMPENSATION INCOME (LOSS) DEFICIT EQUITY (LOSS)
------------ ------------- ----------- ------------- -------------
Balance at January 1,1999......... $ -- $ -- $(12,904) $ 19,665
Issuance of common stock upon
exercise of stock options........ 1,161
Tax benefit from exercise
of stock options................ 57
Issuance of Series C
preferred stock upon
exercise of warrants............ 20
Issuance of Series D
preferred stock................. 55
Conversion of preferred
stock into common stock.......... --
Initial public offering of
common stock..................... 50,156
Secondary public offering
of common stock................. 120,306
Compensation related to
grant of nonemployee
common stock options............ 211
Deferred compensation
related to grant of
employee common stock
options and subsequent
amortization.................... (3,958) 42
Cumulative translation
adjustment...................... (5) (5) $ (5)
Net income........................ 1,411 1,411 1,411
------------ ------------- ----------- ------------- -------------
Balance at December 31, 1999...... (3,958) (5) (11,493) 193,079 $1,406
=======
Issuance of common stock upon
exercise of stock options........ 3,788
Issuance of common stock under
employee stock purchase plan.... 4,190
Issuance of common stock upon
exercise of warrants............
Purchase of treasury stock........ (5,049)
Compensation related to grant of
nonemployee common stock options 386
Tax benefit from exercise of stock
options......................... 2,680
Amortization of deferred
compensation related to
grant of employee common
stock options................... 1,000 1,000
Cumulative translation
adjustment...................... 72 72 $ 72
Net loss.......................... (2,463) (2,463) (2,463)
------------ ------------- ----------- ------------- -------------
Balance at December 31, 2000...... (2,958) 67 (13,956) 197,683 $ (2,391)
=============
Issuance of common stock upon
exercise of stock options....... 347
Issuance of common stock under
employee stock purchase plan.... 271
Purchase of treasury stock........ (2,139)
Compensation related to grant of
nonemployee common stock options 10
Amortization and cancellation
of deferred compensation
related to grant of employee
common stock options............ (2,958) 42
Cumulative translation adjustment. 33 33 $ 33
Net loss........................ (71,992) (71,992) (71,992
------------ ------------- --------- ------------ -------------
Balance at December 31, 2001...... $ -- $100 $(85,948) $124,255 $ (71,959)
=========== ============= ========= ===========- =============
The accompanying notes are an integral part of these consolidated financial
statements.
33
VIANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Viant is a professional services firm that helps global companies
identify and solve complex business problems with digital solutions. Viant
creates value by deploying integrated teams of strategists, creative designers
and technologists to work closely with the client to develop and implement
solutions that address challenges facing businesses today. Viant focuses upon
service offerings related to collaboration networks, knowledge portals and the
leverage of intellectual property as a way to assist its clients in improving
business process and increasing revenue productivity.
Viant's financial results for the year ended December 31, 2001 declined
substantially from the results for the year ended December 31, 2000, due to the
significant decline in the market for Viant's services, along with the declining
economic climate in the United States in late 2000 and in 2001. As a result of
this decrease in demand, Viant's revenues for the year ended December 31, 2001
decreased 73% from the prior year and Viant's net loss increased from $2.5
million in 2000 to $72.0 million in 2001. Viant expects to continue to incur net
losses in 2002. In response to these business conditions, Viant undertook
restructuring actions to reduce headcount and close offices in December 2000,
March 2001 and October 2001 (Note 8). Although Viant used cash in operations of
$41.5 million in the year ended December 31, 2001, Viant had cash, cash
equivalents and short-term investments of $137.8 million remaining at December
31, 2001. Viant believes that its current cash, cash equivalents and short-term
investments will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 24 months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Viant and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated.
Certain amounts in previously issued Financial Statements have been
reclassified to conform to the current presentation.
Fiscal Year
During 2000, Viant changed its fiscal year to coincide with the calendar
year. All references herein to the results of operations for 2000 are the actual
operating results for the fiscal year ended December 31, 2000. Prior to this
change, Viant's fiscal year was the 52 -week period ending on the Friday nearest
to the last day of December of that year. Had Viant not changed its fiscal year,
the fiscal year 2000 would have ended on December 29, 2000; the change of the
fiscal year in 2000 had an immaterial effect on these consolidated financial
statements.
Cash, Cash Equivalents and Short-Term Investments
Viant considers all highly liquid instruments with an original maturity
of three months or less to be cash equivalents. All other investments with
original maturities between 91 and 360 days are classified as short-term
investments because they are liquid and are available to meet working capital
needs. Short-term investments are classified as held -to-maturity securities
and are recorded at amortized cost. Investments with original maturities greater
than one year are classified as long-term investments. At December 31, 2001 and
2000, Viant's short-term investments consisted primarily of certificates of
deposit, U.S. Government-backed securities and money market funds secured by
U.S. Government-backed securities. At December 31, 2001, cash and cash
equivalents include $5,638,000, which collateralize outstanding letters of
credit (Note 18). In March 2002, Viant exercised a lease buy-out option on a
Boston real estate lease. This buy-out agreement reduced the outstanding letters
of credit and the required cash collateral by $3,683,000 (Note 18).
34
Concentrations of Credit Risk
Financial instruments that potentially subject Viant to concentrations
of credit risk consist primarily of cash equivalents, short -term investments
and accounts receivable. Substantially all of Viant's cash equivalents and
short-term investments are held at high credit quality financial institutions.
Accounts receivable are typically unsecured and are derived from revenue earned
from clients primarily located in the United States. Viant performs ongoing
credit evaluations of its clients' financial condition and maintains reserves
for potential credit losses based upon the expected collectibility of total
accounts receivable.
Two clients accounted for 10% and 21% of total net revenue in 2001. No
client accounted for greater than 10% of total net revenue in 2000. Two clients
accounted for 15% and 13% of total net revenues in 1999. At December 31, 2001,
six clients accounted for 74% of total accounts receivable. At December 31,
2000, no one client accounted for more than 10% of accounts receivable.
Fair Value of Financial Instruments
Financial instruments that are subject to fair value disclosure
requirements are carried in the financial statements at amounts that approximate
fair value and include cash and cash equivalents, accounts receivable, accounts
payable, capital lease obligations and other credit facilities. Fair values are
based on quoted market prices and assumptions concerning the amount and timing
of estimated future cash flows and assumed discount rates reflecting varying
degrees of perceived risk. Short-term investments are carried in the financial
statements at amortized cost, which approximates fair value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets,
generally 3-5 years. Equipment under capital leases is amortized over the
shorter of the useful life of the equipment or the lease term. Leasehold
improvements are amortized over the shorter of the lease period or the useful
life of the improvement. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation are relieved from accounts and any
resulting gain or loss is reflected in the statement of operations.
Revenue Recognition
Viant derives substantially all of its revenues from the performance of
professional services. The contracts that it enters into and operates under
specify whether the engagement is on a fixed-price or time and materials basis.
For each engagement, Viant generally enters into a Master Services Agreement
with its clients establishing the legal and general business terms of the
relationship. As specific engagements are identified, Viant and the client then
enter into separate statements of work that outline the time frame, billing
rates and fees applicable to the specific engagement. Typically, these
engagements are of a short predetermined time frame, generally lasting three to
six months. A member of Viant's senior management team approves all contracts.
We recognize all of our revenue under written service contracts with our
clients. Revenues from time and materials service contracts are recognized as
the services are provided. Revenues from fixed-price engagements are recognized
using the percentage of completion method based on the ratio of costs incurred
to the total estimated project costs. Project costs are based on the direct
payroll and associated fringe benefits of the consultants on the engagement plus
all direct expenses incurred to complete the engagement that are not reimbursed
by the client. The percentage of completion method is used since reasonably
dependable estimates of the revenues and costs applicable to various stages of a
contract can be made, based on historical experience and milestones set in the
contract. Finance department personnel meet regularly with project managers to
discuss the status of the projects and,
35
for fixed-price engagements, the finance department is updated on the budgeted
costs and required resources to complete the project. These budgets are then
used to calculate revenue recognition and to estimate the anticipated income or
loss on the project. In the past, we have been required to commit unanticipated
additional resources to complete projects, which have resulted in lower than
anticipated profitability or losses on those contracts. We may experience
similar situations in the future. Provisions for estimated losses on contracts
are made during the period in which such losses become probable and can be
reasonably estimated. To date, such losses have not been significant.
In November 2001, FASB issued Topic Number D-103 regarding "Income
Statement Characterization of Reimbursements Received for "Out-Of-Pocket"
Expenses Incurred." This announcement requires that reimbursements received for
out-of-pocket expenses should be characterized as revenue in our statement of
operations. We incur incidental expenses in the delivery of services to our
clients that in practice are commonly referred to as "out-of-pocket" expenses.
These expenses include, but are not limited to, travel and administrative
charges. Historically, we have reported our revenues net of these
reimbursements; such reimbursements were offset against the related costs of
professional services. The provisions of this announcement will be effective for
fiscal years beginning after December 15, 2001, and therefore will be adopted by
us, as required, on January 1, 2002. Comparative financial statements for prior
periods will be reclassified to comply with the guidance of this FASB
announcement. Management is currently determining what effect D-103 will have
on Viant's financial position and results of operations.
Professional Services
Professional services expenses consist primarily of compensation and
benefit costs for employees engaged in the delivery of professional services and
expenses related to client projects.
Sales and Marketing
Sales and marketing expenses consist primarily of compensation, benefits
and travel costs for employees in the sales and marketing groups, marketing
program costs and an allocation of facilities costs.
General and Administrative
General and administrative expenses consist primarily of compensation,
benefits and travel costs for employees in Viant's management, human resources,
finance and administration groups and facilities costs not allocated to sales
and marketing or research and development.
Research and Development
Viant's research and development efforts focus on evaluating and testing
technologies to be deployed to clients. Accordingly, all research and
development costs are charged to expense as incurred.
Stock-based Compensation
Viant accounts for stock -based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense is recorded for options issued to
employees in fixed amounts and with fixed exercise prices to the extent such
exercise prices are less than the fair market value of Viant's common stock at
date of grant. Viant follows the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" (Note 14).
36
Advertising Costs
Viant charges the cost of advertising to expense as incurred, and is
classified in selling and marketing in the consolidated statement of operations.
These costs totaled $38,000, $3,005,000 and $19,000 for the years ended December
31, 2001, 2000 and 1999, respectively.
Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the carrying value of long-lived assets is reviewed
on a regular basis for the existence of facts or circumstances, both internally
and externally, that may suggest impairment. If such circumstances exist, the
Company evaluates the carrying value of long-lived assets to determine if
impairment exists based on estimated undiscounted future cash flows over the
remaining useful life of the assets. In determining expected future cash flows,
assets are grouped at the lowest level for which cash flows are identifiable and
independent of cash flows from other asset groups. To date, no such impairment
has been indicated. Should there be an impairment in the future, Viant will
measure the amount of the impairment, if any, based on the fair value of the
impaired assets. The cash flow estimates that are used contain management's best
estimates, using appropriate and customary assumptions and projections at the
time. See "New Accounting Pronouncements."
Income Taxes
Viant records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred tax assets.
Significant management judgment is required in determining Viant's provision for
income taxes, its deferred tax assets and liabilities and any valuation
allowance recorded against its net deferred tax assets. Viant evaluates the
weight of all available evidence to determine whether it is more likely than not
that some portion or all of the deferred income tax assets will not be realized.
The amount of the deferred tax asset considered realizable is based on
significant estimates, and it is at least reasonably possible that changes in
these estimates in the near term could materially affect Viant's financial
condition and results of operations.
Earnings (Loss) per Share
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted income (loss) per common share reflect the maximum dilution
that would have resulted from the assumed exercise and share repurchase related
to dilutive stock options and is computed by dividing net income (loss) by the
weighted average number of common shares and all dilutive securities
outstanding.
37
The reconciliation of the numerators and denominators of the basic and
diluted net income (loss) per common share computations for the Company's
reported net income (loss) is as follows (in thousands, except per share data):
2001 2000 1999
-------- -------- --------
Weighted average number of shares outstanding -
basic .......................................... 49,944 48,049 27,208
Incremental shares upon exercise of common stock
options ........................................ -- -- 4,696
-------- -------- --------
Weighted average number of shares outstanding -
diluted ........................................ 49,944 48,049 31,904
======== ======== ========
Net income (loss) .............................. $(71,992) $ (2,463) $ 1,411
Basic income (loss) per share .................. $ (1.44) $ (0.05) $ 0.05
Diluted income (loss) per share ................ $ (1.44) $ (0.05) $ 0.04
Stock options to purchase shares of common stock totaling 0.9 and 13.4
million were outstanding at December 31, 2001 and 2000, respectively, but were
not included in the calculation of diluted earnings per share since the effect
was anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as currently
reported under generally accepted accounting principles and also considers the
effect of additional economic events that are not required to be recorded in
determining net income (loss) but are rather reported as a separate component of
stockholders' equity. Viant reports foreign currency translation gains and
losses as a component of comprehensive income (loss).
Segments and Geographic Information
Viant engages in business activities in one operating segment, which
provides professional services to global companies that seek to solve complex
business problems with digital solutions. Revenues from and long-lived assets at
Viant's international operations in Munich, whose operations ceased as a result
of the restructuring undertaken in March 2001, and in London, whose operations
ceased as a result of the restructuring undertaken in October 2001, are not
significant for the periods reported.
Foreign Currency Translation
Assets and liabilities of Viant's international operations are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at average exchange rates during
the year. Translation adjustments are accumulated in a separate component of
stockholders' equity. Realized gains and losses recorded in the statements of
operations were not material for each period presented. Viant's foreign
operations were substantially reduced as a result of the March and October 2001
reductions in force and office closures.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
38
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
141 requires use of the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminated the pooling-of-interests method.
SFAS 142 is effective for Viant on January 1, 2002 and requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangible assets into goodwill, the reassessment of the useful lives of
existing recognized intangible assets, the reclassification of certain
intangible assets out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Since Viant has not previously completed any business combinations,
the adoption of SFAS 141 and SFAS 142 will not have any impact on its financial
statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 is required to be adopted for fiscal
years beginning after June 15, 2002. Management is currently determining what
effect, if any, SFAS 143 will have on Viant's financial position and results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to Be Disposed of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and thus will be adopted by the Company, on January 1, 2002. Management has
determined that SFAS 144 will have no impact on Viant's financial position and
results of operations.
In November 2001, FASB issued Topic Number D-103 regarding "Income
Statement Characterization of Reimbursements Received for "Out-Of-Pocket"
Expenses Incurred." This announcement requires that reimbursements received for
out-of-pocket expenses should be characterized as revenue in our statement of
operations. We incur incidental expenses in the delivery of services to our
clients that in practice are commonly referred to as "out-of-pocket" expenses.
These expenses include, but are not limited to, travel and administrative
charges. Historically, we have reported our revenues net of these
reimbursements; such reimbursements were offset against the related costs of
professional services. The provisions of this announcement will be effective for
fiscal years beginning after December 15, 2001, and therefore will be adopted by
us, as required, on January 1, 2002. Comparative financial statements for prior
periods will be reclassified to comply with the guidance of this FASB
announcement. Management is currently determining what effect D-103 will have
on Viant's financial position and results of operations.
39
3. SHORT TERM INVESTMENTS
As of December 31, 2001 and 2000, Viant held investments in marketable
securities that are classified as held-to-maturity. Marketable securities
consisted of the following (in thousands):
NET
AMORTIZED UNREALIZED FAIR
DECEMBER 31, 2001 COST GAIN VALUE
- ----------------- --------- ---------- -------
U.S. government notes and bonds..... $94,158 $ 65 $94,223
NET
AMORTIZED UNREALIZED FAIR
DECEMBER 31, 2000 COST GAIN VALUE
- ----------------- --------- ---------- -------
U.S. government notes and bonds..... $43,758 $ 25 $43,783
During 2000, Viant sold certain short-term and long-term investments
classified as held-to-maturity. The investments were sold to re -allocate
Viant's investment portfolio from corporate bonds and notes to U.S. government
bonds and notes. The amortized cost of the securities sold was $36,605,000 and
the net realized gain was immaterial.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Billed ............................. $ 3,366 $ 22,645
Unbilled ........................... 54 2,745
Allowance for doubtful accounts..... (859) (3,024)
-------- --------
$ 2,561 $ 22,366
======== ========
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Computer equipment and software..... $ 10,796 $ 13,714
Furniture and equipment ............ 1,532 2,845
Leasehold improvements ............. 5,624 6,083
-------- --------
17,952 22,642
Less: accumulated depreciation...... (9,726) (7,342)
-------- --------
$ 8,226 $ 15,300
======== ========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$5,640,000, $4,174,000 and $1,958,000, respectively.
Included in the above is equipment and leasehold improvements acquired
under capital leases of $2,668,000 at December 31, 2001 and 2000. Depreciation
expense on equipment and leasehold improvements acquired under capital lease was
$535,000, $839,000 and $787,000 at December 31, 2001, 2000 and 1999,
respectively.
40
6. LONG-TERM INVESTMENTS
Investments in entities in which Viant has an equity interest of less
than 20% and does not have the ability to exercise significant influence are
classified as long-term investments. At December 31, 2001 and 2000, Viant's long
- -term investments consisted of investments accounted for under the cost method.
At each balance sheet date, Viant assesses the value of its cost-based
investments and recognizes any identified impairment. Viant recorded charges of
$1,695,000 and $3,852,000 for the years ended December 31, 2001 and 2000,
respectively, to account for identified impairments in certain of its cost-based
investments.
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Payroll and related......... $ 4,143 $12,977
Other ...................... 1,687 2,526
======= =======
$ 5,830 $15,503
======= =======
8. RESTRUCTURING
In December 2000, Viant recorded restructuring and other related charges
of $6.0 million, consisting of $1.7 million for headcount reductions, $4.0
million for closure and consolidation of facilities and related fixed assets,
and $0.3 million of other related restructuring charges. These restructuring and
other related charges were taken to align Viant's cost structure with changing
market conditions and decreased demand for Viant's services. The plan resulted
in headcount reduction of 125 employees, which was made up of 99 professional
services staff and 26 enterprise services staff.
On March 27, 2001, Viant announced that it was undertaking additional
cost cutting measures to address the increasingly challenging demand
environment. Viant recorded additional restructuring costs of $16.7 million,
consisting of $4.1 million for headcount reductions, $11.6 million for
consolidation of facilities and related fixed assets, $6.5 million of which was
an update to the fourth quarter 2000 estimated restructuring reserve, and $1.0
million of other restructuring related charges. This change in estimate was the
result of the significant softening in the overall commercial real estate
market. The $11.6 million for facilities costs represents future minimum
facility lease payments net of amounts estimated to be received for subleases.
This plan resulted in headcount reduction of 211 employees, which was made up of
152 professional services staff and 59 enterprise services staff. The reduction
in force was primarily the result of the closure of the Houston, San Francisco
and Munich offices.
On October 12, 2001 Viant announced it would undertake further cost
cutting measures. Viant recorded additional restructuring costs of $14.3 million
during the fourth quarter 2001, consisting of $1.2 million for headcount
reductions, $12.3 million for consolidation of facilities and related fixed
assets, $8.6 million of which was an update to previous quarter restructuring
estimates, and $0.8 million of other restructuring related charges. The change
in estimate was the result of the continued significant softening in the overall
commercial real estate market. The $12.3 million for facilities costs represents
future minimum facility lease payments net of amounts estimated to be received
for subleases. This plan resulted in the headcount reduction of 116 employees,
which was made up of 82 professional services staff and 34 enterprise services
staff. As a result of the restructuring, Viant closed its Atlanta, Chicago and
London offices.
As of December 31, 2001, $20.8 million remained accrued for
restructuring. Of this amount, a $13.6 million cash outlay is expected in the
first quarter of 2002, and the remaining cash outlay of
41
approximately $6.7 million, primarily related to real estate lease obligations,
is expected to occur over the next 6 years.
Restructuring reserve activities as of and for the year ended December
31, 2000 was as follows (in thousands):
BALANCE
DECEMBER 31,
EXPENSE UTILIZATION 2000
------- ----------- ------------
Severance and benefits.... $1,744 $ (609) $1,135
Facilities ............... 4,025 (239) 3,786
Other .................... 259 (6) 253
------ ------ ------
Total .................... $6,028 $ (854) $5,174
====== ====== ======
Restructuring reserve activities as of and for the year ended December 31, 2001
was as follows (in thousands):
BALANCE BALANCE
DECEMBER 31, DECEMBER 31,
2000 EXPENSE UTILIZATION 2001
------------ -------- ----------- ------------
Severance and benefits.... $ 1,135 $ 5,350 $ (6,366) $ 119
Facilities ............... 3,786 23,810 (7,029) 20,567
Other .................... 253 1,855 (1,972) 136
-------- -------- -------- --------
Total .................... $ 5,174 $ 31,015 $(15,367) $ 20,822
======== ======== ======== ========
9. CREDIT FACILITIES
In September 1996, Viant secured a revolving line of credit with a bank
which provided for borrowings of up to $1,250,000. In July 1997, the revolving
line of credit was increased to $3,000,000. In March 1998, Viant amended the
revolving line of credit to provide for borrowings up to $5,000,000 including a
$2,000,000 letter of credit facility. Borrowings under the revolving line of
credit were limited to 80% of eligible accounts receivable plus $1,000,000. The
revolving line of credit was repaid in full on July 1, 1999 and has not been
renewed. Warrants to purchase 5,517 shares of Series C preferred stock were
issued as part of the agreement and were exercised during 1999. At December 31,
2001 and 2000, letters of credit totaling $5,638,000 and $6,126,000,
respectively, were collateralized by bank deposits (see Note 18). The letters of
credit expire periodically through December 31, 2003.
10. CAPITAL LEASE COMMITMENTS
Viant leases certain equipment under capital leases. In March 1998,
Viant entered into an agreement with a leasing company which provides for
capital lease borrowings related to equipment purchases up to $3,250,000 at an
interest rate of 10.9%, which expired in December 1999. Pursuant to the
agreement, Viant issued warrants to purchase 35,986 shares of Series C preferred
stock at $3.625 per share which expires five years from the date of an
underwritten initial public offering of common stock. The value ascribed to
these warrants was not material to Viant's financial position or results of
operations.
42
Minimum future lease commitments under noncancelable operating leases
are disclosed in Note 18. Minimum future lease commitments under noncancelable
capital leases at December 31, 2001 are as follows (in thousands):
2002..................................................... $790
2003..................................................... 117
----
Total minimum lease payments ............................ 907
Less: Amount representing interest ...................... 52
----
Total present value of minimum capital lease payments.... $855
====
11. RELATED PARTY TRANSACTIONS
During 2000, Viant entered into an agreement with an employee for a
personal loan in the amount of $400,000. Interest on the loan accrues quarterly
at 6.1%. Principal and interest payments are due quarterly through December 31,
2004.
During 1999, a Viant employee served on the Board of Directors for a
client. Viant generated $3,141,000 in revenue from this client during 1999.
12. PREFERRED STOCK
In June 1999, in connection with Viant's initial public offering of
common stock, all shares of preferred stock were converted into common stock. As
of December 31, 2001, Viant's Certificate of Incorporation, as amended, has
authorized Viant to issue 5,000,000 shares of preferred stock, $0.001 par value.
There were no shares of preferred stock outstanding as of December 31, 2001 and
2000.
13. COMMON STOCK
In April 2001, the Board of Directors authorized an amendment to the
1999 Employee Stock Purchase Plan (the "1999 ESPP"), subject to stockholder
approval, to increase the shares reserved for issuance by 1,000,000, in addition
to shares allowed under the evergreen provision of the plan.
In March 2001, 400,000 shares of common stock became available for
issuance under Viant's 1999 ESPP, in accordance with a previously approved
automatic increase feature in the plan on the anniversary of the adoption of the
plan. This increased the number of shares for issuance under the plan from
800,000 to 1,200,000.
In October 2000, Viant's Board of Directors authorized the repurchase of
up to $50 million of Viant's outstanding common stock. The purpose of the stock
repurchase program is to help Viant achieve its long-term goal of enhancing
stockholder value. Under the stock repurchase program, Viant may purchase shares
from time to time through October 2002 Viant repurchased 1.7 million shares for
$2.1 million and 1.0 million shares for $5.0 million during the years ending
December 31, 2001 and 2000, respectively.
In March 2000, 400,000 shares of common stock became available for
issuance under Viant's 1999 ESPP, in accordance with a previously approved
automatic increase feature in the plan on the anniversary of the adoption of the
plan. This increased the number of shares for issuance under the plan from
400,000 to 800,000.
In February 2000, Viant's Certificate of Incorporation, as amended,
increased the authorized common stock to 200,000,000 shares.
43
On February 8, 2000, the Board of Directors of Viant approved a 2-for-1
stock split to be effected in the form of a 100% stock dividend to shareholders
of record. This stock dividend has been given effect retroactively in these
financial statements for all periods presented.
On December 8, 1999, Viant closed its secondary public offering of
common stock at a public offering price of $47.3125 per share. The net proceeds
to Viant from the offering were $120.3 million, net of underwriting discounts
and offering costs.
On June 18, 1999, Viant closed its initial public offering of common
stock at a public offering price of $8 per share. The net proceeds to Viant from
the offering were $50.2 million, net of underwriting discounts and offering
costs.
In March 1999, the Board of Directors authorized, subject to stockholder
approval, the 1999 ESPP, which provides for the issuance of a maximum of 400,000
shares of common stock. The 1999 ESPP permits eligible employees to purchase
common stock through payroll deductions of up to 15% of the participant's
compensation. Amounts deducted and accumulated by the participant are used to
purchase shares of common stock at the end of semi-annual enrollment periods.
The price of stock purchased under the 1999 ESPP is 85% of the lower of the fair
market value of the common stock at the beginning or end of the enrollment
period.
14. STOCK OPTIONS
In March 2001, the Board of Directors approved a Shareholder Rights Plan
(the "Plan") designed to protect stockholders from various abusive takeover
tactics including attempts to acquire control of the company at an inadequate
price. Under the terms of the plan, Viant issued a dividend of one preferred
share purchase right (a "right") for each share of common stock outstanding on
April 30, 2001. Each right entitles the registered holder to purchase from
Viant, upon certain triggering events, one one-thousandth of a share of Series A
Junior Participating Preferred Stock, par value $0.001 per share (the "Series A
Preferred Shares"), of the Company, at a purchase price of $21.75 per one
one-thousandth of a Series A Preferred Share, subject to adjustment. The rights
expire on the earliest of (i) April 30, 2011 or (ii) the redemption of the
rights as described above. The terms of the rights may generally be amended by
the Board of Directors without the consent of the holders of the rights.
In 1996, the Board of Directors and stockholders adopted the 1996 Stock
Option Plan (the "1996 Plan") which provides for granting incentive stock
options ("ISOs") and nonqualified stock options ("NSOs") for up to 8,583,752
shares of common stock to employees and consultants of Viant. In November 1997,
the 1996 Plan was amended to authorize options for up to 11,983,752 shares. In
1999, the Board of Directors and stockholders adopted the 1999 Stock Option Plan
(the "1999 Plan") which provides for the granting of ISOs to employees, and for
the granting of NSOs and stock purchase rights to employees, directors and
consultants of Viant. A total of 9,737,858 shares of common stock were
authorized for issuance pursuant to the 1999 Plan. In 2000, the Board of
Directors authorized, subject to stockholder approval, 4,500,000 shares in
addition to the annual increase of 1,878,180 provided by the 1999 Plan. In 2001,
the Board of Directors authorized an annual increase, subject to shareholder
approval, of 2,000,000 shares, increasing total options available for grant to
18,116,038. The 1999 Plan also provides for early exercise of options for
certain employees, the stock for which is subject to the same vesting and
repurchase terms under the 1999 Plan. In accordance with the 1999 Plan, the
stated exercise price shall not be less than 100% of the fair market value of
common stock on the date of grant for ISOs and shall be at least 85% of the fair
market value for NSOs. The 1999 Plan provides that the options shall be
exercisable over a period not to exceed ten years. Options generally vest 25%
after one year of service and quarterly for the three years thereafter.
In connection with the grant of stock options to an employee in 1999,
Viant recorded deferred compensation of $4.0 million, representing the
difference between the option exercise price and the fair value of the common
stock at the grant date multiplied by the number of shares under option. Such
44
amount is presented as a decrease to stockholders' equity and amortized over the
vesting period of the options. Viant recorded compensation expense related to
these options of $42,000, $1,000,000 and $42,000 in 2001, 2000 and 1999,
respectively.
During 2001, Viant issued options to purchase a total of 20,000 shares
to non-employees. These options were immediately exercisable and Viant recorded
compensation expense of $10,000 in 2001 related to these options. During 2000,
Viant issued options to purchase a total of 65,000 shares to non-employees.
These options were immediately exercisable and Viant recorded compensation
expense of $386,000 in 2000 related to these options.
In January 2001, a stock option exchange program was initiated. Under
this program, all employees except Senior Management, were given the opportunity
to cancel outstanding stock option grants, granted to them by Viant. Under this
program, the employee could select grants to be exchanged at 100% for all vested
options and 75% for all unvested options, to be granted at least six months and
one day from the date the old options are cancelled, provided the individual is
still employed on such date. In addition, each employee who chose to exchange
any options was also required to exchange all options granted six months prior
to the cancellation date. The cancellation date for the program was January 16,
2001. Vesting continued for all exchanged options according to the original
schedule; the amount that vested during the cancellation period was reduced to
the 75% factor. The vesting commencement date of the old options stayed intact.
On January 16, 2001, Viant accepted for cancellation and exchange options to
purchase a total of 6.0 million shares of common stock. On July 31, 2001, stock
options to purchase 2.9 million shares were issued at the then fair market value
pursuant to the terms of the option exchange program. On August 10, 2001 an
additional 0.4 million shares were issued at the then fair market value under
the UK Stock Option Plan pursuant to the terms of the exchange program. The
exercise price of these stock options was the same as the fair value on the date
of grant; accordingly compensation charges were not recorded.
Activity under the Plans is summarized as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------ ---------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- --------- ---------- ------ ---------- ------
Outstanding at beginning of year . 13,390,261 $17.54 12,211,734 $ 7.86 8,461,710 $ 0.50
Granted .......................... 7,062,974 1.60 7,830,580 23.96 7,420,610 12.95
Exercised ........................ (440,895) 0.82 (4,064,819) 0.93 (2,599,496) 0.44
Cancelled ........................ (12,309,970) 18.42 (2,587,234) 17.21 (1,071,090) 1.78
----------- ------ ---------- ------ ---------- ------
Outstanding at end of year ....... 7,702,370 $ 2.80 13,390,261 $17.54 12,211,734 $ 7.86
=========== ========== ==========
Options exercisable at end of year 2,830,511 $ 3.38 2,202,062 $12.68 2,922,064 $ 1.24
Weighted-average fair value of
options granted during the year .. $0.94 $18.12 $11.44
Options available for future grant 13,233,896 3,344,046 2,628,676
45
The following summarizes information about Viant's stock options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- ----------------------- ----------- ---------------- -------- ----------- --------
$0.00-1.40.......... 658,029 5.9 $0.98 384,195 $0.08
$1.41-1.50.......... 4,344,539 7.9 1.45 998,842 1.45
$1.51-4.00.......... 1,314,054 7.1 2.21 620,345 2.12
$4.01-58.75......... 1,385,748 6.7 8.44 827,129 7.87
--------- ---------
7,702,370 7.4 $2.80 2,830,511 $3.38
========= =========
Viant recognizes stock-based compensation expense for stock options
granted in accordance with the provisions of Accounting Principles Board Opinion
No. 25. Had compensation expense been determined based on the fair value at the
grant dates, consistent with the methodology prescribed under SFAS No. 123,
Viant's pro forma net income (loss) would have been as follows:
YEAR ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Net income (loss):
As reported ............. $(71,992) $ (2,463) $ 1,411
Pro forma ............... (77,266) (67,092) (11,000)
Net income (loss) per share:
As reported
Basic ................ (1.44) (0.05) 0.05
Diluted .............. (1.44) (0.05) 0.04
Pro forma
Basic ................ (1.55) (1.40) (0.40)
Diluted .............. $ (1.55) $ (1.40) $ (0.40)
The following assumptions were used by Viant to determine the fair
value of stock options granted under the Black-Scholes options-pricing model for
the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
------- -------- --------
Risk-free interest rate.... 4.0% 5.4% 5.9%
Expected option life ...... 4 years 4 years 4 years
Expected volatility ....... 82.5% 110.0% 115.6%
Expected dividend yield.... 0.0% 0.0% 0.0%
Because additional stock options are expected to be granted each year
and the pro forma net income (loss) only includes the effect of options granted
in 2001, 2000 and 1999, the above pro forma disclosures are not representative
of the pro forma effects on reported financial results for future years.
15. EMPLOYEE SAVINGS PLAN
Viant's Retirement/Savings Plan (the "401(k) Plan") under Section 401(k)
of the Internal Revenue Code covers all full -time employees. The 401(k) Plan
allows eligible employees to make contributions up to a specified annual maximum
contribution, as defined. Under the 401(k) Plan, Viant may, but is not obligated
to, match a portion of the employee contributions up to a defined maximum. Viant
has
46
expensed $291,330 for the year ended December 31, 2001 in connection with this
plan. Viant did not contribute to the 401(k) Plan in 2000 and 1999.
16. INCOME TAXES
As a result of losses generated, Viant had no current or deferred tax
provisions for the year ended December 31, 2001. For the year ended December 31,
2001, Viant had domestic and foreign income (loss) before income taxes of
$(66,623,000) and $(5,369,000), respectively. For the year ended December 31,
2000, Viant had federal, state and foreign tax provision of $2,255,000, $821,000
and $372,000, respectively. For the year ended December 31, 1999, Viant had
current federal and state tax provisions of $41,000 and $16,000, respectively.
As a result of losses generated, Viant had no current or deferred tax provisions
for the year ended January 1, 1999.
Deferred tax assets consist of the following:
YEAR ENDED
--------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Deferred tax assets:
Allowance for doubtful accounts ...... $ 258 $ 1,240 $ 423
Accrued expenses ..................... 77 1,978 247
Loss carryforwards ................... 26,721 1,988 4,929
Deferred compensation ................ 774 514 --
Depreciation ......................... 576 165 --
Investment impairment ................ 2,067 1,372 --
Restructuring reserve ................ 8,846 1,230 --
Tax credit carryforwards ............. 125 537 --
Foreign loss carryforwards ........... 2,070 324 --
Other ................................ 417 107 --
-------- -------- --------
Gross deferred tax assets ............ 41,931 9,455 5,599
Deferred tax asset valuation allowance (41,931) (9,455) (5,599)
-------- -------- --------
Net deferred tax asset .................. $ -- $ -- $ --
======== ======== ========
Realization of deferred tax assets is contingent upon the generation of
future taxable income. Due to the uncertainty of realization of these tax
benefits, Viant has provided a valuation allowance for the full amount of its
net deferred tax asset.
At December 31, 2001, Viant had net operating loss carryforwards of
approximately $62,440,000 available for federal purposes to reduce future
taxable income. If not utilized, these carryforwards will expire at various
dates ranging from 2011 to 2021. Under the provisions of the Internal Revenue
Code, certain substantial changes in Viant's ownership may have limited, or may
limit in the future, the amount of net operating loss carryforwards which could
be utilized annually to offset future taxable income. The amount of any annual
limitation is determined based upon Viant's value prior to an ownership change.
At December 31, 2001, $7,904,000 of the net operating loss carryforwards
available for federal income tax purposes relate to exercises of non-qualified
stock options and disqualifying dispositions of incentive stock options, the tax
benefit from which, if realized, will be credited to additional paid-in capital.
47
Income taxes computed using the federal statutory income tax rate
differs from Viant's effective tax rate as follows (in thousands):
YEAR ENDED
----------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
U.S. federal statutory rate ............... $(25,197) $ 345 $ 470
State income tax, net of federal income tax
effect .................................... (4,688) 169 119
Change in valuation allowance ............. 29,936 2,855 (647)
Permanent differences ..................... 93 252 115
Other ..................................... (144) (173) --
-------- ------ -----
Provision for income taxes ................ $ 0 $3,448 $ 57
======== ====== =====
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth unaudited quarterly statement of
operations data of Viant for each of the eight quarters during the two years
ended December 31, 2001. In management's opinion, this unaudited information has
been prepared on the same basis as the audited annual consolidated financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of the unaudited information for
the quarters presented. You should read this information in conjunction with the
consolidated audited financial statements, including the notes thereto, included
in this Form 10-K. The results of operations for a quarter are not necessarily
indicative of results that Viant may achieve for any subsequent periods.
DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH
31, 30, 30, 31, 31, 29, 30, 31,
2001 2001 2001 2001 2000 2000 2000 2000
-------- --------- ------- ------- -------- --------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ..... $ 4,419 $ 6,386 $ 9,515 $14,286 $24,951 $33,078 $38,545 $30,588
------- ------- ------- ------- ------- ------- ------- -------
Operating
expenses:
Professional
services ...... 6,182 7,537 8,760 13,276 13,696 16,543 14,925 12,616
Sales and
marketing ..... 1,058 1,648 2,159 2,363 1,048 2,796 3,955 3,417
General and
administrative 6,285 7,860 9,520 12,148 13,827 16,092 13,863 9,621
Research and
development ... 97 560 393 581 797 1,326 1,496 1,609
Restructuring .. 14,268 -- -- 16,747 6,028 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total
operating
expenses ...... 27,890 17,605 20,832 45,115 35,396 36,757 34,239 27,263
------- ------- ------- ------- ------- ------- ------- -------
Income
(loss) from
operations ....... (23,471) (11,219) (11,317) (30,829) (10,445) (3,679) 4,306 3,325
Interest and other
income
(expense), net ... 712 1,453 1,329 1,350 (757) 2,546 3,451 2,238
-------- ------- ------- -------- -------- ------- ------- -------
Income (loss)
before income
taxes ............ (22,759) (9,766) (9,988) (29,479) (11,202) (1,133) 7,757 5,563
Provision for
income taxes ..... -- -- -- -- 1,975 -- 1,473 --
-------- ------- ------- -------- -------- ------- ------- -------
Net income (loss) $(22,759) $(9,766) $(9,988) $(29,479) $(13,177) $(1,133) $ 6,284 $ 5,563
======== ======= ======= ======== ======== ======= ======= =======
Net income (loss)
per share:
Basic ............ $ (0.46) $ (0.19) $ (0.20) $ (0.59) $ (0.26) $ (0.02) $ 0.13 $ 0.12
Diluted .......... $ (0.46) $ (0.19) $ (0.20) $ (0.59) $ (0.26) $ (0.02) $ 0.11 $ 0.10
Shares used in
computing net
income (loss) per
share:
Basic ............ 49,183 50,230 50,316 50,053 49,734 48,247 47,500 46,680
Diluted .......... 49,183 50,230 50,316 50,053 49,734 48,247 55,276 55,721
48
18. SUBSEQUENT EVENT AND OPERATING LEASE COMMITMENTS
On March 7, 2002, Viant announced that it had eliminated a $32.2 million
real estate obligation through the buyout of a Boston lease agreement. In
connection with the lease buyout, Viant paid a total of $11.9 million to release
its lease obligation outstanding as of December 31, 2001, which effectively
reduced its total net real estate and other operating equipment lease
obligations outstanding as of that date from $56.1 million to $35.8 million
(including the settlement payment). The agreement included the cancellation of
an outstanding letter of credit in the amount of $3.7 million and the
requirement to maintain cash collateral in the same amount. The $11.9 million
payment amount was accrued in Viant's restructuring reserve as of December 31,
2001.
Viant leases office facilities under operating leases. Viant entered
into lease agreements for facilities in Atlanta, Boston, Chicago, Dallas, Los
Angeles, London, Munich, New York, San Francisco, and Mountain View, CA., which
expire in 2008, 2003, 2004, 2004, 2008, 2003, 2002, 2007, 2003 and 2005,
respectively. Rent expense under operating leases for the year ended December
31, 2001 was $9,011,000, net of rental income of $2,575,000. Rent expense under
operating leases for the year ended December 31, 2000 was $5,025,000, net of
rental income of $194,000. Viant is party to letters of credit in support of
their minimum future lease payments under leases for permanent office space
amounting to $5,638,000 as of December 31, 2001, declining annually. These
letters of credit are collateralized in equal amount by short -term certificates
of deposit.
Minimum future lease commitments under noncancelable operating leases at
December 31, 2001, including reducing the Boston lease commitment to the final
settlement payment of $11.9 million, are as follows (in thousands):
2002........................................................... $20,015
2003........................................................... 6,693
2004........................................................... 4,972
2005........................................................... 3,651
2006........................................................... 2,771
Thereafter..................................................... 4,136
-------
Total minimum lease payments 42,238
Less: Amounts representing sublease income 6,456
-------
Total net minimum value of operating lease payments $35,782
=======
49
VIANT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Revenues:
Revenues before expense reimbursements $ 4,952 $ 14,286
Reimbursements for expenses 402 808
------- -------
Total revenues 5,354 15,094
------- -------
Operating expenses:
Cost of professional services
Cost of professional services before reimbursable expenses 4,383 13,276
Reimbursable expenses 402 808
------- -------
Total cost of professional services 4,785 14,084
Sales and marketing 1,426 2,944
General and administrative 5,765 12,148
Restructuring -- 16,747
------- -------
Total operating expenses 11,976 45,923
------- -------
Loss from operations (6,622) (30,829)
Interest and other income (expense), net 647 1,350
------- -------
Net loss $(5,975) $(29,479)
------- -------
Net loss per share:
Basic $ (0.12) $ (0.59)
Diluted $ (0.12) $ (0.59)
Shares used in computing net loss per share:
Basic 48,988 50,053
Diluted 48,988 50,053
The accompanying notes are an integral part of these
consolidated financial statements.
VIANT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 76,703 $ 43,601
Short-term investments 39,354 94,158
Accounts receivable, net 4,149 2,561
Prepaid expenses and other current assets 874 1,462
-------- ---------
Total current assets 121,080 141,782
Property and equipment, net 6,763 8,226
Long-term investments 314 314
Other assets 3,778 3,778
-------- ---------
Total assets $131,935 $ 154,100
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 625 $ 741
Accounts payable 1,597 1,673
Accrued expenses 3,107 5,830
Restructuring reserve 4,218 17,885
Deferred revenues 912 665
-------- ---------
Total current liabilities 10,459 26,794
Capital lease obligations, net of current portion 49 114
Restructuring reserve, net of current portion 3,039 2,937
-------- ---------
Total liabilities 13,547 29,845
-------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares;
Issued and outstanding: no shares at March 31, 2002 and December 31,
2001 -- --
Common stock, $0.001 par value; Authorized 200,000,000 shares;
Issued and outstanding: 51,715,845 and 49,001,845 at March 31, 2002
and 51,591,468 and 48,877,468 shares at December 31, 2001,
respectively 52 52
Additional paid-in capital 217,367 217,239
Treasury stock, at cost, 2,714,000 shares at March 31, 2002 and December
31, 2001 (7,188) (7,188)
Accumulated other comprehensive income 80 100
Accumulated deficit (91,923) (85,948)
-------- ---------
Total stockholders' equity 118,388 124,255
-------- ---------
Total liabilities and stockholders' equity $131,935 $ 154,100
======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
VIANT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,975) $(29,479)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,092 1,510
Loss on disposal of property and equipment 325 --
Write-down of investments -- 971
Stock-based compensation expense -- 42
Changes in operating assets and liabilities:
Accounts receivable (1,588) 10,885
Prepaid expenses and other assets 588 486
Accounts payable (76) (1,973)
Accrued expenses (2,723) (7,006)
Restructuring reserve (13,565) 15,897
Deferred revenues 247 (1,924)
-------- --------
Net cash used in operating activities (21,675) (10,591)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,400) (55,513)
Maturities of short-term investments 58,204 31,631
Purchases of long-term investments -- (971)
Proceeds from sale of property and equipment 50 --
Purchases of property and equipment (4) (2,143)
-------- --------
Net cash provided by (used in) investing activities 54,850 (26,996)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 128 211
Principal payments on capital lease obligations (181) (163)
-------- --------
Net cash (used in) provided by financing activities (53) 48
-------- --------
Effect of exchange rate changes on cash and cash equivalents (20) 112
-------- --------
Net increase (decrease) in cash and cash equivalents 33,102 (37,427)
Cash and cash equivalents at beginning of period 43,601 141,629
-------- --------
Cash and cash equivalents at end of period $ 76,703 $104,202
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 27 $ 40
The accompanying notes are an integral part of these
consolidated financial statements.
VIANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Viant Corporation ("Viant", "We" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
2001 included in the Company's Form 10-K, filed April 1, 2002 (File No.
0-26303), as amended on Form 10-K/A on April 30, 2002. The accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
solely of normal, recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the interim periods
presented. The results of operations for the three month period ended March 31,
2002 are not necessarily indicative of the results to be expected for any future
period or the full fiscal year.
On January 1, 2002, Viant adopted EITF Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for "Out-Of-Pocket" Expenses
Incurred." This consensus requires that reimbursements received for
out-of-pocket expenses should be characterized as revenue and the corresponding
amount as cost of services. We incur incidental expenses in the delivery of
services to our clients that in practice are commonly referred to as
"out-of-pocket" expenses. These expenses include, but are not limited to, travel
and administrative charges. Historically, we have reported our revenues and cost
of services net of these reimbursements. Comparative financial statements for
prior periods have been reclassified to comply with the guidance of this FASB
announcement.
2. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted income (loss) per common share reflects the maximum dilution
that would have resulted from the assumed exercise and share repurchase related
to dilutive stock options and is computed by dividing net income (loss) by the
weighted average number of common shares and all dilutive securities
outstanding. The calculation of diluted net loss per common share does not
include 0.2 and 1.6 million potential shares of common stock equivalents for the
three months ended March 31, 2002 and March 31, 2001, respectively, as their
inclusion would be anti-dilutive.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Viant considers all highly liquid instruments with an original maturity of
three months or less to be cash equivalents. All other investments with original
maturities between 91 and 360 days are classified as short-term investments
because they are liquid and are available to meet working capital needs.
Short-term investments are classified as held-to-maturity securities and are
recorded at amortized cost. Investments with original maturities greater than
one year are classified as long-term investments. At March 31, 2002 and December
31, 2001, Viant's short-term investments consisted primarily of certificates of
deposit, U.S. Government-backed securities and money market funds secured by
U.S. Government-backed securities. At March 31, 2002, cash and cash equivalents
included $2.0 million, which collateralizes outstanding letters of credit.
4. SEGMENTS AND GEOGRAPHIC INFORMATION
Viant engages in business activities in one operating segment that
provides professional services to global companies that seek to solve complex
business problems with digital solutions. Revenues from and long-lived assets at
Viant's international operations in Munich, whose operations ceased as a result
of the restructuring undertaken in March 2001, and London, whose operations
ceased as a result of the restructuring undertaken in October 2001, are not
significant for the periods reported.
5. RESTRUCTURING
In December 2000, Viant recorded restructuring and other related charges of
$6.0 million, consisting of $1.7 million for headcount reductions, $4.0 million
for closure and consolidation of facilities and related fixed assets, and $0.3
million of other related restructuring charges. These restructuring and other
related charges were taken to align Viant's cost structure with changing market
conditions and decreased demand for Viant's services. The plan resulted in
headcount reduction of 125 employees, which was made up of 99 professional
services staff and 26 enterprise services staff.
On March 27, 2001, Viant announced that it was undertaking additional cost
cutting measures to address the increasingly challenging demand environment.
Viant recorded additional restructuring costs of $16.7 million, consisting of
$4.1 million for headcount reductions, $11.6 million for consolidation of
facilities and related fixed assets, $6.5 million of which was an update to the
fourth quarter 2000 estimated restructuring reserve, and $1.0 million of other
restructuring related charges. This change in estimate was the result of the
significant softening in the overall commercial real estate market. The $11.6
million for facilities costs represents future minimum facility lease payments
net of amounts estimated to be received for subleases. This plan resulted in
headcount reduction of 211 employees, which was made up of 152 professional
services staff and 59 enterprise services staff. The reduction in force was
primarily the result of the closure of the Houston, San Francisco and Munich
offices.
On October 12, 2001 Viant announced it would undertake further cost cutting
measures. Viant recorded additional restructuring costs of $14.3 million during
the fourth quarter 2001, consisting of $1.2 million for headcount reductions,
$12.3 million for consolidation of facilities and related fixed assets, $8.6
million of which was an update to previous quarter restructuring estimates, and
$0.8 million of other restructuring related charges. The change in estimate was
the result of the continued significant softening in the overall commercial real
estate market. The $12.3 million for facilities costs represents future minimum
facility lease payments net of amounts estimated to be received for subleases.
This plan resulted in the headcount reduction of 116 employees, which was made
up of 82 professional services staff and 34 enterprise services staff. As a
result of the restructuring, Viant closed its Atlanta, Chicago and London
offices.
As of March 31, 2002, $7.3 million remained accrued for restructuring. Of
this amount, a $4.3 million cash outlay is expected over the next 12 months, and
the remaining cash outlay of approximately $3.0 million, primarily related to
real estate lease obligations, is expected to occur over the next 6 years.
Restructuring reserve activities during the three months ended March 31,
2002 were as follows (in thousands):
BALANCE BALANCE
----------------- --------------
DECEMBER 31, 2001 EXPENSE UTILIZATION MARCH 31, 2002
----------------- ------- ----------- --------------
Severance and benefits $ 119 $ -- $ (119) $ --
Facilities 20,567 -- (13,425) 7,142
Other 136 -- (21) 115
------- ---- -------- ------
Total $20,822 $ -- $(13,565) $7,257
======= ==== ======== ======
6. COMPREHENSIVE LOSS
Total comprehensive loss, which was comprised of net loss and foreign
currency translation adjustments, was $(5,995,000) and $(29,367,000) for the
three months ended March 31, 2002 and 2001, respectively.
7. SUBSEQUENT EVENT
On April 5, 2002, Viant Corporation entered into an Agreement and Plan of
Merger and Reorganization, with divine, inc. and DVC Acquisition Company,
pursuant to which DVC, a direct, wholly-owned subsidiary of divine, will be
merged with and into Viant and the separate corporate existence of DVC shall
cease. Following the merger, Viant will be a wholly-owned subsidiary of divine.
Upon consummation of the merger, each of the approximately 49.1 million
outstanding shares of Viant common stock will be converted into the right to
receive 3.977 shares of divine Class A common stock. In addition, in connection
with the closing of the merger, Viant will distribute $24 million, in the
aggregate, to its stockholders; provided, however, that if the proposed business
combination does not close, the cash distribution will not occur. The record
date for the cash distribution has not yet been set.
ANNEX S
HISTORICAL FINANCIAL STATEMENTS OF ROWECOM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF ROWECOM INC.
Independent Auditors' Report ............................................... F-2
Consolidated Statement of Operations and Comprehensive Loss
for the ten months ended October 31, 2001 ................................ F-3
Consolidated Statement of Cash Flows for the ten months ended
October 31, 2001.......................................................... F-4
Notes to Consolidated Financial Statements ................................. F-5
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RoweCom Inc.:
We have audited the accompanying consolidated statements of operations and
comprehensive loss and cash flows of RoweCom Inc. and subsidiaries for the ten
months ended October 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of RoweCom Inc. and subsidiaries for the ten months ended October 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Chicago, Illinois
May 31, 2002
F-2
ROWECOM INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE TEN MONTHS ENDED OCTOBER 31, 2001
Revenues........................................................ $ 336,329
Cost of revenues................................................ 306,806
-----------
Gross profit.............................................. 29,523
Operating expenses:
Sales and marketing........................................... 20,424
General and administrative.................................... 16,736
Depreciation.................................................. 2,461
Amortization of goodwill and other intangible assets.......... 3,799
-----------
Total operating expenses.................................... 43,420
-----------
Loss from operations...................................... (13,897)
Other income (expense):
Interest income............................................... 552
Interest expense.............................................. (6,455)
Other income, net............................................. 2
-----------
Total other expense......................................... (5,901)
-----------
Loss before income tax benefit............................ (19,798)
Income tax benefit.............................................. 921
-----------
Net loss.................................................. $ (18,877)
===========
Foreign exchange translation adjustment......................... (1,339)
-----------
Comprehensive loss.............................................. (20,216)
Basic and diluted net loss per share............................ $ (1.49)
Shares used in computing basic and diluted net loss per share... 12,694,693
See accompanying notes to consolidated financial statements.
F-3
ROWECOM INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE TEN MONTHS ENDED OCTOBER 31, 2001
Cash flows from operating activities:
Net loss ....................................................................... $(18,877)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense ......................................................... 2,461
Amortization of goodwill and other intangible assets ......................... 3,799
Amortization of discount on convertible notes ................................ 903
Amortization of capital raising costs ........................................ 922
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net ................................................... (14,014)
Deferred publisher costs ................................................... 101,181
Other assets ............................................................... 3,180
Accounts payable ........................................................... (12,493)
Accrued expenses and accrued compensation .................................. (149)
Customer advances .......................................................... 3,541
Deferred revenue ........................................................... (51,421)
--------
Net cash provided by operating activities ...................................... 19,033
--------
Cash flows from investing activities:
Purchase of property and equipment ............................................. (900)
Acquisitions, including cash acquired .......................................... (101)
--------
Net cash used in investing activities .......................................... (1,001)
--------
Cash flows from financing activities:
Proceeds from exercise of stock options ........................................ 24
Proceeds from issuance of stock under employee stock purchase plan ............. 38
Loan proceeds .................................................................. 21,620
Loan repayments ................................................................ (36,242)
--------
Net cash used in financing activities .......................................... (14,560)
--------
Effect of exchange rates on cash ............................................... (1,339)
--------
Net increase in cash and cash equivalents ...................................... 2,133
--------
Cash and cash equivalents, beginning of period ................................. 26,597
--------
Cash and cash equivalents, end of period ....................................... $ 28,730
========
Supplementary information:
Issuance of common stock in connection with purchase acquisitions .............. $ 581
Income taxes paid .............................................................. 672
Interest paid .................................................................. 2,423
See accompanying notes to consolidated financial statements.
F-4
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RoweCom Inc. ("RoweCom"), was organized as a Delaware corporation in April
1997 as the eventual successor to a corporation that commenced operations in
1994. RoweCom is a leading business-to-business provider of high-quality service
and e-commerce solutions for purchasing and managing the acquisition of
magazines, newspapers, journals and e-journals, books and other printed sources
of commercial, scientific and general interest information and analysis. RoweCom
refers to these products as "knowledge resources." RoweCom offers its clients
and their employees easy and convenient access to one of the largest catalogs of
knowledge resources on the Internet. RoweCom also provides businesses, academic
and other non-profit institutions with a highly effective means of managing and
controlling purchases of knowledge resources and reducing costs. RoweCom's
services fall into two main categories: library services and desktop services.
RoweCom targets clients in knowledge-intense industries, such as business and
financial services; biomedical; academic and the federal government; and
corporate and professional services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RoweCom and
RoweCom's wholly owned subsidiaries. All significant intercompany accounts and
transactions between RoweCom and RoweCom's subsidiaries have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with original maturities of three months or less from the date of purchase and
whose carrying amounts approximate fair value due to the short maturity of the
investments.
REVENUES
Revenues are principally generated from subscription orders for third-party
publications. Revenue generated from subscription orders for third-party
publications is recognized over the subscription period.
DEFERRED PUBLISHER COSTS AND DEFERRED REVENUE
Upon RoweCom's placing a customer order with a third-party publisher,
deferred revenue and deferred publisher costs are recorded. Deferred revenue and
deferred publisher costs are recognized ratably over the underlying subscription
period, which is generally one year.
ADVERTISING COSTS
RoweCom expenses advertising costs as incurred. Advertising expense for the
ten months ended October 31, 2001 was $679,000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is provided using the straight-line method over
the estimated lives of the related assets, which are generally three to five
years for equipment and 25 years for buildings. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life, which
is
F-5
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
generally one to six years. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation or amortization are removed
from the accounts and any resulting gain or loss is included in the
determination of net income or loss.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of acquired businesses
over the estimated fair value of the net assets acquired. Goodwill amortization
is recorded using the straight-line method over three years. The carrying value
of goodwill and intangible assets is reviewed on a quarterly basis for the
existence of facts and circumstances both internally and externally that may
suggest impairment or that the useful lives of these assets are no longer
appropriate. RoweCom determines whether an impairment has occurred based on
gross expected future cash flows and measures the amount of impairment based on
the related future estimated discounted cash flows. The cash flow estimates used
contain management's best estimates, using appropriate and customary assumptions
and projections at that time.
INCOME TAXES
RoweCom accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. The measurement of
deferred tax assets is reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of RoweCom's foreign subsidiaries are translated
into U.S. dollars at period-end exchange rates. Income and expense accounts are
translated using average exchange rates during the period. Transaction gains and
losses are recognized within other income, net in the consolidated statement of
operations and comprehensive loss.
OFF-BALANCE SHEET RISK
RoweCom operates internationally, which exposes it to market risks brought
on by changes in foreign exchange rates. Accordingly, RoweCom enters into
foreign currency forward contracts as a hedge against foreign exchange rate
risk. RoweCom does not hold or issue derivative financial instruments for
trading purposes or leveraged derivative financial instruments.
RoweCom's hedging activities do not subject RoweCom to exchange rate risk
because the gains and losses on these contracts offset the losses and gains on
the transactions being hedged. Forward contracts involve agreements to purchase
or sell foreign currencies at specific rates at future dates. The risk of loss
associated with forward contracts is equal to the exchange rate differential
from the time the contract is made until the time it is settled.
The objective of RoweCom's foreign currency hedging activities is to
protect RoweCom from the longer-term risk that the eventual dollar-value
equivalent of net cash inflows resulting from foreign currency denominated sales
will be adversely affected by changes in the exchange rates. Contracts used to
hedge foreign currency denominated sales have average maturities at inception of
less than one year.
F-6
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RoweCom's accounting for foreign currency forward contracts used as a means
of hedging exposure to foreign currency exchange risk is in accordance with the
concepts established in Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation," and various Emerging Issues Task Force
(EITF) pronouncements. Gains and losses on foreign forward currency contracts
are recognized within other income, net in the consolidated statement of
operations and comprehensive loss. The contract premiums or discounts are
amortized over the life of the foreign exchange contracts and are recognized
within other income, net. The cash flows generated from forward contracts are
reported as arising from operating activities in the consolidated statement of
cash flows.
At October 31, 2001, RoweCom had no outstanding forward currency contracts.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to provide 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 expense during
the reporting period. Actual results could differ from those estimates.
RoweCom is subject to the risks encountered by companies relying on the
continued growth of online commerce and Internet infrastructure. The risk
includes the use of the Internet as a viable commercial marketplace and the
potentially inadequate development of the necessary network infrastructure.
2. NET LOSS PER COMMON SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
per Share." Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents and common stock warrants are included in the
calculation of diluted earnings per share only when the effect of their
inclusion would be dilutive. Because RoweCom reported a net loss for the ten
months ended October 31, 2001, potentially dilutive securities have not been
included in the shares used to compute net loss per share.
Options to purchase shares of RoweCom's stock totaling 2,191,000 at October
31, 2001, and common stock warrants totaling 1,370,000 at October 31, 2001, were
outstanding but were not included in the computations of diluted earnings per
share as the inclusion of these shares would have been antidilutive.
3. INCOME TAXES
RoweCom's loss before income taxes is as follows:
TEN MONTHS
ENDED
OCTOBER 31,
2001
-----------
(IN THOUSANDS)
Domestic........................... $(14,593)
Foreign............................ (5,205)
--------
$(19,798)
--------
F-7
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The components of the income tax benefit are as follows:
Current:
Federal .............. $ --
State ................ --
Foreign .............. 912
----
Total .................. 912
Deferred:
Federal .............. --
State ................ --
Foreign .............. 9
----
Total .................. 9
----
Total income tax benefit $921
----
The difference between the United States federal statutory tax rate of 34%
and the effective rate of (0.5%) for the ten months ended October 31, 2001 is
due to the nonrecognition of the domestic net operating losses and
non-deductible expenses, as well as recognized foreign tax benefit.
4. BUSINESS COMBINATIONS.
In September 2001, RoweCom purchased the assets of MDLB Enterprises, L.L.C.
(doing business as Doody Publishing), an online medical publisher of products
for health care professionals, in exchange for 600,000 shares of RoweCom common
stock with a fair value of $0.58 per share. RoweCom also issued 400,000 shares
of its common stock to Chatsworth Securities LLC, an investment banking firm
that acted as financial advisor to RoweCom regarding this acquisition. RoweCom
has accounted for the Doody acquisition using the purchase method of accounting.
Doody's results of operations are included in RoweCom's consolidated results of
operations and comprehensive loss since the date of acquisition. Pro forma
information for the Doody acquisition is not presented herein as it would be
immaterial.
F-8
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
RoweCom leases various office spaces under operating lease agreements which
expire at various dates through 2007. Rent expense, net of sublease income, for
the ten months ended October 31, 2001 was $1,402,000. RoweCom also leases
certain office equipment and automobiles under operating leases expiring through
2006. At October 31, 2001, future minimum lease payments under noncancellable
operating leases with remaining terms of one or more years are as follows:
FOR THE
TWELVE MONTHS
ENDED
OCTOBER 31,
-------------
(IN THOUSANDS)
2002 ....................... $2,103
2003 ....................... 1,893
2004 ....................... 1,803
2005 ....................... 1,755
2006 ........................ 1,338
Thereafter .................. 623
------
Total minimum lease payments $9,515
======
6. PENSIONS AND OTHER RETIREMENT BENEFITS
RoweCom has a contributory defined benefit plan covering approximately ten
of its UK employees. RoweCom became the sponsoring employer for the plan
effective April 6, 2000. The plan has been closed to new members since April
2000. Contributions made by RoweCom to the plan during the ten months ended
October 31, 2001 totaled pound sterling 94,000 ($135,000). As of October 31,
2001, the plan is underfunded by approximately pound sterling 152,000
($221,000). RoweCom plans to fund this shortage in the future.
RoweCom maintains a contributory 401(k) defined contribution plan (the
"Plan") to provide retirement benefits for principally all domestic RoweCom
employees. Under the terms of the Plan, participants may defer between 1% and
15% of their compensation, a portion of which may be contributed on a pretax
basis as defined by law.
RoweCom may also make discretionary contributions to the Plan. Participants
vest in employer contributions over a five-year period. RoweCom did not make any
contributions to the Plan during the ten months ended October 31, 2001.
F-9
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (DEFICIT)
The table below reflects the activity in each caption of stockholders'
equity (deficit) for the ten months ended October 31, 2001. In November 2001,
all of the common stock of RoweCom was acquired by divine, inc. (divine). Prior
to November 2001, RoweCom had recognized revenue from subscription services upon
receipt of the customer order and placement of the order with the publisher.
divine subsequently concluded that revenue from subscription services should be
recognized ratably over the subscription period. The table below includes a
cumulative adjustment to accumulated deficit as of December 31, 2000 to reflect
the recognition of revenue from subscription services ratably over the
subscription period:
COMMON ADDITIONAL TREASURY CUMULATED
STOCK COMMON PAID-IN STOCK AT ACCUMULATED TRANSLATION
SHARES STOCK CAPITAL COST DEFICIT ADJUSTMENT TOTAL
---------- ------ ---------- -------- ----------- ----------- ----------
December 31, 2000, as previously
reported ..................... 12,450,954 $ 124 $ 113,235 $ (53) $ (113,319) $ (1,765) $ (1,778)
Adjustment ..................... -- -- -- -- (22,767) -- (22,767)
---------- ------ ---------- ------ ---------- ---------- ----------
December 31, 2000, as adjusted . 12,450,954 124 113,235 (53) (136,086) (1,765) (24,545)
Exercise of stock options ...... 32,251 -- 24 -- -- -- 24
Issuance of stock under Employee
Stock Purchase Plan .......... 68,101 1 37 -- -- -- 38
Issuance of common stock in
connection with an acquisition 1,000,000 11 570 -- -- -- 581
Net loss ....................... -- -- -- -- (18,877) -- (18,877)
Foreign exchange translation
adjustment ................... -- -- -- -- -- (1,339) (1,339)
---------- ------ ---------- ------ ---------- ---------- ----------
October 31, 2001 ............... 13,551,306 $ 136 $ 113,866 $ (53) $ (154,963) $ (3,104) $ (44,118)
========== ====== ========== ====== ========== ========== ==========
8. STOCK OPTIONS
On April 25, 1997, RoweCom adopted the 1997 Stock Incentive Plan for
directors, officers, employees and consultants of RoweCom. A total of 114,618
shares of common stock were initially reserved for issuance under the 1997 Stock
Incentive Plan. These options vested upon RoweCom's initial public offering on
March 9, 1999, and expire over a period not exceeding ten years.
On April 8, 1998, RoweCom adopted the 1998 Stock Incentive Plan. A total of
872,625 shares of common stock were initially reserved for issuance under the
1998 Stock Incentive Plan. These options generally vest over a four-year period
and expire over a period not exceeding ten years.
The board establishes the exercise price based on the closing price of the
stock on the day of grant and specifies these terms in the applicable option
agreements.
Under the terms of the Plans, the exercise price of incentive stock options
granted must not be less than 100% (110% in certain cases) of the fair market
value of the common stock on the date of grant, as determined by the board of
directors. Prior to RoweCom's common stock becoming a publicly traded stock, the
board of directors considered a broad range of factors to determine the fair
market value of the option to be granted including, the illiquid nature of an
investment in RoweCom's common stock, RoweCom's historical financial
performance, and RoweCom's future prospects.
F-10
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
In February 1999, RoweCom's board of directors and its stockholders
approved the 1999 Non-Employee Director Stock Option Plan. Under this plan, each
director of RoweCom who is not also an employee of RoweCom received upon the
commencement of RoweCom's initial public offering, or upon later initial
election to RoweCom's board of directors, an option to purchase 10,472 shares of
common stock. Additionally, after a director's initial grant, the director will
receive, as of each date on which he is reelected as a director, but not more
frequently than 3 years, an option to purchase 10,472 shares of common stock
minus the number of options previously granted under this plan which have not
yet vested. Options are granted under the plan at an exercise price equal to the
fair market value of the common stock on the date of grant. They vest monthly,
at the rate of 3,491 shares a year, and have a term of ten years. An aggregate
of 87,263 shares of common stock have been reserved for issuance under this
plan.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS No. 123), encourages, but does not require, companies
to record compensation cost for stock-based employee plans at fair value.
RoweCom has chosen to account for stock-based employee compensation using the
intrinsic value method prescribed under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plan.
Had compensation cost for RoweCom's stock option plans been determined
based on the estimated fair value of the option at the date of grant using the
Black-Scholes option pricing model consistent with SFAS No. 123, pro forma net
loss for the ten months ended October 31, 2001, would have been $19,532,000 and
basic and diluted net loss per share would have been $1.54. For this purpose,
the fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions for the ten months ended 2001: risk-free interest rate of 4.62%; no
dividend yield; expected volatility of 150%; and a weighted-average expected
life of the options of seven years. RoweCom granted options to purchase
1,274,800 shares of its common stock, at a weighted average exercise price of
$1.03, during the ten months ended October 31, 2001.
9. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
RoweCom operates in one business segment, that being a provider of
knowledge acquisition and management services. RoweCom's reportable segments are
based upon geographic area. RoweCom has four reportable segments: North America,
France, the United Kingdom and Other. North America consists of the United
States and Canada. Other consists of Spain, Australia, the Netherlands, the
British Virgin Islands, Barbados, Korea, and Taiwan and were not reported
separately as they are not material. RoweCom evaluates performance based on
several factors, of which the primary financial measure is operating income. The
accounting policies of the business segments are the same as those described in
Note 1, Summary of Significant Accounting Policies. The following table
summarizes the
F-11
ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
revenue, gross profit, operating income (loss), and depreciation and
amortization expense by reportable segment for the ten months ended October 31,
2001.
NORTH UNITED
AMERICA FRANCE KINGDOM OTHER CONSOLIDATED
--------- ------ ------- ------ ------------
(IN THOUSANDS)
Revenue ...................... $ 218,231 73,293 33,150 11,655 $ 336,329
Gross profit ................. 17,633 7,406 2,826 1,658 29,523
Operating income (loss) ...... (12,630) 976 (748) (1,495) (13,897)
Depreciation and amortization 4,500 880 349 531 6,260
10. SUBSEQUENT EVENT
In November 2001, all of the common stock of RoweCom was acquired by
divine, inc. in exchange for 10,158,420 shares of divine's class A common stock.
divine also issued warrants to purchase 3,752,602 shares of divine's class A
common stock upon conversion of existing options and warrants to purchase
RoweCom common stock.
F-12
ANNEX T
DIVINE FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 2002 (U.S. GAAP)
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------------- ----------------------
COMMISSION FILE NUMBER 0-30043
---------------------
DIVINE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-4301991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1301 N. ELSTON AVENUE, CHICAGO, ILLINOIS 60622
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 394-6600
---------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At May 10, 2002, the registrant had outstanding an aggregate of
470,213,701 shares of class A common stock.
================================================================================
DIVINE, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.................................. 3
Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001................. 3
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 2002 and 2001....................... 4
Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2002 (unaudited).................... 5
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2002 and March 31, 2001............. 6
Notes to Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................... 27
Item 6. Exhibits and Reports on Form 8-K................................... 27
SIGNATURE....................................................................... 28
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DIVINE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 39,960 $ 104,480
Restricted cash ....................................................... 38,130 32,566
Accounts receivable, net of allowance for doubtful accounts
of $10,366 and $6,983 ............................................... 122,071 200,833
Available-for-sale securities ......................................... 2,577 3,686
Notes receivable ...................................................... 308 332
Prepaid expenses ...................................................... 13,336 10,495
Deferred publisher costs .............................................. 227,544 238,522
Other current assets .................................................. 5,941 10,651
----------- -----------
Total current assets ................................................. 449,867 601,565
Property and equipment, net ............................................. 50,295 44,335
Goodwill and other intangible assets, net of accumulated
amortization of $7,523 and $4,097 ..................................... 283,059 211,075
Restricted cash ......................................................... -- 1,075
Other noncurrent assets ................................................. 13,504 16,661
----------- -----------
Total assets ......................................................... $ 796,725 $ 874,711
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 20,216 $ 18,013
Publisher payables .................................................... 40,797 70,703
Accrued payroll expenses .............................................. 14,457 11,658
Accrued professional fees ............................................. 3,053 3,804
Current portion of facilities impairment .............................. 7,801 7,723
Current portion of capital leases ..................................... 15,407 899
Notes payable and current portion of long-term debt ................... 15,798 39,738
Deferred revenue ...................................................... 288,357 303,663
Other accrued expenses and current liabilities ........................ 49,032 65,457
----------- -----------
Total current liabilities ............................................ 454,918 521,658
Long-term debt .......................................................... 62,378 63,294
Long-term facilities impairment ......................................... 22,546 22,155
Capital leases .......................................................... 6,625 1,293
Other noncurrent liabilities ............................................ 15,381 14,552
Stockholders' equity:
Class A common stock, $.001 par value; 2,500,000,000 shares authorized;
470,864,231 and 371,408,945 shares issued; and
462,675,299 and 365,997,791 shares outstanding ...................... 470 366
Additional paid-in capital ............................................ 1,228,569 1,171,853
Unearned stock-based compensation ..................................... (15,230) (16,654)
Accumulated other comprehensive loss .................................. (4,785) (3,861)
Treasury stock, at cost; 6,855,599 and 4,077,821 shares ............... (12,945) (9,639)
Accumulated deficit ................................................... (961,202) (890,306)
----------- -----------
Total stockholders' equity ........................................... 234,877 251,759
----------- -----------
Total liabilities and stockholders' equity ........................... $ 796,725 $ 874,711
=========== ===========
See accompanying notes to consolidated financial statements.
3
DIVINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
----------------------------------
MARCH 31, MARCH 31,
2002 2001
------------- ------------
Revenues:
Products .............................................................. $ 110,172 $ 1,535
Services .............................................................. 36,157 8,222
------------ ------------
Total revenues ....................................................... 146,329 9,757
Operating expenses:
Cost of revenues:
Products (exclusive of $13 and $21 of amortization
of stock-based compensation) ....................................... 79,715 851
Services (exclusive of $185 and $120 of amortization
of stock-based compensation) ....................................... 44,987 6,769
------------ ------------
Total cost of revenues .............................................. 124,702 7,620
Selling, general and administrative (exclusive of $1,621 and $3,056
of amortization of stock-based compensation) ........................ 56,223 31,711
Research and development (exclusive of $57 and $122
of amortization of stock-based compensation) ........................ 30,541 3,133
Bad debt expense (recovery) ........................................... (675) 1,103
Amortization of intangible assets ..................................... 3,792 1,184
Impairment of intangible and other assets ............................. 250 3,256
Amortization of stock-based compensation .............................. 1,876 3,319
------------ ------------
Total operating expenses ............................................ 216,709 51,326
------------ ------------
Operating loss ...................................................... (70,380) (41,569)
Other income (expense):
Interest income ....................................................... 253 3,507
Interest expense ...................................................... (2,194) (276)
Other income (expense), net ........................................... 467 (50)
------------ ------------
Total other income (expense) ........................................ (1,474) 3,181
Loss before minority interest, net gain on stock transactions
of associated companies, equity in losses of associated companies,
impairment of investment in equity and cost method companies and
extraordinary gain .................................................. (71,854) (38,388)
Minority interest ....................................................... -- 2,820
Net gain on stock transactions of associated companies .................. -- 695
Equity in losses of associated companies ................................ -- (7,251)
Impairment of investment in equity method and cost method
associated companies .................................................. (1,461) (23,463)
------------ ------------
Net loss before extraordinary gain .................................. (73,315) (65,587)
Extraordinary gain ...................................................... 2,419 --
------------ ------------
Net loss ............................................................ $ (70,896) $ (65,587)
============ ============
Basic and diluted net loss per share before extraordinary gain ...... $ (0.16) $ (0.49)
Extraordinary gain .................................................. -- --
------------ ------------
Basic and diluted net loss per share ................................ $ (0.16) $ (0.49)
============ ============
Shares used in computing basic and diluted net loss per share ....... 447,848,467 134,585,774
See accompanying notes to consolidated financial statements.
4
DIVINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL UNEARNED
----------------------------- PAID-IN STOCK-BASED
SHARES AMOUNT CAPITAL COMPENSATION
----------- ------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 2001 .............................. 365,997,791 $366 $1,171,853 $(16,654)
Comprehensive loss:
Net loss .............................................. -- -- -- --
Other comprehensive loss:
Unrealized holding loss during the period .............. -- -- -- --
Foreign currency translation ........................... -- -- -- --
Total comprehensive loss.................................
Issuance of Class A common stock .......................... 96,494,042 101 49,190 --
Issuance of warrants in conjunction with acquisitions ..... -- -- 151 --
Issuance of warrants to acquire the Company's common stock -- -- 822 --
Issuance of stock options in conjunction with acquisitions -- -- 5,820 --
Issuance of Class A common stock through the Employee
Stock Purchase Plan ..................................... 1,077,803 1 558 --
Issuance of Class A common stock through the exercise
of stock options ........................................ 1,883,441 2 175 --
Unearned stock-based compensation ......................... -- -- -- (452)
Stock-based compensation .................................. -- -- -- 1,876
Purchase of treasury stock, at cost ....................... (2,777,778) -- -- --
----------- ---- ---------- --------
Balance at March 31, 2002 ................................. 462,675,299 $470 $1,228,569 $(15,230)
=========== ==== ========== ========
ACCUMULATED
OTHER TOTAL
TREASURY ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK DEFICIT INCOME EQUITY
----------- ----------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 2001 .............................. $(9,639) $(890,306) $(3,861) $251,759
Comprehensive loss:
Net loss .............................................. -- (70,896) -- (70,896)
Other comprehensive loss:
Unrealized holding loss during the period .............. -- -- (1,109) (1,109)
Foreign currency translation ........................... -- -- 185 185
-------
Total comprehensive loss................................. (71,820)
-------
Issuance of Class A common stock .......................... -- -- -- 49,291
Issuance of warrants in conjunction with acquisitions ..... -- -- -- 151
Issuance of warrants to acquire the Company's common stock (822) -- -- --
Issuance of stock options in conjunction with acquisitions -- -- -- 5,820
Issuance of Class A common stock through the Employee
Stock Purchase Plan ..................................... -- -- -- 559
Issuance of Class A common stock through the exercise
of stock options ........................................ -- -- -- 177
Unearned stock-based compensation ......................... -- -- -- (452)
Stock-based compensation .................................. -- -- -- 1,876
Purchase of treasury stock, at cost ....................... (2,484) -- -- (2,484)
-------- --------- ------- -------
Balance at March 31, 2002 ................................. $(12,945) $(961,202) $(4,785) $234,877
======== ========== ======= ========
See accompanying notes to consolidated financial statements.
DIVINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss .............................................................. $ (70,896) $ (65,587)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................ 8,549 4,179
Extraordinary gain ................................................... (2,419) --
Stock-based compensation ............................................. 1,876 3,319
Other noncash compensation expense ................................... -- 2,903
Bad debt expense (recovery) .......................................... (675) 1,103
Equity in losses of associated companies ............................. -- 7,251
Gain (loss) on stock transactions of associated companies ............ -- (695)
Impairment charges ................................................... 1,711 26,719
Minority interest .................................................... -- (2,820)
Gain on the sale of assets ........................................... (526) --
Changes in assets and liabilities, excluding effects from acquisitions:
Restricted cash ...................................................... (4,384) 1,200
Accounts receivable .................................................. 75,908 1,096
Prepaid expenses ..................................................... 1,545 1,402
Deferred publisher costs ............................................. 10,978 --
Other assets ......................................................... (7,823) 160
Accounts payable ..................................................... (1,467) 2,171
Publisher payables ................................................... (29,906) --
Accrued expenses and other liabilities ............................... (7,938) (1,939)
Deferred revenue ..................................................... (16,918) 528
--------- ---------
Net cash used in operating activities ............................... (42,385) (19,010)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment .................................. (1,707) (5,016)
Acquisition, sale and deconsolidation of ownership interests in
associated companies, including cash acquired ........................ 4,674 (6,326)
Capitalized acquisition costs ........................................ (1,862) --
Proceeds from the sale of property and equipment ..................... 891 --
Change in current notes receivable ................................... 24 37
--------- ---------
Net cash provided by (used in) investing activities ................. 2,020 (11,305)
--------- ---------
Cash flows from financing activities:
Issuance of shares under Employee Stock Purchase Plan ................ 559 159
Change in current notes payable ...................................... (25,052) (280)
Proceeds from the issuance of long-term debt ......................... -- 242
Repayments of long-term debt ......................................... (24) --
Proceeds from the exercise of stock options .......................... 177 --
Repurchase and cancellation of exercised stock options ............... -- (3)
Purchase of treasury stock ........................................... -- (49)
--------- ---------
Net cash provided by (used in) financing activities ................. (24,340) 69
--------- ---------
Effect of exchange rates on cash ........................................ 185 --
Net decrease in cash and cash equivalents ............................... (64,520) (30,246)
Cash and cash equivalents at beginning of period ........................ 104,480 252,533
--------- ---------
Cash and cash equivalents at end of period .............................. $ 39,960 $ 222,287
========= =========
Supplemental disclosures:
Interest paid ......................................................... $ 1,511 $ 242
Noncash financing and investing activities:
Issuance of notes payable, stock, options, or warrants in
conjunction with acquisitions ........................................ 55,252 15,464
Issuance of warrants in conjunction with the acquisition of
treasury stock ....................................................... 822 --
Retirement of notes receivable from exercise of stock options ........ -- 2,249
See accompanying notes to consolidated financial statements.
6
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation have been included. The results of operations for the
three months ended March 31, 2002 are not necessarily indicative of results that
may be expected for the year ending December 31, 2002 or for any future periods.
These unaudited consolidated financial statements and related notes should be
read in conjunction with the audited consolidated financial statements and
related notes for the year ended December 31, 2001, which are contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission (SEC) on April 1, 2002.
(b) Net Loss Per Share
Net loss per share is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents is included in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive. Because the Company
reported a net loss for the three month periods ended March 31, 2002 and 2001,
potentially dilutive securities have not been included in the shares used to
compute net loss per share.
Had the Company reported net income for the three month period ended
March 31, 2002, the weighted average number of shares outstanding would have
potentially been diluted by 85,684,286 common equivalent shares, assuming the
exercise of all outstanding stock options, and by 9,272,052 common equivalent
shares, assuming the exercise of all outstanding warrants. Had the Company
reported net income for the three month period ended March 31, 2001, the
weighted average number of shares outstanding would have potentially been
diluted by approximately 6,918,376 common equivalent shares, assuming the
exercise of stock options.
(c) Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to current period presentations.
(2) BUSINESS COMBINATIONS
(a) Acquisitions/Mergers
In January 2002, the Company acquired 100% of the stock of Data Return
Corporation, a provider of high-availability managed hosting services. The
purchase price, for the purpose of purchase accounting for this transaction,
consisted of $8,898,000 of cash payments related to acquisition costs and
interim financing, and 74,437,043 shares of the Company's class A common stock,
with a fair value of $34,037,000. In addition, the Company assumed or issued
options and warrants to purchase 15,070,454 shares of the Company's class A
common stock which are included as part of the purchase price paid for Data
Return. The Black-Scholes fair value of these options and warrants was
$5,948,000.
7
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2002, through one of its wholly-owned subsidiaries, the
Company acquired certain assets of Northern Light Technology LLC, a leading
provider of search and content integration solutions, in exchange for 14,002,643
shares of the Company's class A common stock and the assumption of certain
liabilities of Northern Light. In addition, the Company issued to a vendor of
Northern Light a warrant to purchase up to 120,065 shares of the Company's class
A common stock. The exact number of shares for which the warrant will be
exercisable has not yet been determined, and is subject to the amount of cash
paid to the Company under a Development Agreement between the Company and that
vendor.
In February 2002, the Company acquired the 66.7% of Perceptual Robotics,
Inc. that it did not already own in exchange for 4,427,683 shares of the
Company's class A common stock and $55,000 in cash.
In February 2002, the Company acquired the minority interest of Net
Unlimited, Inc. in exchange for 365,020 shares of the Company's class A common
stock.
In February 2002, the Company acquired 100% of RWT Corporation (d/b/a
RealWorld Technologies, Inc.), a leading provider of production management and
tracking software, in exchange for 769,231 shares of the Company's class A
common stock.
In March 2002, the Company signed a definitive agreement to acquire
Delano Technology Corporation, a Toronto-based marketing solutions company
offering state-of-the-art interaction-based e-business and CRM solutions. The
Company expects to issue approximately 51,550,000 shares of the Company's class
A common stock in connection with the acquisition. The transaction, which will
be structured as a plan of arrangement under Canadian law, is subject to
customary regulatory and court approvals, as well as the approval of Delano's
shareholders.
During the three months ended March 31, 2002, in conjunction with the
Company's transactions related to Northern Light, Perceptual Robotics, Net
Unlimited, and RWT, as described herein, the purchase price, for the purpose of
recording the purchase accounting for these transactions, consisted of $198,000
of cash payments (including acquisition costs) and 19,564,577 shares of the
Company's class A common stock, with a fair value of $13,841,000. Additionally,
in conjunction with the Northern Light acquisition, the Company has granted a
warrant to purchase up to 120,065 shares of the Company's class A common stock
which is included as part of the purchase price paid for the assets of Northern
Light. The Black-Scholes fair value of this warrant, assuming it will be
exercisable for the maximum number of shares, was $23,000.
The value of stock issued as consideration in these acquisitions was
determined based on the average closing market price of divine's common shares
on the measurement date and the three trading days before and after the
measurement date. The measurement date is generally the date on which the terms
of the acquisition are agreed to and announced, unless the number of shares or
the amount of other consideration is subsequently changed as a result of further
negotiations or a revised acquisition agreement, or if the number of shares or
the amount of other consideration to be issued could change pursuant to a
formula in the initial acquisition agreement. In these cases, the measurement
date is the first date on which the number of acquirer shares and the amount of
other consideration become fixed.
8
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents information (in thousands) concerning the
purchase price allocations for acquisitions completed during the three months
ended March 31, 2002.
FAIR VALUE ON ACQUISITION DATE
FAIR VALUE --------------------------------------------------------
OF TANGIBLE UNEARNED
PURCHASE NET ASSETS DEVELOPED STOCK-BASED EXTRAORDINARY
COMPANY PRICE ACQUIRED TECHNOLOGY COMPENSATION GAIN GOODWILL
------- -------- -------- ---------- ------------ ------------- --------
(IN THOUSANDS)
2002
Data Return.. $48,883 $(17,046) $ - $452 $ - $65,477
Others....... 14,062 5,422 9,619 - (2,419) 1,440
------- -------- ------ ---- ------- -------
$62,945 $(11,624) $9,619 $452 $(2,419) $66,917
======= ======== ====== ==== ======= =======
Developed technology is amortized over the useful life of the technology, which
ranges from two to four years. The extraordinary gain represents the excess of
the fair value of the net current assets acquired over the fair value of the
Company's purchase price related to the Company's acquisition of Perceptual
Robotics.
The acquired companies are included in the Company's consolidated
financial statements from the dates of acquisition. The following table
summarizes the estimated fair value (in thousands) of the tangible net assets
acquired at the date of acquisition for the acquisitions completed during the
three months ended March 31, 2002.
DATA RETURN OTHERS
----------- ------
(IN THOUSANDS)
Current assets ..................................... $ 9,751 $8,704
Fixed assets ....................................... 9,706 -
Other non-current assets ........................... 30 -
-------- ------
Total tangible assets acquired ................... 19,487 8,704
-------- ------
Current liabilities ................................ 26,885 3,282
Non-current liabilities ............................ 9,648 -
-------- ------
Total liabilities assumed ........................ 36,533 3,282
-------- ------
Tangible net assets acquired ..................... $(17,046) $5,422
======== ======
As of January 1, 2002, we implemented SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives and reviewed for impairment. For the three months ended March 31, 2001,
the Company recorded amortization expense of $4,612,000 related to goodwill and
certain intangible assets, as well as net excess investment over the equity in
net assets of equity-method associated companies, that are no longer being
amortized in accordance with SFAS No. 142. Had the Company not recorded these
amortization expenses, net loss
9
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and basic and diluted loss per share for the quarter ended March 31, 2001 would
have been $60,975,000 and $0.45, respectively. Detail about the Company's
intangible assets is as follows.
AS OF MARCH 31, 2002 AS OF DECEMBER 31, 2001
------------------------------ ------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
(IN THOUSANDS)
Amortized intangible assets:
Developed technology ............... $ 67,105 $(7,386) $57,310 $3,976
Other intangible assets ............ 613 (137) 615 121
Unamortized intangible assets:
Goodwill ........................... 222,864 - 157,247 -
(b) Sales/Terminations
In February 2002, the Company sold 51% of its interest in mindwrap, Inc.
to mindwrap LLC for nominal consideration. Additionally, the Company entered
into a General Release and Operating Agreement wherein mindwrap LLC paid the
Company $766,000, which constitutes payment in full for all amounts due and
owing to the Company from or arising out of the Company's ownership and control
of mindwrap, Inc. prior to the closing date. In exchange, the Company released
mindwrap LLC from any current or future liability arising from any situation
prior to the closing date. The Company also entered into a Joint Ownership
Conveyance Agreement with mindwrap LLC wherein the Company will receive
perpetual, royalty-free, transferable joint ownership interest in certain
mindwrap software and other intellectual property.
(c) Pro Forma Impact of Acquisitions
During the year ended December 31, 2001, the Company acquired 100% of
eshare communications, Inc., Eprise Corporation, RoweCom Inc., and Open Market,
Inc. ("the pro forma acquisitions"). The following unaudited pro forma financial
information for the three months ended March 31, 2001 presents the consolidated
operations of the Company as if the acquisitions had been made on January 1,
2001, after giving effect to certain adjustments, including amortization of
certain intangible assets actually recorded by the Company as part of the
purchase accounting for the pro forma acquisitions as of the respective
acquisition dates. Under the provisions of SFAS No. 142, goodwill acquired in
transactions completed after June 30, 2001 is not amortized. As the pro forma
acquisitions occurred subsequent to that date, these pro forma results do not
reflect any goodwill amortization expense related to these acquisitions. Other
acquisitions made during 2001 and during the three months ended March 31, 2002
have been excluded from the unaudited pro forma financial information because
their effects would be immaterial. The unaudited pro forma financial information
is provided for informational purposes only and should not be construed to be
indicative of the
10
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's consolidated results of operations had the 2001 acquisitions been
consummated on these earlier dates, and do not project the Company's results of
operations for any future period:
THREE MONTHS
ENDED
MARCH 31, 2001
--------------
IN THOUSANDS,
EXCEPT PER
(SHARE DATA)
Revenues ................................................................... $131,507
Net loss applicable to common stockholders ................................. (95,270)
Basic and diluted net loss per share applicable to common stockholders ..... $ (0.31)
(3) IMPAIRMENT CHARGES
For the three months ended March 31, 2002, the Company recorded
impairment charges on intangible and other assets of $250,000. These charges
related mainly to cash paid by the Company during the three months ended March
31, 2002, to settle pre-acquisition invoices owed by acquired companies that
were written off as of December 31, 2001. Additionally, for the three months
ended March 31, 2002, the Company recorded $1,461,000 of impairment of
investment in equity method and cost method associated companies. These charges
represent mainly the fair value of 2,159,074 shares of the Company's class A
common stock that were issued in February 2002 as partial settlement of an
obligation of the Company pursuant to the Company's collar agreement with
Launchworks. This collar agreement was entered into in conjunction with the
Company's investment in Launchworks in August 2000. The Company had completely
written off its investment in Launchworks as of December 31, 2001.
(4) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two operating segments: the software, services and
hosting segment and the divine interVentures segment. The software, services and
hosting segment encompasses the operations surrounding the Company's core
strategy of delivering integrated Web solutions. The divine interVentures
segment encompasses the operations of the Company's remaining portfolio of
associated companies, focusing primarily on e-commerce and vertical markets. The
Company evaluates segment performance based on income from operations. The
Company does not allocate total assets to its segments.
11
DIVINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
standard is based on a management approach, which requires segmentation based
upon the Company's internal organization and disclosure of revenue and operating
loss based upon internal accounting methods. Segment results are as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
------------------------------------------------- --------------------------------------------------
SOFTWARE/ DIVINE DIVINE, INC. SOFTWARE/ DIVINE DIVINE, INC.
SERVICES/HOSTING INTERVENTURES CONSOLIDATED SERVICES/HOSTING INTERVENTURES CONSOLIDATED
---------------- ------------- ------------ ---------------- ------------- ------------
(IN THOUSANDS)
External revenue......... $146,329 $ -- $146,329 $ 7,412 $ 2,124 $ 9,536
Intersegment revenue..... -- -- -- 634 -- 634
-------- ------- -------- -------- -------- --------
$146,329 $ -- 146,329 $ 8,046 $ 2,124 10,170
Eliminations............. -- (413)
-------- --------
Total revenues........... $146,329 $ 9,757
======== ========
Net loss applicable to
common stockholders...... $(69,493) $(1,403) $(70,896) $(24,931) $(40,656) $(65,587)
======== ======= ======== ======== ======== ========
The Company's business is conducted on a global basis, with the
principal markets for the Company's products and services located in the United
States. For the three months ended March 31, 2002, the Company recorded revenues
of $146,329,000. Of these revenues, $100,898,000 were generated in the United
States, $23,175,000 were generated in France, and $22,256,000 were generated in
other foreign countries. Revenues are attributed to countries based on the
location of the sales group, as well as the country of domicile of the sales
contract.
(5) SUBSEQUENT EVENT
In April 2002, the Company acquired Denalii Inc., a provider of content
management solutions for the Asian market, in exchange for 1,504,742 shares of
the Company's class A common stock. In addition, the Company granted options to
purchase a total of 490,000 shares of the Company's class A common stock to
certain continuing employees of Denalii and the Company agreed to issue a
maximum of $5,600,000 of the Company's class A common stock if the acquired
Denalii business meets certain revenue thresholds in 2002.
In April 2002 the Company signed a definitive agreement to acquire Viant
Corporation, a professional services organization providing business solutions,
and industry insight and understanding to help clients leverage assets for
better business performance. The Company expects to issue approximately
200,000,000 shares of the Company's class A common stock in connection with the
acquisition. In addition, the Company expects to issue options to purchase
approximately 26,500,000 shares of the Company's class A common stock.
Consummation of the merger is subject to a number of closing conditions,
including approval of the merger by divine's and Viant's stockholders.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We provide extended enterprise solutions for our base of over 20,000
customers. We offer Web-based software and technology that allows the critical
business units and functional areas of our clients to operate in a more cohesive
manner. We also offer the services necessary to deploy these software solutions
and to integrate them with existing software and technical systems. Our product
and service offerings allow us to provide a comprehensive solution for our
clients. Additionally, we offer our customers a single point of accountability
as our solutions extend across the enterprise. Our extended enterprise solution
is comprised of the following key components:
divine Professional Services combines our knowledge of how to design
and deploy software solutions with our expertise in technology,
infrastructure, and marketing services and offers services for legacy
systems integration, brand extension, call center automation, business
process optimization, operational strategy consulting, SAP
installation, supply chain and customer management, and technology
infrastructure consulting.
divine Software Services deploys software solutions that focus on
collaboration, workflow, and relationship and content management such
as voice-based customer contact tools, auto-response applications,
telephony webinars (Web-based seminars), secured messaging, team
interaction, content acquisition, organization and management, content
delivery, and training programs.
divine Managed Services builds, hosts, manages, monitors, and secures
clients' critical applications by offering design and engineering of
managed hosting solutions; installation, configuration, and testing of
hardware and software systems; ongoing maintenance, back-ups, and
upgrades; performance and security monitoring; and technical support.
We focus on Global 5000 and high-growth middle market firms, government
agencies, and educational institutions. We expect that our revenues in future
periods will be generated principally through our extended enterprise solutions.
We began operations as divine interVentures, inc. on June 30, 1999,
engaging in business-to-business e-commerce through a community of associated
companies in which we invested. In 1999 and 2000, we acquired interests in 40
associated companies, established a total of 13 associated companies when we
identified opportunities consistent with our former business strategy, and also
further developed our operational procedures and capabilities.
In February 2001, we announced our strategy to primarily focus on
enterprise Web solutions and changed our name to divine, inc. Since that time,
we have not reflected separately our interests in associated companies that
provide solutions for the extended enterprise. Instead, the operations of these
businesses are considered a part of our core business strategy. Our remaining
associated companies, offering software and services focused on e-commerce and
vertical markets, were included in our divine interVentures segment. As of
December 31, 2001, we have completely written off our investments in the
associated companies in our divine interVentures portfolio, other than amounts
included in available-for-sale securities. We do not expect to invest additional
funds into these companies in future periods.
Through integrating the products and services of acquired companies into
our infrastructure, we extend a broader array of offerings and deliver greater
value to all our constituencies. We introduce combined product suites to gain
financial and market leverage from incremental revenue and operational
efficiencies of integration.
13
Since January 1, 2002, we have completed, or entered into agreements to
complete, several acquisitions, including:
o January 2002, Data Return Corporation - a provider of advanced
managed hosting services based on Microsoft technologies. Data
Return provides these services to businesses seeking to outsource
the deployment, maintenance, and support of their complex Web sites.
Its services include providing, configuring, operating, and
maintaining the hardware, software, and network technologies
necessary to implement and support these Web sites. Data Return also
offers additional services options, such as scalability and
architecture testing, storage solutions, and a suite of security
services, including firewalls.
o January 2002, Northern Light Technology - a leading provider of
search and content integration solutions for enterprises. The
acquisition of Northern Light's award-winning premium content
services, enterprise search technology, and ecommerce transaction
engine enhances our comprehensive integrated content, collaboration,
and knowledge solutions for the extended enterprise.
o February 2002, RWT Corporation (d/b/a Real World Technology, Inc.) -
a leading provider of production management and tracking software to
manage data across the supply chain and improve plant productivity.
Real World Technology's manufacturing execution application is a
core component of our vertical-specific solutions for the
manufacturing industry.
o March 2002, Delano Technology Corporation - agreed to be acquired by
us in a stock-based transaction that is subject to the approval of
Delano's stockholders. Delano offers customer relationship
management software that incorporates advanced analytics with
interaction capabilities on a flexible and scalable technology
platform.
o April 2002, Denalii, Inc. - a provider of content management
solutions for the Asian market. The acquisition of Denalii enhances
our content solutions and expands our market reach in Asia.
o April 2002, Viant Corporation - agreed to be acquired by us in a
stock-based transaction that is subject to the approval of Viant's
and our stockholders. Viant is a professional services organization
providing business solutions, and industry insight and understanding
to help clients leverage assets for better business performance.
We anticipate that the integration of these companies into our products
and services offering will enhance our combination of professional services,
software services, and managed services to our customers.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE CONSOLIDATED FINANCIAL STATEMENTS
We have held ownership interests in many associated companies since our
inception. Since February 2001, our acquisitions have been almost exclusively
acquisitions of 100% of the stock of certain companies that fit our operating
strategy. The following discussion regarding various methods of accounting is
meant to explain how we accounted for investments in associated companies
focused on e-business and vertical markets, which accounted for the majority of
our consolidated operations for the three months ended March 31, 2001. These
companies were considered part of our divine interVentures portfolio throughout
2001. The significance of the operations of these associated companies on our
consolidated operations decreased throughout 2001, and as of December 31, 2001,
we had completely written off our investments in the associated companies in our
divine interVentures portfolio, other than amounts included in
available-for-sale securities.
14
CONSOLIDATION
Associated companies in which we own, directly or indirectly, more than
50% of the outstanding voting power are accounted for under the consolidation
method of accounting. Under this method, an associated company's results of
operations are reflected within our consolidated statement of operations.
Earnings or losses attributable to other stockholders of a consolidated
associated company are identified as "minority interest" in our consolidated
statement of operations. Minority interest adjusts our consolidated net results
of operations to reflect only our share of the earnings or losses of a
consolidated associated company. As of March 31, 2002, we did not reflect any
minority interest liability on our consolidated balance sheet. The results of
operations of our consolidated associated companies are reflected in our
consolidated financial statements from the acquisition date of the related
company.
EQUITY METHOD
Associated companies in which we own 50% or less of the outstanding
voting power, but over which we exercise significant influence, are accounted
for under the equity method of accounting. Whether or not we exercise
significant influence with respect to an associated company depends on an
evaluation of several factors including, among other things, representation on
the associated company's board of directors, ownership percentage, and voting
rights associated with our holdings in the associated company. Under the equity
method of accounting, an associated company's results of operations are not
reflected within our consolidated operating results. However, our share of the
earnings or losses of that associated company is identified as "equity in losses
of associated companies" in our consolidated statement of operations.
The net effect of an associated company's results of operations on our
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because, under each of
these methods, only our share of the earnings or losses of an associated company
is reflected in the net loss in our consolidated statement of operations.
However, the presentation of the consolidation method differs dramatically from
the equity method of accounting. The consolidation method presents associated
company results in the applicable line items within our consolidated financial
statements. In contrast, the equity method of accounting presents associated
company results in a single category, "equity in losses of associated companies"
within our consolidated statement of operations. Because we wrote off our
remaining investments in equity-method associated companies in 2001, our
consolidated statement of operations for the three months ended March 31, 2002
does not reflect any "equity in losses of associated companies".
COST METHOD
Associated companies not accounted for under either the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, our share of the earnings and losses of these
companies is not included in our consolidated statements of operations unless
earnings or losses are distributed.
We record our ownership interest in equity securities of our associated
companies accounted for under the cost method at the lesser of cost or fair
value. Those cost method associated companies that have readily determinable
fair values based on quoted market prices are classified in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
15
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 VS. THREE MONTHS ENDED MARCH 31, 2001
General
Beginning in the first quarter of 2001, we segregated our operations
into two operating segments. Our software, services, and hosting segment
encompasses the operations surrounding our core strategy of delivering extended
enterprise solutions. Our divine interVentures segment encompasses the
operations of our remaining portfolio of associated companies, focusing
primarily on e-commerce and vertical markets. Beginning in 2001, we changed our
business strategy from being an Internet holding company actively engaged in
business-to-business e-commerce through our community of associated companies to
becoming a leader in Web-based solutions for the extended enterprise. Our
operations for the three months ended March 31, 2002 were considerably different
than our operations for the three months ended March 31, 2001. This is because
nearly all of our acquisitions made in conjunction with our new strategy,
including our acquisitions of RoweCom Inc., eshare communications, Inc., Open
Market, Inc., Eprise Corporation, and Data Return Corporation, and our
acquisition of certain assets, subject to certain liabilities, of marchFIRST,
Inc., were made subsequent to March 31, 2001. These acquisitions have provided
us with a larger customer base and an increased revenue stream. During the three
months ended March 31, 2001, our operations resulted primarily from our
consolidated associated companies in the business-to-business e-commerce sector,
many of which were in the early stages of development and generated significant
losses with comparably low revenue. All of these consolidated associated
companies have discontinued operations, have been sold, or are now included as
part of our core business strategy. Additionally, we held investment interests
in 15 associated companies accounted for under the equity method of accounting
as of March 31, 2001, with a book value of $33,227,000 as of that date.
Conversely, we carried no book value on our consolidated balance sheet related
to our investment interests in associated companies accounted for under the
equity method as of March 31, 2002. This decrease in equity-method associated
companies has led to decreases in our equity in losses of associated companies.
Revenues
We generated revenues totaling $146,329,000 for the three months ended
March 31, 2002, which is an increase of $136,572,000 over revenues of $9,757,000
for the three months ended March 31, 2001. The total revenues for the three
months ended March 31, 2002 included $110,172,000 from the sale of products.
Product revenues included $74,608,000 from sales of content, $18,366,000 from
software sales contracts, and $15,249,000 from managed services. Revenue from
software sales contracts included $8,807,000 related to our CIM Telephony
software, $4,052,000 related to our Enterprise Content Management software,
$1,511,000 related to our Enterprise Content Center software, $1,509,000 related
to our CIM Internet software, $1,164,000 related to our Collaboration software,
and $1,018,000 related to our Enterprise Portal software.
Total revenues for the three months ended March 31, 2002 also included
$36,157,000 from the sale of services, generated exclusively from our
Professional Services Organization. Service revenues consisted of $30,110,000
from consulting services, $3,585,000 from divine Product Solutions Group, and
$2,462,000 from Technology Information Services.
At March 31, 2002, we had deferred revenue of $288,357,000, of which
$241,281,000 related to sales of content. We expect that this deferred revenue
will result in a significant increase in our revenues recognized during 2002.
Revenues for the three months ended March 31, 2001 included
approximately $1,535,000 from the sale of products, all of which was generated
by our software, services, and hosting segment. Product revenues included
$829,000 from software sales contracts and $706,000 from sales of computer
hardware. The total revenues also included approximately $8,222,000 from the
sale of services,
16
including $6,098,000 from our software, services, and hosting segment and
$2,124,000 from our divine interVentures segment. Services revenues from our
software, services, and hosting segment included $2,484,000 from web design
services, $1,315,000 from facilities management, and $765,000 from hosting
services. Services revenues from our divine interVentures segment included
$1,891,000 from inventory management services.
Cost of Revenues
For the three months ended March 31, 2002, our cost of revenues was
$124,702,000, exclusive of $198,000 of amortization of stock-based compensation.
This is an increase of $117,082,000 over the $7,620,000 (exclusive of $141,000
of amortization of stock-based compensation) cost of revenues we incurred for
the three months ended March 31, 2001. Cost of revenues for the three months
ended March 31, 2002 included $44,987,000 of direct costs of providing services,
which consisted principally of $36,055,000 of salaries and benefits, $3,784,000
of rent and facilities services, $1,688,000 of travel costs, and $1,137,000 of
depreciation expense. Cost of revenues for the three months ended March 31, 2002
also included $79,715,000 of direct costs of providing products, which consisted
primarily of $65,444,000 of content costs, $4,782,000 of salaries and benefits,
$3,541,000 of rent and facilities services, and $4,861,000 of office and
computer supplies. Cost of revenues for the three months ended March 31, 2001
included approximately $6,769,000 of direct costs of providing services, which
consisted principally of $4,129,000 of employee salaries and related benefits,
$1,210,000 of rent and facilities services, and $481,000 of depreciation and
amortization. Cost of revenues for 2001 also included approximately $851,000 of
direct costs of providing products.
Selling, General, and Administrative Expenses
For the three months ended March 31, 2002, we incurred selling, general,
and administrative expenses of $56,223,000, exclusive of $1,621,000 of
amortization of stock-based compensation. This represents an increase of
$24,512,000 over the $31,711,000 (exclusive of $3,056,000 of amortization of
stock-based compensation) of selling, general, and administrative expenses for
the three months ended March 31, 2001. These expenses for the three months ended
March 31, 2002 consisted primarily of $33,512,000 of employee salaries and
related benefits, $4,705,000 of travel costs, $4,217,000 of fees for
professional services, including legal, consulting, and accounting, $4,079,000
of office and computer supplies, and $5,993,000 of depreciation and amortization
expense.
Selling, general, and administrative expenses for the three months ended
March 31, 2001 consisted primarily of approximately $16,012,000 of employee
salaries and related benefits, approximately $3,474,000 of facility costs,
consisting primarily of rent expense, approximately $3,076,000 of fees for
professional services, including legal, consulting, and accounting,
approximately $2,779,000 of travel costs, and approximately $2,438,000 of
depreciation expense.
Research and Development Expenses
For the three months ended March 31, 2002, we incurred research and
development expenses of $30,541,000, exclusive of $57,000 of amortization of
stock-based compensation. This represents an increase of $27,408,000 over the
$3,133,000 (exclusive of $122,000 of amortization of stock-based compensation)
of research and development expenses for the three months ended March 31, 2001.
These expenses for the three months ended March 31, 2002 consisted primarily of
$20,120,000 of employee salaries and related benefits, $2,080,000 of
professional fees, and $3,969,000 of facility costs. Research and development
expenses for the three months ended March 31, 2001 consisted primarily of
approximately $2,544,000 of employee salaries and related benefits.
17
Bad Debt Expense (Recovery)
For the three months ended March 31, 2002, we recorded a net bad debt
recovery of $675,000 as compared to $1,103,000 of bad debt expense recorded for
the three months ended March 31, 2001. The net bad debt recovery for the three
months ended March 31, 2002 related mainly to the collection of previously
written off accounts receivable of companies acquired in the fourth quarter of
2001.
Amortization of Intangible Assets
For the three months ended March 31, 2002, we incurred amortization
expense of $3,792,000 on our intangible assets. This represents an increase of
$2,608,000 from the $1,184,000 of amortization expense recorded by us for the
three months ended March 31, 2001. The increase is attributable mainly to
intangible assets recorded in conjunction with acquisitions made in the fourth
quarter of 2001, offset partially by a reduction in amortization related to the
impairment of intangible assets in 2001 and our implementation in January 2002
of SFAS No. 142, under which goodwill and various other intangible assets are no
longer amortized.
Impairment of Intangible and Other Assets
For the three months ended March 31, 2002, we recorded impairment
charges of $250,000 related to intangible and other assets. This represents a
decrease of $3,006,000 from the $3,256,000 of similar impairment charges
recorded for the three months ended March 31, 2001.
Amortization of Stock-Based Compensation
For the three months ended March 31, 2002, we incurred a non-cash
expense of $2,058,000 related mainly to the issuance, prior to our initial
public offering (IPO), of shares of restricted stock and grants of options to
employees, directors, and consultants under our stock incentive plans with
exercise prices lower than the fair value of the class A common stock on the
dates of grant. Also for the three months ended March 31, 2002, we recovered
$182,000 of previously recognized compensation expense related to non-vested
options of terminated employees.
For the three months ended March 31, 2001, we incurred non-cash expense
of approximately $3,817,000 related to the issuance, prior to our IPO, of shares
of restricted stock and grants of options to employees, directors, and
consultants under our stock incentive plans with exercise prices lower than the
fair value of the class A common stock on the dates of grant. Also for the three
months ended March 31, 2001, we recovered $498,000 of previously recognized
compensation expense related to non-vested options of terminated employees, and
we repurchased a total of 36,638 shares of our restricted class A common stock
which were previously exercised by terminated employees.
Interest Income and Expense
Interest income for the three months ended March 31, 2002 was $253,000
and was earned from the investment of our available cash balances. This is a
decrease of $3,254,000 from the $3,507,000 of interest income earned during the
three months ended March 31, 2001. Interest expense for the three months ended
March 31, 2002 was $2,194,000 and was incurred primarily from our long-term
debt. This is an increase of $1,918,000 over the $276,000 of interest expense
incurred during the three months ended March 31, 2001, which was also incurred
primarily from our long-term debt.
Other Income, Net
Other income, net for the three months ended March 31, 2002 was
$467,000. This is an increase of $517,000 over the $50,000 of other expense for
the three months ended March 31, 2001. Other income, net for the three months
ended March 31, 2002 consisted primarily of gains of $526,000 on disposal of
assets and an investment gain of $215,000 in connection with our investment in
i-Fulfillment, Inc.,
18
which filed for bankruptcy in 2001. We had previously written off our entire
investment in i-Fulfillment, and in January 2002, we received proceeds from the
bankruptcy in the amount of $215,000. Additionally, we recorded other expenses,
net, of $274,000.
Income Taxes
We recorded no income tax provision or benefit for the three months
ended March 31, 2002 or the three months ended March 31, 2001. Because we have
no history of taxable income through March 31, 2002, the tax benefit associated
with our net losses has been fully reserved. As of March 31, 2002 we had total
net operating loss carryforwards of $101,116,000, of which $52,608,000 may be
utilized by us to reduce future consolidated taxable income, if any. Of the
total net operating loss carryforwards, $47,000 are attributable to
majority-owned subsidiaries not includible in our consolidated tax group.
Although each majority-owned subsidiary excluded from our consolidated tax group
may utilize its net operating loss carryforwards to reduce separate future
income taxes, if any, such carryforwards may not offset our consolidated taxable
income, if any. Of the total net operating loss carryforwards, $48,461,000
relate to pre-acquisition net operating losses attributable to acquired
companies. Our ability to utilize such pre-acquisition losses is substantially
limited by current tax laws. In addition, our utilization of the net operating
loss carryforwards may be limited under Internal Revenue Code Section 382 as a
result of prior ownership changes. The net operating loss carryforwards will
expire from 2019 through 2022.
In assessing whether or not the deferred tax assets will be realized, we
consider whether it is more likely than not that some or all of the deferred tax
assets will not be realized. Based upon our historical net operating losses and
projections for future tax losses, we believe it is more likely than not that we
will not realize the deferred tax assets. Thus, we have provided a full
valuation allowance against the net deferred tax assets as of March 31, 2002.
Minority Interest
Minority interest of $0 and $2,820,000 represents the non-controlling
stockholders' share of our consolidated associated companies' net losses for the
three months ended March 31, 2002 and the three months ended March 31, 2001,
respectively.
Net Gain on Stock Transactions of Associated Companies
We reported no gain on stock transactions of associated companies for
the three months ended March 31, 2002. The net gain on stock transactions of
associated companies of approximately $695,000 for the three months ended March
31, 2001 related to the net increase in the value of our investments in
associated companies resulting from the issuance of stock by these companies to
outside investors at prices higher than the value at which we have carried these
investments, and other stock transactions of these associated companies. The
gain was attributed mainly to issuances of stock by Outtask, which accounted for
approximately $312,000.
Equity in Losses of Associated Companies
Because we had written off, as of December 31, 2001, all of our
investments in associated companies accounted for under the equity method of
accounting, we recorded no equity in losses of associated companies for the
three months ended March 31, 2002. We recorded $3,252,000 in net losses for the
three months ended March 31, 2001. Equity in losses of associated companies also
included amortization of our net excess investment over the equity in the net
assets of these associated companies, which totaled $3,999,000 for the three
months ended March 31, 2001.
Impairment of Investment in Equity and Cost Method Associated Companies
For the three months ended March 31, 2002, we recorded $1,461,000 of
impairment of investment in equity method and cost method associated companies.
These charges represent mainly the fair value
19
of 2,159,074 shares of our class A common stock that we issued in February 2002
as partial settlement of our obligation under a collar agreement with
Launchworks inc. We had completely written off our investment in Launchworks as
of December 31, 2001. For the three months ended March 31, 2001, we recorded
impairment charges of $23,463,000 for other than temporary declines in the
carrying values of certain equity and cost method associated companies.
Extraordinary Gain
For the three months ended March 31, 2002, we reported an extraordinary
gain of $2,419,000, which related to our acquisition of the outstanding equity
of Perceptual Robotics that we did not already own. This extraordinary gain
represented the excess of the fair value of the net assets acquired over the
fair value of the consideration we paid in conjunction with this acquisition. We
did not report an extraordinary gain for the three months ended March 31, 2001.
SUMMARY OF CURRENTLY EXPECTED FIXED CHARGES
The following table summarizes the fixed charges as of March 31, 2002
that we currently expect to incur, throughout the remainder of 2002 and over the
next three years, for amortization of identifiable intangible assets and
unearned stock-based compensation:
YEAR
--------------------------------------------------------
AMORTIZATION OF: 2002 2003 2004 2005
- ---------------- ----------- ----------- ----------- -----------
Identifiable Intangible Assets ........... $12,845,000 $17,047,000 $16,808,000 $13,495,000
Unearned Stock-Based Compensation(1) ..... 6,846,000 8,003,000 381,000 --
----------- ----------- ----------- -----------
Total .................................... $19,691,000 $25,050,000 $17,189,000 $13,495,000
- ----------
(1) These unearned stock-based compensation charges do not reflect potential
additional charges associated with options granted to employees that are
accounted for under the variable method of accounting as well as options
granted to consultants. The future value of these potential charges
cannot be estimated at this time because the charges will be based on
the future value of our stock.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, we had cash and cash equivalents, current
restricted cash, and available-for-sale securities of $80,667,000, which
represented a decrease of $60,065,000 from $140,732,000 as of December 31, 2001.
The net decrease in cash and cash equivalents was due primarily to net cash used
in operating activities of $42,385,000, net cash used to pay down notes payable
of $25,052,000, net cash provided from the acquisition and sale of ownership
interests in associated companies of $4,674,000, and cash used to acquire
property and equipment of $1,707,000.
As of March 31, 2002, we had a $25,000,000 line of credit with LaSalle
Bank N.A, which was increased to $40,000,000 in April 2002. This line of credit
is cash collateralized and is available for working capital financing and
general corporate purposes other than permanent financing for acquisitions of
interests in associated companies. As of March 31, 2002, we had established
letters of credit of $23,353,000 against this line of credit. These letters of
credit include $13,535,000 for assumed debt of RoweCom, $4,868,000 for a note
payable to marchFIRST GmbH, and $4,950,000 as collateral for various real estate
and equipment leases.
As of March 31, 2002, we had current restricted cash of $38,130,000,
which represented an increase of $5,564,000 from $32,566,000 as of December 31,
2001. Current restricted cash as of March 31, 2002 included $25,798,000 that
secured the $23,353,000 in letters of credit from LaSalle Bank N.A. described
above, $2,622,000 that collateralized $2,250,000 of loans payable by RoweCom to
20
publishers, $7,314,000 for other future RoweCom obligations to publishers, and
$2,396,000 that secures real estate leases we assumed in our various
acquisitions.
At March 31, 2002, we had $2,577,000 in available-for-sale securities.
This amount includes shares of Neoforma.com and CMGI.
In connection with purchases of our shares of class A and class C common
stock by private investors concurrent with our IPO in July 2000:
(1) we agreed under our Alliance Agreement with Microsoft
Corporation to purchase $9,600,000 of software products, $4,700,000 of
consulting services, and $1,000,000 of product support services from
Microsoft during the four-year term of the agreement, to expend
$4,000,000 over four years to promote Microsoft solutions, to open an
accelerator facility in Seattle, the cost for which would be determined
as the size and scope of the accelerator was finalized, and to dedicate
up to $50,000,000 in capital to projects and acquisitions that support,
directly or indirectly, the Microsoft platform. As of March 31, 2002,
we had purchased, or entered into binding agreements to purchase, a
total of $4,114,000 of software products, $738,000 of consulting
services, and $366,000 of product support services toward these
obligations, which amounts do not include additional purchases by or
obligations of entities that we have acquired since our IPO. In
connection with our acquisition of HostOne in October 2001, we agreed
with Microsoft that we would use our best efforts to amend the Alliance
Agreement to provide, among other things: that we will commit to be a
Microsoft .NET partner and develop products and services that are
coordinated with Microsoft's products and its .NET strategy; that we
will identify other opportunities to promote Microsoft products; and
that Microsoft will promote our products and services.
(2) we entered into an agreement concerning the purchase of a
minimum of $100,000,000 of co-location and bandwidth services from
Level 3 Communications, LLC over a four-year period, $25,000,000 of
which would have been credited to us as consideration for Level 3's
purchase of shares from us. In August 2001, we agreed to repurchase the
5,555,555 shares of our common stock owned by Level 3 in exchange for
$5,555,555 and warrants to purchase 2,200,000 shares of our common
stock. We paid the cash in two equal installments in August and
December 2001, and issued the warrants in two equal installments in
August 2001 and January 2002. Additionally, we agreed with Level 3 to
cancel our commitment to purchase $100,000,000 of co-location and
bandwidth services and to eliminate our prepaid credit of $25,000,000.
(3) we agreed to purchase a minimum of $5,000,000 of computer
equipment and software, storage solutions, and professional services
from Compaq Computer Corporation over four years. As of March 31, 2002,
we have purchased $2,909,000 of products and services from Compaq
toward this obligation, which amount does not include additional
purchases by or obligations of entities that we have acquired since our
IPO.
In connection with our acquisition of certain assets, subject to certain
liabilities, from marchFIRST, Inc., in April 2001, we issued, and have
outstanding, a $57.5 million balloon note, which is due on April 12, 2006 but
which is accelerated to the extent of 50% of free cash flow from
divine/Whittman-Hart's operations and which is secured by the assets of
divine/Whittman-Hart. We have the option to pay the note with cash or by issuing
shares of our class A common stock. This note bears interest at the Wall Street
Journal prime rate of interest. marchFIRST also is eligible to receive up to an
aggregate of $55.0 million in bonus payments, payable to the extent that 50% of
free cash flow from divine/Whittman-Hart's operations during the five years
ending April 12, 2006 exceeds divine/Whittman-Hart's obligation under the
promissory notes. We have not guaranteed the promissory notes from
divine/Whittman-Hart to marchFIRST, but the terms of the promissory notes
restrict payments from divine/Whittman-Hart to us.
21
In connection with our acquisition of certain assets, subject to certain
liabilities, of marchFIRST GmbH in September 2001, we issued, and have
outstanding, a note payable in the amount of 5,369,000 euros (approximately
$4,672,000 at March 31, 2002), which is included within current notes payable in
our consolidated balance sheets as of March 31, 2002. The note is due on
September 1, 2002. We have the option to pay the note with cash or by issuing
shares of our class A common stock.
In connection with our acquisition of Synchrony Communications, Inc. in
October 2001, we acquired debt with balances totaling $1,184,000 as of March 31,
2002, payable in equal monthly installments through March 2003.
Aleksander Szlam, who served as one of our directors in 2000, was the
Chairman and Chief Executive Officer of eshare communications, Inc. while he
served on our board of directors. In connection with our acquisition of eshare
in October 2001, we entered into two separate stock repurchase arrangements with
Mr. Szlam covering the shares of our common stock that Mr. Szlam received in the
acquisition. These arrangements gave Mr. Szlam the right to sell back a portion
of his shares to us at an agreed upon price (put option), while also giving us
the right to buy back the same number of shares from Mr. Szlam at the same price
(call option). In December 2001, the first buyback period, which covers
5,428,800 shares, was extended to be coterminous with the second buyback period.
The second buyback period is effective for the time period beginning six months
after the merger (April 23, 2002) and ending 18 months after the merger (April
23, 2003), and covers 5,959,200 shares of our common stock. The agreed-upon
purchase price for the related put and call options is $0.53 per share. This
means that until April 23, 2003, Mr. Szlam has the right to sell to us, and we
have a separate right to buy from Mr. Szlam, up to 11,388,000 shares of our
common stock at a price of $0.53 per share. We are currently negotiating the
timing of Mr. Szlam's put and certain other matters related to Mr. Szlam's
relationship with us.
In conjunction with our acquisition of RoweCom Inc. in November 2001, we
acquired current notes payable with balances totaling $15,931,000 as of December
31, 2001. During the three months ended March 31, 2002, we made payments of
$6,750,000 on these notes. The balances of these notes at March 31, 2002 totaled
$9,481,000. In addition, we acquired other RoweCom long-term debt with balances
of $4,743,000 as of March 31, 2002, which is due in quarterly installments from
June 30, 2003 to September 30, 2006.
As of March 31, 2002, we had a revolving loan agreement for $20,000,000
with Fleet Capital Corporation. The loans under that agreement are
collateralized by eligible accounts receivable balances of the domestic
operations of RoweCom, and the loans are repaid from the net operating receipts
of the domestic operations of RoweCom. During the three months ended March 31,
2002, we made payments of $17,083,000 on this loan agreement, and as of March
31, 2002, we had no outstanding balance on this loan. The payments were from the
excess of RoweCom's domestic collections over payments to publishers during the
three months ended March 31, 2002. This revolving loan agreement expired in
April 2002.
In connection with our acquisition of RoweCom, we assumed a factoring
arrangement previously in place between RoweCom's French subsidiary (RoweCom
France) and a European factoring company. The arrangement allows the factoring
company to purchase, without recourse, $55,000,000 of the accounts receivable of
RoweCom France during the period October 1, 2001 to September 30, 2002. The
factoring arrangement is structured so that we receive 90% of the face value of
the accounts receivable upon sale to the factoring company, with the remaining
10% due to us upon the ultimate collection of the accounts receivable by the
factoring company. Our cost for this arrangement is 0.37% of the face value of
the sold accounts receivable, which is paid when the accounts receivable are
transferred to the factoring company.
The operations of RoweCom Inc. historically have resulted in cyclical
cash flows throughout the year, with the fourth calendar quarter historically
resulting in the highest required funding level by
22
RoweCom. The seasonal fourth quarter funding requirements are due to the
required payments to publishers in excess of collections from customers.
During January, February, and March 2002, we used net cash of
approximately $18 million, $29 million, and $16 million, respectively. These
amounts are exclusive of an increase of approximately $4 million related to net
cash received from acquired companies and exclusive of an increase of
approximately $17 million representing RoweCom's domestic collections in excess
of publisher disbursements that were used to pay down the Fleet Capital
Corporation revolving loan agreement as described above. Of the net cash used in
January, February, and March 2002, approximately $1 million, $4 million, and $1
million, respectively, related to cash used for non-recurring operating
activities, primarily severance of non-continuing employees and termination of
contractual obligations of certain acquired companies. Our cash flows from
operating activities can vary significantly from month to month, depending on
the timing of operating cash receipts and payments and other working capital
changes, especially accounts receivable, accounts payable, accrued expenses, and
other current assets and liabilities.
Our operating plan depends on us achieving significant increases in
revenue and cash receipts and significant decreases in expenses. We expect that
our revenue and cash receipts will increase as we continue to integrate the
product and service offerings of our acquired businesses, and we intend to
decrease some of our operating costs, primarily through workforce and payroll
reductions. Based on these forecasts, we believe that our existing unrestricted
cash and cash equivalents, accounts receivable, and new cash generated from our
customers will be sufficient to fund our operations and capital requirements at
least through December 31, 2002. There is a substantial risk, however, that our
revenue and cash receipts will not grow at a sufficient rate, and that we will
not be able to reduce our expenses to keep them in line with our revenue. If we
are unable to meet our revenue and expense management goals, we will need to
significantly reduce our workforce, sell certain of our assets, enter into
strategic relationships or business combinations, discontinue some or all of our
operations, or take other similar restructuring actions. While we expect that
these actions would result in a reduction of recurring costs, they also may
result in a reduction of recurring revenues and cash receipts. It is also likely
that we would incur substantial non-recurring costs to implement one or more of
these restructuring actions.
We are also exploring a number of alternatives to generate cash,
including acquiring other entities that have substantial cash balances, selling
certain assets, and new debt or equity financings. Our pending acquisition of
Viant is expected to increase our cash balance by approximately $80,000,000, net
of acquisition costs. Other than our pending acquisition of Viant, we do not
currently have in place any agreements to provide us any of these sources of
funds, and additional funds may not be available to us on favorable terms, if
they are available to us at all. In addition, any of these transactions also
could result in significant equity dilution to the holders of our common stock
at the time of the transaction, or later.
23
Our outstanding contractual obligations, leasehold commitments, and
outstanding debt balances as of March 31, 2002 are set forth in the following
table. These amounts represent amounts due by us for the periods indicated under
non-cancelable contracts, leases, and loan arrangements.
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
----------------------------------------------------
2005 AND
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 AFTER
- ----------------------- -------- ------- ------- ------- --------
Notes Payable in Cash or Common Stock.... $ 4,894 $ 4,894 $ -- $ -- $ --
Other Notes Payable ..................... 8,264 8,264 -- -- --
Long-Term Debt Payable in Cash
or Common Stock ........ .............. 57,500 -- -- -- 57,500
Other Long-Term Debt .................... 7,518 2,340 1,366 1,311 2,501
Capital Lease Obligations .. ............ 24,614 13,561 9,545 1,508 --
Operating Leases ....... ................ 151,503 23,332 25,478 21,186 81,507
Other Long-Term Obligations(1) .......... 66,196 -- -- 16,196 50,000
Other(2) ................................ 6,036 6,036 -- -- --
-------- ------- ------- ------- ---------
Total ................................. $326,525 $58,427 $36,389 $40,201 $191,508
- ----------
(1) Includes obligations under our Alliance Agreement with Microsoft to
purchase software products, consulting services, and product support
services from Microsoft of $10,105,000 (which amount does not include
additional purchases by or obligations of entities that we have acquired
since our IPO); obligations to promote Microsoft solutions of $4,000,000
and open an accelerator facility in Seattle; and dedicate up to
$50,000,000 in capital to projects and acquisitions that support,
directly or indirectly, the Microsoft platform, with no time period
specified. In connection with our acquisition of HostOne in October
2001, we agreed with Microsoft that we would use our best efforts to
amend the Alliance Agreement to provide, among other things: that we
will commit to be a Microsoft.NET partner and develop products and
services that are coordinated with Microsoft's products and its .NET
strategy; that we will identify other opportunities to promote Microsoft
products; and that Microsoft will promote our products and services. In
addition, includes an obligation to purchase computer equipment and
software, storage solutions, and professional services from Compaq of
$2,091,000 (which amount does not include additional purchases by or
obligations of entities that we have acquired since our IPO) by July
2004.
(2) Represents the potential net amount due to Mr. Szlam in connection with
our acquisition of eshare in October 2001. Until April 23, 2003, Mr.
Szlam has the right to sell to us, and we have a separate right to buy
from Mr. Szlam, up to 11,388,000 shares of our common stock at a price
of $0.53 per share. Amounts due as reflected in the table above assume a
put by Mr. Szlam.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 2002, we implemented SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives and reviewed for impairment.
In December 2001, the FASB staff issued Topic No. D-103, Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred (Topic No. D-103), which is effective for fiscal years
beginning after December 15, 2001. Topic D-103 requires that certain
out-of-pocket expenses rebilled to customers be recorded as revenue versus an
offset to the related expense. Effective January 1, 2002, we reflect rebilled
expenses as revenue, in accordance with Topic No. D-103.
24
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that reflect our current
expectations and projections about our future results, performance, prospects,
and opportunities. We have tried to identify these forward-looking statements by
using words such as "may," "will," "expect," "anticipate," "believe," "intend,"
"plan," "estimate," and similar expressions. These forward-looking statements
are based on information currently available to us and are subject to a number
of risks, uncertainties, and other factors that could cause our actual results,
performance, prospects, or opportunities to differ materially from those
expressed in, or implied by, these forward-looking statements. These risks,
uncertainties, and other factors include:
o our ability to become cash flow positive before we deplete our
unrestricted cash reserves or become insolvent;
o our ability to maintain our Nasdaq National Market listing;
o our ability to execute our integrated Web-based software services,
professional services, and managed services strategy;
o our ability to successfully implement our acquisition strategy,
including our ability to integrate the operations, personnel,
products, and technologies of, and address the risks associated
with, acquired companies;
o our ability to develop enterprise Web software and services;
o the uncertainty of customer demand for enterprise Web software and
services;
o our ability to expand our customer base and achieve and maintain
profitability;
o our ability to retain key personnel;
o our ability to predict revenues from project-based engagements;
o our ability to keep pace with technological developments and
industry requirements;
o our ability to efficiently manage our growing operations;
o changes in the market for Internet services and the economy in
general, including as a result of any additional terrorist attacks
or responses to terrorist attacks;
o increasing competition from other providers of software solutions,
professional services, and managed applications;
o the extent to which customers want to purchase software applications
under hosted subscription based models; and
o our ability to address the risks associated with international
operations.
Other matters, including unanticipated events and conditions, also may
cause our actual future results to differ materially from these forward-looking
statements. We cannot assure you that our expectations will prove to be correct.
In addition, all subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements mentioned above. You should not
place undue reliance on these forward-looking statements. All of these
forward-looking statements are based on our expectations as of the date of this
report. We do not intend to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Equity Price Risk - At March 31, 2002, we had $2,577,000 of
available-for-sale equity securities. These securities represent companies in
the Internet and hi-tech sectors, both of which have recently experienced
significant volatility. These investments are at risk in the event of a downturn
in the public markets in general or a downturn in their specific sectors.
However, these investments accounted for only 0.3% of our total assets at March
31, 2002.
Interest Rate Risk - At March 31, 2002, we had $78,090,000 in cash and
cash equivalents and restricted cash. A decrease in market rates of interest
would have no material effect on the value of these assets, as they are
short-term financial instruments with a fair value approximating our cost basis.
Cash equivalents consist mainly of money market accounts, short-term treasury
bills, and commercial paper. The carrying values of other financial instruments,
such as accounts receivable, notes receivable, accounts payable, and notes
payable approximate fair value as well because of their short-term nature. The
carrying value of long-term debt approximates fair value due to the variable
rates at which the underlying notes bear interest.
At March 31, 2002, we had $64,883,000 of notes payable and long-term
debt carried at variable interest rates. A hypothetical 1% change in market
rates of interest would not have a material effect on our net loss.
Foreign Currency Exchange Risk - Our financial market risk includes
risks associated with our acquisition of companies with operations outside the
United States. This risk is mainly derived from our fourth quarter acquisitions
of eshare, Open Market, RoweCom, and Eprise. Through March 31, 2002, we have
recorded a $756,000 foreign currency translation adjustment in other
comprehensive income as a result of fluctuations in foreign currency exchange
rates. We do not currently engage in any activities for the purpose of hedging
foreign currency.
Impairment Risk - At March 31, 2002, we had goodwill and other
intangible assets of $283,059,000 related almost exclusively to our acquisition
of companies in the fourth quarter of 2001 and the first quarter of 2002. We
will assess the net realizable value of the assets acquired from these companies
on a regular basis to determine if we have incurred any other than temporary
decline in the value of our capital investment. For the three months ended March
31, 2002, we incurred $1,711,000 of impairment charges, $1,461,000 of which
related to our investment in equity-method and cost-method associated companies
in our divine interVentures segment. In February 2002, we issued 2,159,074
shares of our class A common stock with a fair value of $1,403,000 in
conjunction with the settlement of our collar agreement with Launchworks, an
equity-method associated company since February 2000. The Company's investment
in Launchworks was fully impaired as of December 31, 2001. We have no
investments in equity- or cost-basis associated companies reflected on our
balance sheet as of March 31, 2002. At March 31, 2002, we also had $7,801,000
and $22,546,000, respectively, of current and long-term facilities impairment,
representing future cash payments we are obligated to make under operating
leases, related mainly to facilities or portions of facilities that we are no
longer utilizing. We may incur additional impairment charges in future periods.
26
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, we issued 14,002,643 shares of our class A common stock
to a creditor of Northern Light Technology, LLC in connection with our
acquisition of certain of the assets of Northern Light. Additionally, we issued
to a vendor of Northern Light a warrant to purchase up to 120,065 shares of our
class A common stock.
In January 2002, we issued a warrant to purchase 1,100,000 shares of our
class A common stock to Level 3 Communications, LLC in connection with the
termination of an agreement concerning the purchase of co-location and bandwidth
services from Level 3.
In February 2002, we issued 4,427,683 shares of our class A common stock
to the former stockholders of Perceptual Robotics, Inc. in connection with our
acquisition of the 66.7% interest in Perceptual Robotics that we did not already
own.
In February 2002, we issued 365,020 shares of our class A common stock
to certain former stockholders of NetUnlimited, Inc. in connection with our
acquisition of the minority interest of NetUnlimited.
In February 2002, we issued 769,231 shares of our class A common stock
to Comerica Bank - California in connection with our acquisition of RWT
Corporation (d/b/a RealWorld Technologies, Inc.).
In February 2002, we issued 333,333 shares of our class A common stock
to Dynegy Technology Capital Corp. upon resolution of a holdback established in
connection with our 2001 acquisition of SageMaker, Inc.
In February 2002, we issued 2,159,074 shares of our class A common stock
to Launchworks inc. pursuant to a collar agreement that we entered into with
Launchworks in February 2000.
All of our class A common stock issued in the transactions described
above were issued in transactions exempt from registration pursuant to Section
4(2) and Rule 506 of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2.1 Combination Agreement, dated as of March 12, 2002, between divine,
inc. and Delano Technology Corporation (incorporated herein by reference
to Exhibit 2.1 of divine's Report on Form 8-K filed March 14, 2002).
(b) REPORTS ON FORM 8-K
We filed a Report on Form 8-K, dated January 24, 2002, announcing the
completion of our acquisition of Data Return Corporation.
We filed a Report on Form 8-K, dated March 14, 2002, announcing that we
had entered into an agreement and plan of merger with Delano Technology
Corporation, pursuant to which Delano would become one of our wholly owned
subsidiaries.
We filed a Report on Form 8-K/A, dated March 28, 2002, to amend our
Report on Form 8-K, dated July 12, 2001, to include the financial statements of
Emicom Group, Inc. and the pro forma financial information reflecting the pro
forma effect on our consolidated financial statements of our acquisitions of
Emicom, Open Market, Inc., eshare communications, Inc., Eprise Corporation, and
Data Return Corporation.
27
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON MAY 15, 2002.
DIVINE, INC.
/S/ MICHAEL P. CULLINANE
--------------------------------------------
Michael P. Cullinane
Executive Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
28
ANNEX U
DIVINE FORM 8-K DATED MAY 3, 2002, RESPECTING THE RESIGNATION
OF THOMAS J. MEREDITH FROM DIVINE'S BOARD OF DIRECTORS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): MAY 3, 2002
DIVINE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-30043 36-4301991
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)
1301 N. ELSTON AVENUE
CHICAGO, ILLINOIS 60622
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 394-6600
N/A
(Former name or former address, if changed since last report)
--------------------
ITEM 5. OTHER EVENTS.
On May 3, 2002, Thomas J. Meredith resigned as a director of divine, inc.,
a Delaware corporation ("divine"). In addition, Mr. Meredith will not stand for
re-election to divine's board of directors at the annual meeting of stockholders
to be held on May 21, 2002. As a result, the board of directors of divine has
reduced the number of directors to nine directors, and only one director will be
elected as a Class III director at the annual meeting. As described in divine's
Proxy Statement, dated April 22, 2002, for its annual meeting, Michael H.
Forster has been nominated for re-election as the Class III director. divine
intends in the future to rebalance the number of directors in each of three
classes of directors. It may achieve this by adding additional directors, or by
moving existing directors from one class to another.
1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 9, 2002
divine, inc.
By: /s/ MICHAEL P. CULLINANE
--------------------------------------
Michael P. Cullinane
Executive Vice President,
Chief Financial Officer, and Treasurer
2
ANNEX V
DIVINE FORM 8-K DATED MAY 29, 2002, RESPECTING THE
PRIVATE PLACEMENT OF OAK INVESTMENT PARTNERS
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================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: May 29, 2002
(Date of earliest event reported)
divine, inc.
(Exact name of registrant as specified in the charter)
Delaware 0-30043 36-4301991
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1301 N. Elston Avenue
Chicago, Illinois 60622
(Address of Principal Executive Offices)
(773) 394-6600
(Registrant's telephone number including area code)
Not Applicable
(Former name or former address, if changed since last report)
================================================================================
Item 5. Other Items
On May 29, 2002, divine, inc. (the "Company") entered into a Securities
Purchase Agreement (the "Purchase Agreement") with Oak Investment Partners X,
Limited Partnership, Oak X Affiliates Fund, Limited Partnership and certain
other investors named therein (collectively, the "Purchasers"), whereby on May
31, 2002 the Company issued and sold to the Purchasers 22,741 shares of its
Series B Convertible Preferred Stock (the "Initial Preferred Shares") for an
aggregate purchase price of $22,741,000 and the Purchasers agreed to purchase at
a later date, subject to certain conditions, 38,259 shares of the Company's
Series B Convertible Preferred Stock (the "Mandatory Preferred Shares") together
with related warrants (the "Warrants") to purchase 9,567 shares of Series B
Convertible Preferred Stock (the "Warrant Preferred Shares", and together with
the Initial Preferred Shares and Mandatory Preferred Shares, the "Preferred
Shares"), at a purchase price of $1,000 per Preferred Share together with the
related Warrants. Unless the Company receives stockholder approval, the Company
will not convert Preferred Shares into more than 3,823,618 shares of its common
stock, par value $0.001 ("Common Stock"). The Series B Convertible Preferred
Stock is subject to the terms and conditions of the Certificate of Designations,
Preferences and Rights attached hereto as Exhibit 3.1. The Warrants are subject
to the terms and conditions of the form of Warrant attached hereto as Exhibit
4.2. Pursuant to a Registration Rights Agreement attached hereto as Exhibit
10.1, the Company has agreed to prepare and file with the Securities and
Exchange Commission a registration statement covering the resale of the shares
of Common Stock issuable pursuant to the terms of the Series B Convertible
Preferred Stock. The terms of the private placement are more fully set forth in
the Securities Purchase Agreement attached hereto as Exhibit 4.1.
Additionally, the Company amended that certain Rights Agreement dated as
of February 12, 2001, between the Company and Computershare Investor Services,
LLC, as Rights Agent, as amended by Amendment No. 1 to Rights Agreement dated as
of July 8, 2001 and Amendment No. 2 to Rights Agreement dated as of August 15,
2001 (as amended, the "Rights Agreement"), to exclude each Purchaser who is or
becomes a party to the Purchase Agreement from the definition of Acquiring
Person under the Rights Agreement, but only to the extent such Purchaser or
Purchasers would become an Acquiring Person due to the beneficial ownership of
Common Stock issued or issuable upon conversion of the Series B Convertible
Preferred Stock issued pursuant to the Purchase Agreement.
On May 30, 2002, the Company issued a press release related to these
transactions. A copy of the press release is attached hereto as Exhibit 99.1 and
is incorporated herein by reference.
Item 7. Financial Statements and Exhibits
(c) EXHIBITS.
The exhibits to this report are listed in the Exhibit Index set forth
elsewhere herein.
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
divine, inc.
By: /s/ JUDE SULLIVAN
-----------------------------------------
Jude Sullivan
Senior Vice President and General Counsel
Date: June 3, 2002
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock.
4.1 Securities Purchase Agreement dated as of May 29, 2002, by and
between divine, inc. and the investors named therein.
4.2 Form of Warrant.
4.3 Amendment No. 3 to Rights Agreement, dated as of May 29, 2002,
between divine and Computershare Investor Services, LLC, as
Rights Agent.
10.1 Registration Rights Agreement dated as of May 31, 2002, by and
between divine, inc. and the investors named therein.
99.1 Press Release of divine, inc., dated May 30, 2002.
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Item 5. Other Items
Item 7. Financial Statements and Exhibits
SIGNATURE
EXHIBIT INDEX
Exhibit 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
divine, inc.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, the undersigned, Jude M. Sullivan, Senior Vice President and Secretary
of divine, inc., a Delaware corporation (hereinafter called the "CORPORATION"),
pursuant to the provisions of Sections 103 and 151 of the General Corporation
Law of the State of Delaware, do hereby make this Certificate of Designations
and do hereby state and certify that pursuant to the authority expressly vested
in the Board of Directors of the Corporation by the Third Amended and Restated
Certificate of Incorporation of the Corporation, the Board of Directors duly
adopted the following resolutions:
RESOLVED, that, pursuant to Article FOURTH of the Third Amended and
Restated Certificate of Incorporation of the Corporation (which authorizes
50,000,000 shares of preferred stock, $0.001 par value ("PREFERRED STOCK")), the
Board of Directors hereby fixes the powers, designations, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions, of a series of Preferred Stock.
RESOLVED, that each share of such series of Preferred Stock shall rank
equally in all respects and shall be subject to the following provisions:
1. NUMBER AND DESIGNATION. 100,000 shares of the Preferred Stock of the
Corporation shall be designated as Series B Convertible Preferred Stock (the
"SERIES B PREFERRED STOCK").
2. DEFINITIONS. In addition to the capitalized terms elsewhere defined
herein, the following terms, when used herein, shall have the meanings
indicated, unless the context otherwise requires.
"ADJUSTED CONVERSION PRICE" means, with respect to any share of Series B
Preferred Stock, at any time, the Initial Conversion Price of such share of
Series B Preferred Stock, as adjusted from time to time pursuant to Section 6(e)
hereof.
"AFFILIATE" means, with respect to any specified Person, any other Person
which, directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "affiliated," "controlling," and "controlled" have meanings
correlative to the foregoing.
"BOARD OF DIRECTORS" means the Board of Directors of the Corporation.
"BUSINESS DAY" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in New York
City, New York generally are authorized or required by law or other governmental
actions to close.
"COMMON STOCK" means the Corporation's Class A Common Stock, par value
$0.001 per share.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor statute, and the rules and regulations promulgated thereunder.
"GROUP" means a group within the meaning of Section 13(d)(3) of the
Exchange Act.
"INITIAL CLOSING" has the meaning specified in the Securities Purchase
Agreement.
"INITIAL CONVERSION PRICE" means (i) with respect to any share of Series B
Preferred Stock issued at the Initial Closing, $6.00 per share of Series B
Preferred Stock (after giving effect to the reverse stock split of the Common
Stock effective at 12:01 a.m. on May 29, 2002 but subject to adjustment for
stock splits, reverse stock splits, stock dividends and similar transactions
with respect to the Common Stock after such date), subject to adjustment from
time to time pursuant to Section 6(e) hereof and (ii) with respect to any share
of Series B Preferred Stock issued at the Mandatory Closing (or upon exercise of
Warrants issued at such Mandatory Closing), $6.00 per share of Series B
Preferred Stock (after giving effect to the reverse stock split of the Common
Stock effective at 12:01 a.m. on May 29, 2002 but subject to adjustment for
stock splits, reverse stock splits, stock dividends and similar transactions
with respect to the Common Stock after such date), subject to adjustment from
time to time pursuant to Section 6(e) hereof.
"ISSUE DATE" means (i) with respect to any share of Series B Preferred
Stock issued at the Initial Closing, the date of the Initial Closing and (ii)
with respect to any share of Series B Preferred Stock issued at the Mandatory
Closing or upon exercise of Warrants issued at the Mandatory Closing, the date
of the Mandatory Closing.
"LIQUIDATION PREFERENCE" means, with respect to any share of Series B
Preferred Stock, $1,000 per whole share of Series B Preferred Stock (as adjusted
for stock splits, reverse stock splits, stock dividends and similar transactions
with respect to the Series B Preferred Stock).
"MANDATORY CLOSING" has the meaning specified in the Securities Purchase
Agreement.
"MARKET PRICE" means, with respect to the Common Stock, on any given day,
(i) the price of the last trade, as reported on the Nasdaq National Market, not
identified as having been reported late to such system, or (ii) if the Common
Stock is so quoted, but not so traded, the average of the last bid and ask
prices, as those prices are reported on the Nasdaq National Market, or (iii) if
the Common Stock is not listed or authorized for trading on the Nasdaq National
Market or any comparable system, the average of the closing bid and asked prices
as furnished by two members of the National Association of Securities Dealers,
Inc. selected from time to time by the Corporation for that purpose and
reasonably acceptable to Oak. If the
2
Common Stock is not listed and traded in a manner that the quotations referred
to above are available for the period required hereunder, the Market Price per
share of Common Stock shall be deemed to be the fair value per share of such
security as mutually agreed upon by the Corporation and Oak.
"OAK" means Oak Investment Partners X, Limited Partnership; Oak Investment
Partners IX, Limited Partnership; Oak X Affiliates Fund, Limited Partnership;
Oak IX Affiliates Fund, Limited Partnership; and Oak IX Affiliates Fund-A,
Limited Partnership and their respective Affiliates, but any of such Persons
(including the Persons listed above) will only be deemed to be Oak if such
Person purchases shares of Series B Preferred Stock under and pursuant to the
Securities Purchase Agreement and holds Series B Preferred Stock or shares of
Common Stock issued upon conversion thereof in accordance with this Certificate
of Designations.
"OUTSTANDING", when used with reference to shares of stock, means issued
and outstanding shares, excluding shares held by the Corporation or a
subsidiary.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust and any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"PURCHASERS" has the meaning specified in Section 6(g) of this Certificate
of Designations.
"RIGHTS PLAN" has the meaning specified in the Securities Purchase
Agreement.
"SECURITIES PURCHASE AGREEMENT" means that certain Securities Purchase
Agreement, dated on or about May 29, 2002, between the Corporation and the
Purchasers.
"SERIES A JUNIOR PREFERRED STOCK" means the Series A Junior Participating
Preferred Stock, par value $0.001 per share.
"WARRANTS" means the warrants to purchase shares of Series B Preferred
Stock issued or to be issued pursuant to the Securities Purchase Agreement.
3. RANK. (a) Any class or series of capital stock of the Corporation
shall be deemed to rank:
(i) prior to the Series B Preferred Stock, either as to
the payment of dividends or as to distribution of assets upon liquidation,
dissolution or winding up, or both, if the holders of such class or series
shall be entitled by the terms thereof to the receipt of dividends and of
amounts distributable upon liquidation, dissolution or winding up, in
preference or priority to the holders of Series B Preferred Stock ("SENIOR
SECURITIES");
(ii) on a parity with the Series B Preferred Stock,
either as to the payment of dividends or as to distribution of assets upon
liquidation, dissolution or winding up, or both, if the holders of the
Series B Preferred Stock and of such class of
3
stock or series shall be entitled by the terms thereof to the receipt of
dividends or of amounts distributable upon liquidation, dissolution or
winding up, or both, in proportion to their respective amounts of accrued
and unpaid dividends per share or liquidation preferences (including, but
not limited to, preferences as to payment of dividends or other amounts
distributable upon liquidation), without preference or priority one over
the other and such class of stock or series is not a class of Senior
Securities ("PARITY SECURITIES"); and
(iii) junior to the Series B Preferred Stock, either as
to the payment of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, or both, if such stock or series
shall be Common Stock or Series A Junior Preferred Stock or if the holders
of the Series B Preferred Stock shall be entitled by the terms thereof to
the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, in preference or priority to the holders of
shares of such stock or series (including, but not limited to, preferences
as to payment of dividends or other amounts distributable upon liquidation)
("JUNIOR SECURITIES").
(b) The respective definitions of Senior Securities, Junior
Securities and Parity Securities shall also include any rights or options
exercisable or exchangeable for or convertible into any of the Senior
Securities, Junior Securities and Parity Securities, as the case may be.
(c) The Series B Preferred Stock shall be subject to the
creation of Junior Securities and, subject to Section 7(b) of this Certificate
of Designations, Parity Securities.
4. DIVIDENDS. In the event any dividend or other distribution payable in
cash or other property is declared on the Common Stock (other than dividends
payable solely in shares of Common Stock), each holder of shares of Series B
Preferred Stock on the record date for such dividend or distribution shall be
entitled to receive on the date of payment or distribution of such dividend or
other distribution the same cash or other property which such holder would have
received if on such record date such holder was the holder of record of the
number (including any fraction) of shares of Common Stock into which the shares
of Series B Preferred Stock then held by such holder are then convertible.
5. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, before any
payment or distribution of the assets of the Corporation (whether capital or
surplus) shall be made to or set apart for the holders of Junior Securities, the
holders of the shares of Series B Preferred Stock shall be entitled to receive
with respect to each share of Series B Preferred Stock held thereby an amount in
cash equal to the Liquidation Preference of such share of Series B Preferred
Stock. If, upon any liquidation, dissolution or winding up of the Corporation,
the assets of the Corporation, or proceeds thereof, distributable among the
holders of the shares of Series B Preferred Stock shall be insufficient to pay
in full the preferential amount aforesaid and liquidating payments on any Parity
Securities, then such assets, or the proceeds thereof, shall be distributed
among the holders of shares of Series B Preferred Stock and any such other
Parity Securities ratably in accordance with the respective amounts that would
be payable on such shares of Series B
4
Preferred Stock and any such other Parity Securities if all amounts payable
thereon were paid in full.
(b) Upon the completion of the distribution required by
Section 5(a) and any other distribution that may be required with respect to any
other series of Preferred Stock that may from time to time come into existence,
subject to the rights of any other series of Preferred Stock that may from time
to time come into existence, the holders of Series B Preferred Stock shall
participate with the Common Stock and the Series A Junior Preferred Stock
ratably on an as-converted basis (without regard to the Exchange Cap) in the
distribution of assets, or the proceeds thereof, until the holders of Series B
Preferred Stock shall have received with respect to each share of Series B
Preferred Stock held thereby (including amounts paid pursuant to Section 5(a))
an aggregate amount per share of Series B Preferred Stock equal to the product
of (x) the Liquidation Preference of each such share of Series B Preferred
Stock, TIMES (y) three (3); thereafter, the holders of Series B Preferred Stock
shall not be entitled to any further distribution or payment and, subject to the
rights of the Series A Junior Preferred Stock and any other series of Preferred
Stock that may from time to time come into existence, if assets remain in the
Corporation, the holders of the Common Stock of the Corporation shall receive
the distribution of the remaining assets, or the proceeds thereof.
Notwithstanding anything in this Section 5 to the contrary, if a holder of
Series B Preferred Stock would receive under and pursuant to this Section 5 a
greater liquidation amount than such holder is entitled to receive pursuant to
Sections 5(a)-(b) by converting such shares of Series B Preferred Stock into
shares of Common Stock, then such holder shall not receive any amounts under
Section 5(a), but shall be treated for purposes of this Section 5 as though they
had converted into shares of Common Stock, whether or not such holders had
elected to so convert.
(c) Notwithstanding anything else in this Certificate of
Designations, a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation shall be deemed to have occurred upon (A) (i)
the acquisition of the Corporation by another Person by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger, consolidation or similar transaction, whether of the
Corporation with or into any other Person or Persons or of any other Person or
Persons with or into the Corporation, but excluding any merger effected
exclusively for the purpose of changing the domicile of the Corporation); or
(ii) a sale of all or substantially all of the assets of the Corporation;
PROVIDED that a consolidation or merger as a result of which the holders of
capital stock of the Corporation immediately prior to such merger or
consolidation possess (by reason of such holdings) 50% or more of the voting
power of the corporation surviving such merger, consolidation or similar
transaction (or other Person which is the issuer of the capital stock into which
the capital stock of the Corporation is converted or exchanged in such merger or
consolidation) shall not be treated as a liquidation, dissolution or winding up,
voluntary or involuntary, of the Corporation within the meaning of this Section
5 or (B) a transaction or series of transactions in which a person or group of
persons (as defined in Rule 13d-5(b)(1) of the Exchange Act) (excluding Oak)
acquires beneficial ownership (as determined in accordance with Rule 13d-3 of
the Exchange Act) of more than 50% of the Common Stock or the voting power of
the Corporation (a "CHANGE OF CONTROL").
6. CONVERSION. (a) Shares of Series B Preferred Stock shall be
convertible into Common Stock on the terms and conditions set forth in this
Section 6. Subject to the provisions
5
of this Section 6, each holder of shares of Series B Preferred Stock shall have
the right, at any time, at such holder's option, to convert any or all
outstanding shares (and fractional shares) of Series B Preferred Stock, in whole
or in part, into fully paid and non-assessable shares of Common Stock. In
addition, if the Market Price of the Common Stock exceeds $50.00 per share
(after giving effect to the reverse stock split of the Common Stock effective at
12:01 a.m. on May 29, 2002 but subject to adjustment for stock splits, reverse
stock splits, stock dividends and similar transactions with respect to the
Common Stock after such date) for any 60 consecutive trading day period that
begins after November 29, 2003 (a "MANDATORY CONVERSION EVENT"), then, upon such
Mandatory Conversion Event, each outstanding share of Series B Preferred Stock
shall automatically be converted into Common Stock as set forth in this Section
6 and in accordance with Section 6(c) hereof. The number of shares of Common
Stock deliverable upon the conversion hereunder of a share of Series B Preferred
Stock as of any date shall be an amount equal to $1,000 (as adjusted for stock
splits, reverse stock splits, stock dividends and similar transactions with
respect to the Series B Preferred Stock), DIVIDED BY the Adjusted Conversion
Price of such share of Series B Preferred Stock.
(b) (i) In order to exercise the conversion privilege, the
holder of the shares of Series B Preferred Stock to be converted shall
surrender the certificate representing such shares of Series B Preferred
Stock (or a lost stock affidavit therefor reasonably acceptable to the
Corporation) at the office of the Corporation, with a written notice of
election to convert completed and signed, specifying the number of shares
of Series B Preferred Stock to be converted. Unless the shares issuable on
conversion are to be issued in the same name as the name in which such
shares of Series B Preferred Stock are registered, each share surrendered
for conversion shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder or the
holder's duly authorized attorney.
(ii) As promptly as practicable after the surrender by
a holder of certificates for shares of Series B Preferred Stock as
aforesaid, the Corporation shall issue and shall deliver to such holder, or
on the holder's written order to the holder's transferee, (w) a certificate
or certificates for the whole number of shares of Common Stock issuable
upon the conversion of such shares in accordance with the provisions of
this Section 6, (x) any cash adjustment required pursuant to Section 6(d)
and (y) in the event of a conversion in part, a certificate or certificates
for the whole number of shares of Series B Preferred Stock not being so
converted.
(iii) Each conversion shall be deemed to have been
effected immediately prior to the close of business on the date on which
the certificates for shares of Series B Preferred Stock shall have been
surrendered to the Corporation for conversion and such notice received by
the Corporation as aforesaid, and the person in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder of record of
the shares of Common Stock represented thereby at such time on such date.
All shares of Common Stock delivered upon conversion of the Series B
Preferred Stock will upon delivery be duly and validly issued and fully
paid and non-assessable, free of all liens and charges and not subject to
any preemptive rights. Upon the surrender of certificates representing
shares of Series B Preferred Stock, such shares shall no longer be deemed
to be
6
outstanding and all rights of a holder with respect to such shares
surrendered for conversion shall immediately terminate except the right to
receive the Common Stock and other amounts payable pursuant to this Section
6 and a certificate or certificates representing shares of Series B
Preferred Stock not converted.
(c) Upon the occurrence of a Mandatory Conversion Event, all
holders of shares of Series B Preferred Stock and all holders of Warrants to
purchase shares of Series B Preferred Stock shall surrender to the Company for
cancellation the original stock certificates and Warrants, as the case may be,
duly endorsed for cancellation and such shares of Series B Preferred Stock and
Warrants to purchase Series B Preferred Stock shall be deemed to have been
converted in accordance with this Section 6 as of the date of the occurrence of
the Mandatory Conversion Event.
(d) In connection with the conversion of any shares of
Series B Preferred Stock, no fractions of shares of Common Stock shall be
issued, but in lieu thereof the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Market Price per share of Common Stock on the
business day on which such shares of Series B Preferred Stock are deemed to have
been converted.
(e) (i) In case the Corporation shall at any time after the
Issue Date of the Series B Preferred Stock (A) declare a dividend or make a
distribution on Common Stock payable in Common Stock, (B) subdivide or
split the outstanding Common Stock, (C) combine or reclassify the
outstanding Common Stock into a smaller number of shares, (D) issue any
shares of its capital stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Corporation is the continuing corporation), or (E)
consolidate with, or merge with or into, any other Person, the Adjusted
Conversion Price in effect at the time of the record date for such dividend
or distribution or of the effective date of such subdivision, split,
combination, consolidation, merger or reclassification shall be
proportionately adjusted so that the conversion of the Series B Preferred
Stock after such time shall entitle the holder to receive the aggregate
number of shares of Common Stock or other securities of the Corporation (or
shares of any security into which such shares of Common Stock have been
combined, consolidated, merged or reclassified pursuant to clause
(e)(i)(C), (e)(i)(D) or (e)(i)(E) above of this Section 6) which, if the
Series B Preferred Stock had been converted immediately prior to such time,
such holder would have owned upon such conversion and been entitled to
receive by virtue of such dividend, distribution, subdivision, split,
combination, consolidation, merger or reclassification, assuming for
purposes of such calculation that such holder of Common Stock of the
Corporation (x) is not a Person with which the Corporation consolidated or
into which the Corporation merged or which merged into the Corporation or
to which such recapitalization, sale or transfer was made, as the case may
be ("CONSTITUENT PERSON"), or an affiliate of a constituent person and (y)
failed to exercise any rights of election as to the kind or amount of
securities, cash and other property receivable upon such reclassification,
change, consolidation, merger, recapitalization, sale or transfer
(PROVIDED, that if the kind or amount of securities, cash and other
property receivable upon such reclassification, change, consolidation,
merger, recapitalization, sale or
7
transfer is not the same for each share of Common Stock of the Corporation
held immediately prior to such reclassification, change, consolidation,
merger, recapitalization, sale or transfer by other than a constituent
person or an affiliate thereof and in respect of which such rights of
election shall not have been exercised ("NON-ELECTING SHARE"), then for the
purpose of this Section 6(e) the kind and amount of securities, cash and
other property receivable upon such reclassification, change,
consolidation, merger, recapitalization, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable
per share by a plurality of the non-electing shares). Such adjustment shall
be made successively whenever any event listed above shall occur.
(ii) In case the Corporation shall issue or sell any
Common Stock (other than Common Stock (collectively, the "EXCLUDED
SECURITIES") issued (A) pursuant to the Corporation's stock option plans or
pursuant to any other Common Stock related employee compensation plans of
the Corporation approved by the Corporation's Board of Directors or its
predecessors (including such plans under Section 423 of the Internal
Revenue Code of 1986, as amended) (collectively, "STOCK PLANS"), (B) to
vendors, banks, lenders and equipment lessors of the Corporation or its
subsidiaries in transactions the primary purpose of which is not the
raising of capital, provided that the aggregate number of shares of Common
Stock so issued after the date of the Initial Closing do not (1) have an
aggregate market price at the date of such issuance in excess of $5 million
or (2) exceed 1 million shares of Common Stock (after giving effect to the
reverse stock split of the Common Stock effective at 12:01 a.m. on May 29,
2002 but subject to adjustment for stock splits, reverse stock splits,
stock dividends and similar transactions with respect to the Common Stock
after such date), (C) pursuant to (1) the conversion of convertible notes
or other debt instruments outstanding as of the date of the Initial
Closing, (2) the exercise of warrants outstanding as of the date of the
Initial Closing and (3) obligations of the Corporation existing as of the
date of the Initial Closing to issue shares of Common Stock, (D) in
connection with (1) acquisitions by the Corporation or its subsidiaries of
assets or equity securities of third Persons or (2) mergers,
consolidations, joint ventures or other business combinations by the
Corporation with third Persons, (E) pursuant to the Rights Plan or (F) upon
exercise or conversion of any security the issuance of which caused an
adjustment under Section 6(e)(iii) or 6(e)(iv) hereof) without
consideration or for a consideration per share less than the Adjusted
Conversion Price then in effect, the Adjusted Conversion Price to be in
effect after such issuance or sale shall be determined by multiplying the
Adjusted Conversion Price in effect immediately prior to such issuance or
sale by a fraction, (1) the numerator of which shall be the product of (I)
the aggregate number of shares of Common Stock outstanding immediately
before such issuance or sale, plus the aggregate number of shares of Common
Stock into which the outstanding shares of Series B Preferred Stock
8
are convertible immediately before such issuance or sale (but excluding any
other options, warrants or convertible securities), plus the aggregate
number of shares of Common Stock that the aggregate consideration received
by the Corporation upon such issuance or sale would purchase at the
Adjusted Conversion Price then in effect and (2) the denominator of which
shall be (I) the aggregate number of shares of Common Stock outstanding
immediately before such issuance or sale, plus the aggregate number of
shares of Common Stock into which the outstanding shares of Series B
Preferred Stock are convertible immediately before such issuance or sale
(but excluding any other options, warrants or convertible securities), plus
the aggregate number of shares of Common Stock so issued or sold; provided,
however, that notwithstanding anything in this Certificate of Designations
to the contrary, no adjustment in the Adjusted Conversion Price shall be
effectuated, or required to be effectuated, pursuant to this Section
6(e)(ii) unless and until the Corporation issues or is deemed to have
issued shares of Common Stock (other than Excluded Securities) which, when
aggregated with all shares of Common Stock (other than Excluded Securities)
issued or deemed to have been issued by the Corporation after the date of
the Initial Closing have an aggregate market price at the date of such
issuance or deemed issuance in excess of $20 million, at which time
adjustments in the Adjusted Conversion Price pursuant to this Section
6(e)(ii) shall be effectuated, and be required to be effectuated, hereunder
with respect to all issuances or deemed issuances of Common Stock that
comprised or that are in excess of such $20 million amount, as if all such
issuances occurred on the date such threshold is exceeded. In case any
portion of the consideration to be received by the Corporation shall be in
a form other than cash, the fair market value of such noncash consideration
shall be utilized in the foregoing computation. Such fair market value
shall be determined by the Board of Directors of the Corporation; PROVIDED,
HOWEVER, that if the holders of a majority of the Series B Preferred Stock
shall object to any such determination, the Board of Directors shall retain
an independent appraiser reasonably satisfactory to such holders to
determine such fair market value. The holders shall be notified promptly of
any consideration other than cash to be received by the Corporation and
furnished with a description of the consideration and the fair market value
thereof, as determined by the Board of Directors.
(iii) Except for and with respect to Excluded
Securities, in the event that the Corporation fixes a record date for the
issuance of rights, options or warrants to the holders of its Common Stock
or other securities entitling such holders to subscribe for or purchase
shares of Common Stock (or securities convertible into shares of Common
Stock) at a price per share of Common Stock (or having a conversion price
per share of Common Stock, if a security convertible into shares of Common
Stock) less than the Adjusted Conversion Price in effect on such record
date, the maximum number of shares of Common Stock issuable upon exercise
of such rights, options or warrants (or conversion of such convertible
securities) shall be deemed to have been issued and outstanding as of such
record date and the Adjusted Conversion Price then in effect shall be
adjusted pursuant to Section 6(e)(ii) hereof, as though such maximum number
of shares of Common Stock had been so issued for the aggregate
consideration payable by the holders of such rights, options, warrants or
convertible securities prior to their receipt of such shares of Common
Stock. In case any portion of such consideration shall be in a form other
than cash, the fair market value of such noncash consideration shall be
determined as set forth in Section 6(e)(ii) hereof. Such adjustment shall
be made successively whenever such record date is fixed; and in the event
that such rights, options or warrants are not so issued or expire
unexercised, or in the event of a change in the number of shares of Common
Stock to which the holders of such rights, options or warrants are entitled
(other than pursuant to adjustment provisions therein comparable to those
contained in this Section 6(e)), the Adjusted Conversion Price then in
effect shall again be adjusted to be the Adjusted Conversion Price which
would then be in effect if such record date had not been fixed, in the
former event, or the Adjusted Conversion
9
Price which would then be in effect if such holder had initially been
entitled to such changed number of shares of Common Stock, in the latter
event.
(iv) Except for and with respect to Excluded
Securities, in the event that the Corporation issues rights, options or
warrants entitling the holders thereof to subscribe for or purchase Common
Stock (or securities convertible into shares of Common Stock) or shall
issue securities that are convertible, directly or indirectly, into Common
Stock, and the price per share of Common Stock of such rights, options,
warrants or convertible securities (including, in the case of rights,
options or warrants, the price at which they may be exercised) is less than
the Adjusted Conversion Price then in effect, the maximum number of shares
of Common Stock issuable upon exercise of such rights, options or warrants
or upon conversion of such convertible securities shall be deemed to have
been issued and outstanding as of the date of such sale or issuance, and
the Adjusted Conversion Price shall be adjusted pursuant to Section
6(e)(ii) hereof as though such maximum number of shares of Common Stock had
been so issued for an aggregate consideration equal to the minimum
aggregate consideration paid for such rights, options, warrants or
convertible securities and the aggregate consideration payable by the
holders of such rights, options, warrants or convertible securities prior
to their receipt of such shares of Common Stock. In case any portion of
such consideration shall be in a form other than cash, the fair market
value of such noncash consideration shall be determined as set forth in
Section 6(e)(ii) hereof. Such adjustment shall be made successively
whenever such rights, options, warrants or convertible securities are
issued; and in the event that such rights, options or warrants expire
unexercised, or in the event of a change in the number of shares of Common
Stock to which the holders of such rights, options, warrants or convertible
securities are entitled (other than pursuant to adjustment provisions
therein comparable to those contained in this Section 6(e)), the Adjusted
Conversion Price shall again be adjusted to be the Adjusted Conversion
Price which would then be in effect if such rights, options, warrants or
convertible securities had not been issued, in the former event, or the
Adjusted Conversion Price which would then be in effect if such holders had
initially been entitled to such changed number of shares of Common Stock,
in the latter event. No adjustment of the Adjusted Conversion Price Factor
shall be made pursuant to this Section 6(e)(iv) to the extent that the
Adjusted Conversion Price shall have been adjusted pursuant to Section
6(e)(iii) upon the setting of any record date relating to such rights,
options, warrants or convertible securities and such adjustment fully
reflects the number of shares of Common Stock to which the holders of such
rights, options, warrants or convertible securities are entitled and the
price payable therefor.
(v) No adjustment to the Adjusted Conversion Price
pursuant to Sections 6(e)(ii), 6(e)(iii) and 6(e)(iv) above shall be
required unless such adjustment would require an increase or decrease of at
least 1% in the Adjusted Conversion Price; PROVIDED HOWEVER, that any
adjustments which by reason of this Section 6(e)(v) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 6(e) shall be made to the
nearest four decimal points.
10
(vi) In the event that, at any time as a result of the
provisions of this Section 6(e), the holder of Series B Preferred Stock
upon subsequent conversion shall become entitled to receive any shares of
capital stock of the Corporation other than Common Stock, the number of
such other shares so receivable upon conversion of Series B Preferred Stock
shall thereafter be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions contained
herein.
(f) All adjustments pursuant to this Section 6 shall be
notified to the holders of Series B Preferred Stock and such notice shall be
accompanied by a Schedule of Computations of the adjustments certified by a
financial officer of the Corporation.
(g) (i) Notwithstanding anything to the contrary contained
herein, the Corporation shall not be obligated to issue more than 3,823,500
shares of Common Stock (after giving effect to the reverse stock split of
the Common Stock effective at 12:01 a.m. on May 29, 2002 but subject to
adjustment for stock splits, reverse stock splits, stock dividends and
similar transactions with respect to the Common Stock after such date) upon
the conversion of any shares of Series B Preferred Stock under this Section
6 in breach of the Corporation's obligations under the rules or regulations
of The Nasdaq Stock Market (the "EXCHANGE CAP"), except that such
limitation shall not apply in the event that the Corporation (a) obtains
the approval of its stockholders as required by the applicable rules of The
Nasdaq Stock Market (or any successor rule or regulation) for issuances of
Common Stock in excess of such amount ("STOCKHOLDER APPROVAL"), or (b)
obtains a written opinion from counsel reasonably acceptable to the
Corporation and Oak that such approval is not required (an "OPINION").
Until Stockholder Approval or an Opinion is obtained, no purchaser of
shares of Series B Preferred Stock, pursuant to the Securities Purchase
Agreement (the "PURCHASERS") shall be issued, upon conversion of shares of
Series B Preferred Stock issued pursuant to the Securities Purchase
Agreement or upon conversion of Series B Preferred Stock issued or issuable
upon exercise of Warrants issued or to be issued pursuant to the Securities
Purchase Agreement, shares of Common Stock in an amount greater than the
product of (i) the Exchange Cap amount multiplied by (ii) a fraction, the
numerator of which is the number of shares of Series B Preferred Stock
issued to such Purchasers pursuant to the Securities Purchase Agreement and
the denominator of which is the aggregate amount of all shares of Series B
Preferred Stock issued to the Purchasers pursuant to the Securities
Purchase Agreement (the "CAP ALLOCATION AMOUNT").
(ii) In the event that the Corporation is, at the time
of any conversion of shares of Series B Preferred Stock under this Section
6 (each, a "SERIES B CONVERSION"), prohibited from issuing all of the
shares of Common Stock then issuable upon such Series B Preferred Stock as
a result of or pursuant to the Exchange Cap, the Corporation shall (x)
convert the maximum aggregate number of such shares of Series B Preferred
Stock then permitted under and in accordance with the Exchange Cap into
Common Stock in accordance with this Section 6, with such amount to be
allocated pro rata among the holders of the Series B Preferred Stock to be
converted in such Series B Conversion (the "CONVERTING SERIES B PREFERRED
HOLDERS") based upon their respective Cap Allocation Amounts, (y) redeem,
to the extent that the Corporation has funds legally available therefor,
pro rata from such Converting Series B Preferred Holders (based upon
11
their respective Cap Allocation Amounts) the maximum aggregate number of
shares of Series B Preferred Stock held by such Converting Series B
Preferred Holder which were originally subject to such Series B Conversion
but which the Corporation was prohibited from converting into Common Stock
as a result of or pursuant to the Exchange Cap (the "INITIAL REDEEMED
EXCESS SHARES") that can be so redeemed at a price per share for each
Initial Redeemed Excess Share equal to the Liquidation Preference of the
Series B Preferred Stock as of the date of the applicable Series B
Conversion (the "REDEMPTION PRICE") and (z) redeem, ratably from such
Converting Series B Preferred Holders (based upon their respective Cap
Allocation Amounts), the remainder of the shares of Series B Preferred
Stock submitted for conversion in such Series B Conversion by such
Converting Series B Preferred Holder which the Corporation was prohibited
from converting into Common Stock as a result of or pursuant to the
Exchange Cap (the "REMAINING REDEEMED EXCESS SHARES") as soon as funds
legally available for such purpose become available at a price per share
for each Remaining Redeemed Excess Share equal to the Redemption Price.
With respect to Initial Redeemed Excess Shares, the Corporation shall
deliver to each applicable Converting Series B Preferred Holder the
aggregate Redemption Price payable thereto hereunder with respect to the
Initial Redeemed Excess Shares held thereby within ten (10) Business Days
after such Converting Series B Preferred Holder has delivered to the
Corporation the original stock certificate(s) representing the applicable
Initial Redeemed Excess Shares (or a lost stock affidavit therefor
reasonably acceptable to the Corporation), duly endorsed for transfer or
accompanied by a stock power executed in blank. With respect to Remaining
Redeemed Excess Shares, (i) such shares shall be deemed for all purposes to
have been redeemed on and as of the date of the applicable Series B
Conversion, (ii) within seven (7) Business Days after funds become legally
available to purchase such Remaining Redeemed Excess Shares, the
Corporation shall give each applicable Converting Series B Holder written
notice to such effect, (iii) until such time as the accrued but unpaid
Redemption Price payable for or with respect to all Remaining Redeemed
Excess Shares has been paid in full, the Corporation shall be prohibited,
without the prior written consent of the former holders of Remaining
Redeemed Excess Shares who are owed a majority of the aggregate Redemption
Price then payable to all former holders of Remaining Redeemed Excess
Shares, from declaring or paying any cash dividends on or with respect to
the Corporation's outstanding capital stock, repurchasing any shares of
outstanding capital stock (except pursuant to Section 6(g) of this
Certificate of Designations and except repurchases from employees,
directors or consultants at cost pursuant to contracts approved by the
Board of Directors) or making any distribution with respect to its capital
stock and (iv) the Corporation shall deliver to each such Converting Series
B Preferred Holder the aggregate Redemption Price payable thereto hereunder
with respect to the applicable Remaining Redeemed Excess Shares held
thereby within ten (10) Business Days after the later of the date (1) such
Converting Series B Preferred Holder has delivered to the Corporation the
original stock certificate(s) representing such Remaining Redeemed Excess
Shares (or a lost stock affidavit therefor reasonably acceptable to the
Corporation) to the Corporation, duly endorsed for transfer or accompanied
by a stock power executed in blank and (2) the Corporation has funds
legally available for such purpose and has delivered an Excess Share
Redemption Notice to such Converting Series
12
B Holder with respect to such Remaining Redeemed Excess Shares in
accordance with this Certificate of Designations.
(iii) In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser's shares of Series B Preferred
Stock, the transferee shall be allocated a pro rata portion of such
Purchaser's Cap Allocation Amount. In the event that any holder of shares
of Series B Preferred Stock shall convert all of such holder's shares of
Series B Preferred Stock into a number of shares of Common Stock which, in
the aggregate, is less than such holder's Cap Allocation Amount, then the
difference between such holder's Cap Allocation Amount and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of shares of
Series B Preferred Stock on a pro rata basis in proportion to the number of
shares of Series B Preferred Stock then held by each such holder.
7. VOTING RIGHTS. (a) Except as otherwise provided by applicable law, the
holders of the shares of Series B Preferred Stock (i) shall be entitled to vote
with the holders of the Common Stock on all matters submitted for a vote of
holders of Common Stock, (ii) shall be entitled to a number of votes equal to
the number of votes to which shares of Common Stock issuable upon conversion of
such shares of Series B Preferred Stock would have been entitled if such shares
of Common Stock had been outstanding at the time of the applicable vote and
related record date and (iii) shall be entitled to notice of any stockholders'
meeting in accordance with the certificate of incorporation and bylaws of the
Corporation. Notwithstanding the foregoing, in the event that, at any time
before Stockholder Approval or an Opinion is obtained, the outstanding shares of
Series B Preferred Stock (on an as-converted to Common Stock basis), plus any
shares of Common Stock previously issued upon conversion of Series B Preferred
Stock, would represent greater than the number of votes that would be held by
the number of shares of Common Stock constituting the Exchange Cap, then for
voting purposes the number of votes per share of Series B Preferred Stock shall
be automatically reduced (with such reduction allocated pro rata among the
holders of Series B Preferred Stock based upon the aggregate number of shares of
Series B Preferred Stock then held) so that the outstanding shares of Series B
Preferred Stock (on an as-converted to Common Stock basis), plus any shares of
Common Stock previously issued upon conversion of Series B Preferred Stock,
represent the number of votes that would be held by the number of shares of
Common Stock constituting the Exchange Cap.
(b) The Corporation shall not, without first obtaining the
approval of the holders of not less than a majority of the total number of
shares of Series B Preferred Stock then outstanding, voting together as a single
class:
(i) offer, sell, authorize, designate or issue
shares of any class or series of Senior Securities or Parity Securities;
(ii) increase the number of shares of Series B
Preferred Stock authorized pursuant to this Certificate of Designations or
except pursuant to the Securities Purchase Agreement or the Warrants, issue
any shares of Series B Preferred Stock; or
13
(iii) amend, alter or repeal the Third Amended and
Restated Certificate of Incorporation, the Amended and Restated By-laws of
the Corporation, this Certificate of Designations (or any other certificate
of designations) or of any provision thereof (including the adoption of a
new provision thereof) which would result in an adverse change of the
voting powers, designation and preferences and relative participating,
optional and other special rights, and qualifications, limitations and
restrictions of the Series B Preferred Stock, excluding for the avoidance
of doubt, (A) any reverse stock split that applies equally to all classes
of capital stock of the Corporation or for which the Series B Preferred
Stock is entitled to anti-dilution protection pursuant to Section 6 hereof
and (B) any amendment from time to time of the Rights Plan or the
Certificate of Designations of the Series A Junior Preferred Stock
effectuated in order to (1) provide that (x) the issuance of, or the
agreement to issue, securities of the Corporation in connection with
certain acquisitions, mergers, consolidations or other similar transactions
of the Corporation or its subsidiaries do not trigger the rights and
obligations under the Rights Plan or (y) certain Person(s) receiving such
securities do not constitute a "Acquiring Person(s)" as defined in the
Rights Plan or (2) increase the number of authorized shares of Series A
Junior Preferred Stock in connection with, or as a result of, certain
acquisitions, mergers, consolidations or other similar transactions of the
Corporation or its subsidiaries (including, but not limited to, that
certain amendment to be filed on or after May 29, 2002 in order to increase
the number of authorized shares of Series A Junior Preferred Stock to
2,000,000); PROVIDED, HOWEVER, no such amendment will have the effect of
causing (i) a Purchaser to be an "Acquiring Person" because of the
acquisition of Series B Preferred Stock (including Series B Preferred Stock
underlying Warrants) (and the Common Stock into which such Series B
Preferred Stock is convertible), (ii) the acquisition of Series B Preferred
Stock (including Series B Preferred Stock underlying Warrants) (or the
Common Stock into which such Series B Preferred Stock is convertible) to
trigger a "Distribution Date" (as defined in the Rights Plan) or (iii) the
inclusion of the Series B Preferred Stock (including Series B Preferred
Stock underlying Warrants) (or the Common Stock into which such Series B
Preferred Stock is convertible) in the determination of whether a Purchaser
is an "Acquiring Person" under the Rights Agreement.
(c) The consent or votes required in Section 7(b) above
shall be in addition to any approval of stockholders of the Corporation which
may be required by law or pursuant to any provision of the Corporation's
Certificate of Incorporation or Amended and Restated Bylaws, which approval
shall be obtained by vote of the stockholders of the Corporation in the manner
provided in Section 7(a) above.
(d) Upon completion of the Initial Closing, the holders of
shares of Series B Preferred Stock, voting as a single class, shall be entitled
to elect at least one member of the Board of Directors who shall be nominated by
Oak and, in the event that the holders of a majority of the Series B Preferred
Stock issued at the Initial Closing elect to exercise such right, the number of
directors then constituting the Board of Directors shall be increased by one.
Upon completion of the Mandatory Closing, the holders of shares of Series B
Preferred Stock, voting as a single class, shall be entitled to elect up to two
members of the Board of Directors in the aggregate, each of whom shall be
nominated by Oak, and, in the event that the holders of a majority of the Series
B Preferred Stock issued at the Initial Closing and the Mandatory Closing,
14
collectively, elect to exercise such right, the number of directors then
constituting the Board of Directors shall be increased in order to provide for a
total of two additional Board seats. Whenever a majority of the shares of Series
B Preferred Stock issued at the Initial Closing and, the Mandatory Closing,
collectively, have been converted into Common Stock pursuant to this Certificate
of Designations or have been transferred by the initial holder thereof to a
Person that is not an Affiliate of the initial holders, then the right of the
holders of the Series B Preferred Stock to elect such additional director(s)
shall cease, and the term of office of any person elected as director by the
holders of the Series B Preferred Stock shall forthwith terminate and the number
of the Board of Directors shall be reduced accordingly.
8. REPORTS. The Corporation shall mail to all holders of Series B Preferred
Stock those reports, proxy statements and other materials that it mails to all
of its holders of Common Stock. In the event the Corporation is not required to
file quarterly and annual financial reports with the Securities and Exchange
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act, the
Corporation will furnish the holders of the Series B Preferred Stock with
reports containing the same information as would be required in such reports.
9. HEADINGS. The headings of the Sections, subsections, clauses and
subclauses of this Certificate of Designations are for convenience of reference
only and shall not define, limit or affect any of the provisions hereof.
15
IN WITNESS WHEREOF, divine, inc. has caused this Certificate of
Designations to be signed and attested by the undersigned this 29th day of May,
2002.
divine, inc.
By: /s/ Jude M. Sullivan
-------------------------------------
Name: Jude M. Sullivan
Title: Senior Vice President and
Secretary
16
Exhibit 4.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of May 29,
2002, by and among divine, inc, a Delaware corporation, with headquarters
located at 1301 North Elston Avenue, Chicago, Illinois 60622 (the "COMPANY"),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT"). (Unless otherwise indicated, capitalized terms used
in this Agreement shall have the meanings ascribed to such terms herein.)
B. The Company has authorized the following new series of its preferred
stock, par value $0.001 per share: the Company's Series B Convertible Preferred
Stock (the "PREFERRED STOCK"), which shall be convertible into shares of the
Company's Class A common stock, par value $0.001 per share (the "COMMON STOCK"),
in accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of the Preferred Stock, substantially in the form
attached hereto as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS").
C. Subject to the terms and conditions set forth in this Agreement, the
Buyers set forth under the heading "Initial Buyers" on the Schedule of Buyers
(the "INITIAL BUYERS") wish to purchase at the Initial Closing an aggregate of
up to 22,941 shares of the Preferred Stock (the "INITIAL PREFERRED SHARES" and,
as converted, the "INITIAL CONVERSION SHARES"), in the respective amounts set
forth opposite such Initial Buyer's name on the Schedule of Buyers, at a
purchase price per share of $1,000 (the "PURCHASE PRICE").
D. Subject to the terms and conditions set forth in this Agreement, the
Buyers set forth under the heading "Mandatory Buyers" on the Schedule of Buyers
(or, if consented to by the Company (which consent will not be unreasonably
withheld), an affiliate thereof) (the "MANDATORY BUYERS") will be required under
this Agreement to buy, and the Company will be required under this Agreement to
sell to the Mandatory Buyers, at the Mandatory Closing, for a purchase price per
share of Mandatory Preferred Share and related Warrant equal to the Purchase
Price, (I) that number of shares of Preferred Stock determined in accordance
with Section 1(a) hereof (the "MANDATORY PREFERRED SHARES" and, as converted,
the "MANDATORY CONVERSION SHARES"), and (II) warrants, substantially in the form
attached hereto as EXHIBIT B (the "WARRANTS"), to acquire a number of shares
(rounded up to the nearest whole share) of Preferred Stock (as exercised,
collectively, the "WARRANT PREFERRED SHARES") equal to 25% of the number of
Mandatory Preferred Shares being purchased by each such Mandatory Buyer at the
Mandatory Closing (as such Warrant Preferred Shares are converted, collectively,
the "WARRANT COMMON SHARES").
E. Contemporaneously with the execution and delivery of this Agreement,
the Company, the Initial Buyers (other than the Follow-On Initial Buyers) and
the Mandatory Buyers
(other than the Follow-On Mandatory Buyers) are executing and delivering a
Registration Rights Agreement substantially in the form attached hereto as
EXHIBIT C (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company
has agreed to provide certain registration rights under the 1933 Act and the
rules and regulations promulgated thereunder, and applicable state securities
laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS.
a. PURCHASE OF PREFERRED SHARES. Subject to the terms and
conditions of this Agreement, including, without limitation, the satisfaction
(or waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the
Company shall issue and sell to each Initial Buyer, and each Initial Buyer
severally agrees to purchase from the Company, at a purchase price per share
equal to the Purchase Price, the respective number of Initial Preferred Shares
set forth opposite such Initial Buyer's name on the Schedule of Buyers (the
"INITIAL CLOSING"). Subject to the terms and conditions of this Agreement,
including, without limitation, the satisfaction (or waiver) of the conditions
set forth in Sections 1(c), 6(b) and 7(b), each Mandatory Buyer shall purchase,
and the Company shall issue and sell to each Mandatory Buyer, for a purchase
price per share of Mandatory Preferred Share and related Warrant equal to the
Purchase Price, (i) the respective number of Mandatory Preferred Shares equal to
the aggregate dollar amount payable by each such Mandatory Buyer as set forth
opposite such Mandatory Buyer's name in the appropriate column on the Schedule
of Buyers, DIVIDED BY the Purchase Price (the "MANDATORY CLOSING"), and (ii) the
related Warrants to acquire a number of Warrant Preferred Shares (rounded up to
the nearest whole share) equal to 25% of the number of Mandatory Preferred
Shares being purchased by such Mandatory Buyer at the Mandatory Closing;
provided, however, that, subject to the terms and conditions of this Agreement,
including, without limitation, the satisfaction (or waiver) of the conditions
set forth in Section 7(b) below, Oak Investment Partners X, Limited Partnership
and Oak X Affiliates Fund, Limited Partnership (collectively, "OAK") and/or
affiliates of Oak (the "OAK AFFILIATES" and, together with Oak, the "OAK FUNDS")
shall purchase at the Mandatory Closing an aggregate number of Mandatory
Preferred Shares (and the related Warrants) equal to the quotient of (i)
$60,000,000, MINUS the aggregate Purchase Price paid by the Oak Funds for
Initial Preferred Shares purchased by the Oak Funds at the Initial Closing,
(including, but not limited to, any Initial Preferred Shares purchased pursuant
to the Initial Closing True Up Amount) DIVIDED BY (ii) the Purchase Price. (The
Initial Closing and the Mandatory Closing collectively are referred to in this
Agreement as the "CLOSINGS"). The Initial Preferred Shares, the Mandatory
Preferred Shares and the Warrant Preferred Shares collectively are referred to
in this Agreement as the "PREFERRED SHARES" and the Initial Conversion Shares,
the Mandatory Conversion Shares and the Warrant Common Shares collectively are
referred to in this Agreement as the "CONVERSION SHARES". "BUSINESS DAYS" means
any day other than Saturday, Sunday or other day on which commercial banks in
the City of New York are authorized or required by law to remain closed.
b. THE INITIAL CLOSING DATE. The date and time of the Initial
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time on a
Business Day within two (2)
2
Business Days following the date hereof, subject to the satisfaction (or waiver)
of the conditions to the Initial Closing set forth in Sections 6(a) and 7(a) (or
such later date as is mutually agreed to by the Company and Oak). With the
exception of Oak, the Initial Buyers may execute and deliver to the Company a
signature page to this Agreement and pay to the Company the aggregate Purchase
Price payable for the Initial Preferred Shares which such Initial Buyer has
agreed to purchase under and in accordance with this Agreement (those Initial
Buyers that so execute a signature page to this Agreement after the date hereof
in accordance herewith are referred to in this Agreement collectively as the
"FOLLOW-ON INITIAL BUYERS") at any time prior to June 7, 2002 (the "INITIAL
CLOSING DEADLINE DATE"); provided, however, notwithstanding anything in this
Agreement to the contrary, if any such Follow-On Initial Buyer has not executed
and delivered to the Company a signature page to this Agreement, or paid the
aggregate Purchase Price payable thereby hereunder with respect to its
respective Initial Preferred Shares, on or prior to the Initial Closing Deadline
Date, such Follow-On Initial Buyer shall have no further right to purchase
Initial Preferred Shares under this Agreement; provided further, that,
notwithstanding anything in this Agreement to the contrary, Oak shall also pay
to the Company on the Initial Closing Deadline Date an amount equal to
$22,941,000.00, minus the aggregate Purchase Price received by the Company on or
prior to such Initial Closing Deadline Date from all Initial Buyers (including,
without limitation, Oak and the Follow-On Initial Buyers) (the "INITIAL CLOSING
TRUE UP AMOUNT"), and the Company shall issue and sell to Oak as of the Initial
Closing Date an aggregate number of Initial Preferred Shares equal to the
Initial Closing True Up Amount, DIVIDED BY the Purchase Price. The Initial
Closing shall occur on the Initial Closing Date at the offices of Katten Muchin
Zavis Rosenman, 525 West Monroe Street, Suite 1600, Chicago, Illinois
60661-3693. The parties hereto agree that for purposes of this Agreement, the
Transaction Documents and any other certificates, documents or agreements
entered into or delivered in connection with the transactions contemplated
hereby, with respect to the Follow-On Initial Buyers, the closing date for the
purchase of the Initial Preferred Shares purchased thereby hereunder shall be
deemed to be the Initial Closing Date.
c. THE MANDATORY CLOSING DATE. The date and time of the
Mandatory Closing (the "MANDATORY CLOSING DATE") shall be 10:00 a.m. Central
Time, within five (5) Business Days after the date of the stockholder meeting
referred to in Section 4(k) at which Stockholder Approval is obtained and
following the date of the receipt by each Buyer of the Mandatory Share Notice,
subject to satisfaction (or waiver) of the conditions to the Mandatory Closing
set forth in Sections 6(b) and 7(b) and the conditions set forth in this Section
1(c) (or such later date as is mutually agreed to by the Company and Oak). With
the exception of Oak, the Mandatory Buyers may execute and deliver to the
Company a signature page to this Agreement (those Mandatory Buyers that execute
and deliver to the Company a signature page to this Agreement after the date
hereof in accordance herewith are referred to in this Agreement collectively as
the "FOLLOW-ON MANDATORY BUYERS") at any time prior to June 7, 2002 (the
"MANDATORY CLOSING EXECUTION DATE"); provided, however, notwithstanding anything
in this Agreement to the contrary, if any such Follow-On Mandatory Buyer has not
executed and delivered to the Company a signature page to this Agreement by the
Mandatory Closing Execution Deadline, such Follow-On Mandatory Buyer shall have
no further right to purchase Mandatory Preferred Shares or Warrants under this
Agreement. The Company shall deliver written notice (the "MANDATORY SHARE
NOTICE") to each Buyer on a date (the "MANDATORY SHARE NOTICE DATE") as soon as
commercially reasonable after the Company has received the approval of the
Company's stockholders pursuant to Section 4(k), but in no event later than
3
July 31, 2002; provided that Oak may agree to an extension of such date by
providing written notice to the Company and the other Buyers of its decision to
extend such date, in which case Oak's right to terminate the parties'
obligations with respect to the Mandatory Closing under Section 8(l) of this
Agreement shall automatically be modified to a date seven (7) days after such
agreed upon extended date. The Mandatory Share Notice shall set forth (i) the
aggregate number of Mandatory Preferred Shares which such Mandatory Buyer is
required to purchase at such Mandatory Closing, (ii) the number of related
Warrant Preferred Shares subject to warrant which such Mandatory Buyer is
required to purchase at such Mandatory Closing, (iii) such Mandatory Buyer's
aggregate Purchase Price for the Mandatory Preferred Shares and the related
Warrants and (iv) the date of the Mandatory Closing Date, which shall in no
event be later than the fifth (5th) Business Day after the date of the
stockholder meeting referred to in Section 4(k) at which the Stockholder
Approval is obtained (or such later date as is mutually agreed to by the Company
and Oak). Notwithstanding the foregoing, the Company shall not be entitled to
deliver a Mandatory Share Notice unless, prior to the Mandatory Closing Date,
the Company has received the Stockholder Approval to issue the Conversion Shares
upon conversion of the Preferred Shares in excess of the Exchange Cap (as
defined in the Certificate of Designation).
d. FORM OF PAYMENT. On each of the Closing Dates, (i) each
Buyer shall pay the Purchase Price to the Company for the Preferred Shares and,
in the case of the Mandatory Closing, the related Warrants to be issued and sold
to such Buyer at such Closing, by wire transfer of immediately available funds
in accordance with the Company's written wire instructions, less any amount
withheld for expenses of Oak pursuant to Section 4(h), and (ii) the Company
shall deliver to each Buyer, stock certificates (in the denominations as such
Buyer shall request) (the "PREFERRED STOCK CERTIFICATES") representing such
number of the Preferred Shares which such Buyer is then purchasing hereunder
along with warrants representing the related Warrants, if applicable, duly
executed on behalf of the Company and registered in the name of such Buyer or
its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself
that:
a. INVESTMENT PURPOSE. Such Buyer (i) is acquiring the
Preferred Shares and the Warrants, (ii) upon conversion of the Preferred Shares,
will acquire the Conversion Shares then issuable upon conversion thereof and
(iii) upon exercise of the Warrants, will acquire the Warrant Preferred Shares
issuable upon exercise thereof (the Preferred Shares, the Conversion Shares and
the Warrants collectively are referred to herein as the "SECURITIES"), for its
own account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.
b. ACCREDITED INVESTOR STATUS. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D and a
"qualified institutional buyer" as that term is defined in Rule 144A promulgated
under the 1933 Act.
4
c. RELIANCE ON EXEMPTIONS. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of the United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
such Buyer to acquire the Securities.
d. INFORMATION. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Sections 3 and 8(m) below. Such Buyer understands that its investment in the
Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.
e. NO GOVERNMENTAL REVIEW. Such Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the Securities
or the fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. TRANSFER OR RESALE. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel (or such other evidence reasonably acceptable to
the Company), in a generally acceptable form, to the effect that such Securities
to be sold, assigned or transferred may be sold, assigned or transferred
pursuant to an exemption from such registration, or (C) such Buyer provides the
Company with reasonable assurance that such Securities can be sold, assigned or
transferred pursuant to Rule 144 promulgated under the 1933 Act, as amended, (or
a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register the Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder.
g. LEGENDS. Such Buyer understands that the certificates or
other instruments representing the Preferred Shares and the Warrants and, until
such time as the sale of the Conversion Shares have been registered under the
1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares, except
5
as set forth below, shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II)
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that the
Securities can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold. Such Buyer acknowledges, covenants and agrees to sell the
Securities represented by a certificate(s) from which the legend has been
removed, only pursuant to (i) a registration statement effective under the 1933
Act or (ii) advice of counsel that such sale is exempt from the registration
requirements of Section 5 of the 1933 Act, including, without limitation, a
transaction pursuant to Rule 144.
h. AUTHORIZATION; ENFORCEMENT; VALIDITY. This Agreement and
the Registration Rights Agreement have been duly and validly authorized,
executed and delivered on behalf of such Buyer and are valid and binding
agreements of such Buyer enforceable against such Buyer in accordance with their
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. RESIDENCY. Such Buyer is a resident of that jurisdiction
specified in its address on the Schedule of Buyers.
6
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that
except to the extent (i) disclosed with reasonable specificity on the schedules
to this Agreement, with respect to Sections 3(b), (e) and (o) and, (ii) with
respect to all other subsections in this Section 3, disclosed with reasonable
specificity on the schedules to this Agreement or the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 and Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 (the "2002 Filings") filed by the
Company (other than (x) those Sections of the 2002 Filings entitled or captioned
"Risk Factors" and (y) disclosures in those documents which are filed as
exhibits to, or incorporated by reference in, such 2002 Filings):
a. ORGANIZATION AND QUALIFICATION. The Company and its
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns fifty percent (50%) or more of the
outstanding voting securities) are corporations duly organized and validly
existing in good standing under the laws of the jurisdiction in which they are
incorporated, and have the requisite corporate power and authorization to own
their properties and to carry on their business as now being conducted. Each of
the Company and its Subsidiaries is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which its ownership
of property or the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse
effect on the business, properties, assets, operations, prospects, results of
operations or financial condition of the Company and its Subsidiaries, if any,
taken as a whole, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents or the Certificate of Designations.
The Company has no Subsidiaries except as set forth on SCHEDULE 3(a).
b. AUTHORIZATION; ENFORCEMENT; VALIDITY. The Company has the
requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions, the Warrants and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), to execute and file the Certificate of Designations, and to issue
the Securities in accordance with the terms hereof and thereof. The execution
and delivery of the Transaction Documents by the Company and the execution and
filing of the Certificate of Designations by the Company and the consummation by
it of the transactions contemplated hereby and thereby, including without
limitation the issuance of the Preferred Shares and the Warrants and the
reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion of the Preferred Shares, have been duly authorized by the Company's
Board of Directors and no further consent or authorization is required by the
Company, its Board of Directors or its stockholders (except such stockholder
approval as may be required by The Nasdaq Stock Market, Inc. for the issuance of
a number of shares of Common Stock which is greater than or equal to 20% of the
number of shares outstanding on the date of this Agreement). The Transaction
Documents have been duly executed and delivered by the Company. The Transaction
Documents constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their
7
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally, the enforcement of creditors' rights and remedies. The
Certificate of Designations has been filed prior to the Initial Closing Date
with the Secretary of State of the State of Delaware and will be in full force
and effect, enforceable against the Company in accordance with its terms and
shall not have been amended unless in compliance with its terms.
c. CAPITALIZATION. As of the date hereof, the authorized
capital stock of the Company consists of (i) 2,650,000,000 shares of Common
Stock, of which as of May 24, 2002, 477,952,161 shares (before giving effect to
the reverse stock split of the Common Stock effective at 12:01 a.m. on May 29,
2002) are issued and outstanding, (ii) 100,000,000 shares of the Company's Class
C common stock, par value $0.001 per share, none of which are issued and
outstanding as of the date hereof, and (iii) 50,000,000 shares of Preferred
Stock, of which as of the date hereof 500,000 shares have been designated as
Series A Junior Participating Preferred Stock (the "PARTICIPATING PREFERRED
STOCK"). As of the date hereof, no shares of Preferred Stock or Participating
Preferred Stock are issued and outstanding. All of such outstanding or issuable
shares have been, or upon issuance will be, validly issued and are fully paid
and nonassessable. Except as set forth in those documents listed on SCHEDULE
3(c) and except for (y) the rights to purchase the Participating Preferred Stock
pursuant to the Rights Plan and (z) options to purchase 62,712,899 shares
(before giving effect to the reverse stock split of the Common Stock effective
at 12:01 a.m. on May 29, 2002) of Common Stock issued pursuant to the Company's
1999 Stock Option Plan, options to purchase 26,914,142 shares (before giving
effect to the reverse stock split of the Common Stock effective at 12:01 a.m. on
May 29, 2002) of Common Stock issued pursuant to the Company's 2001 Stock Option
Plan and 1,342,613 shares (before giving effect to the reverse stock split of
the Common Stock effective at 12:01 a.m. on May 29, 2002) of Common Stock
reserved for issuance pursuant to the Company's 2000 Employee Stock Purchase
Plan, (A) no shares of the Company's capital stock are subject to preemptive
rights or any other similar rights; (B) there are no outstanding debt
instruments issued by the Company; (C) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exercisable
for, any shares of capital stock of the Company or any of its Subsidiaries, or
contracts, commitments, understandings or arrangements by which the Company or
any of its Subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its Subsidiaries or options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exercisable for, any
shares of capital stock of the Company or any of its Subsidiaries; (D) there are
no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries; (E) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities as described in this Agreement; and (F) the Company
does not have any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement. The Company has furnished to each
Buyer true and correct copies of the Company's Certificate of Incorporation, as
amended and as in effect on the date hereof (the "CERTIFICATE OF
INCORPORATION"), and the Company's Amended and Restated Bylaws, as amended and
as in effect on the date hereof (the "BYLAWS"), and the terms of all securities
convertible into, or
8
exercisable or exchangeable for, Common Stock and the material rights of the
holders thereof in respect thereto. Except for the Certificate of Designations,
Preferences and Rights of Series A Junior Participating Preferred Stock, the
Company does not have any certificate of designations in effect as of the date
hereof.
d. ISSUANCE OF SECURITIES. The Preferred Shares are duly
authorized and, upon issuance in accordance with the terms hereof and the
Warrants, shall be (i) validly issued, fully paid and non-assessable, (ii) free
from all taxes, liens and charges with respect to the issuance thereof and (iii)
entitled to the rights and preferences set forth in the Certificate of
Designations. 13,000,000 shares of Common Stock (subject to adjustment pursuant
to the Company's covenant set forth in Section 4(f) below) have been duly
authorized and reserved for issuance upon conversion of the Preferred Shares.
Upon conversion in accordance with the Certificate of Designations, the
Conversion Shares will be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock.
Subject to accuracy of the representations set forth in Section 2, the issuance
by the Company of the Securities is exempt from registration under the 1933 Act.
e. NO CONFLICTS. Except as set forth on SCHEDULE 3(e), the
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares) (either individually or
together with the execution, delivery and performance of the Viant Merger
Agreement and the Delano Merger Agreement (as such terms are defined in Section
3(w))) will not (i) result in a violation of the Certificate of Incorporation,
any Certificate of Designations, Preferences and Rights of any outstanding
series of preferred stock of the Company or the Bylaws; (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument (including, without limitation, any stock option, employee stock
purchase or similar plan or any employment or similar agreement) to which the
Company or any of its Subsidiaries is a party (including, without limitation,
triggering the application of any change of control or similar provision
(whether "single trigger" or "double trigger")); or (iii) result in a violation
of any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the
Principal Market) applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected. Neither the Company nor its Subsidiaries is in violation of any
term of its Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or Bylaws or their organizational charter or bylaws, respectively.
Except as set forth on SCHEDULE 3(e), neither the Company or any of its
Subsidiaries is in violation of any term of or in default under any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries, except where such violations and defaults would not result, either
individually or in the aggregate, in a Material Adverse Effect. The business of
the Company and its Subsidiaries is not being conducted, and shall not be
conducted, in violation of any law, ordinance or regulation of any governmental
entity, except where such violations
9
would not result, either individually or in the aggregate, in a Material Adverse
Effect. Except (A) for compliance with the HSR Act or as specifically
contemplated by this Agreement, (B) as required under the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 ACT") and the rules and
regulations promulgated thereby and the Nasdaq National Market or (C) as may be
required by any applicable state securities laws, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or
self-regulatory agency in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents or to perform its
obligations under the Certificate of Designations, in each case in accordance
with the terms hereof or thereof. Except as set forth on SCHEDULE 3(e), all
consents, authorizations, orders, filings and registrations which the Company is
required to obtain as described in the preceding sentence shall have been
obtained or effected on or prior to the Initial Closing Date. Except as set
forth on SCHEDULE 3(e), the Company is not in violation of the listing
requirements of the Principal Market.
f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31,
2001, the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act (all of the foregoing (including all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein) and all forms, documents and instruments
filed by the Company with the SEC pursuant to the 1933 Act (including all
exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein) being hereinafter referred to as
the "SEC DOCUMENTS"). As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the 1933 Act or 1934 Act and
the rules and regulations of the SEC promulgated thereunder applicable to the
SEC Documents. None of the SEC Documents, at the time they were filed with the
SEC, 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. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with U.S. generally accepted accounting principles ("GAAP") and the
published rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with GAAP, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements or as otherwise may be permitted by the SEC on Form 10-Q
under the 1934 Act) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). As of the date of
this Agreement, the Company meets the requirements for use of Form S-3 for
registration of the resale of Registrable Securities (as defined in the
Registration Rights Agreement).
g. ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE
3(g), since December 31, 2001 there has been no material adverse change and no
material adverse development in the business, properties, assets, operations,
prospects, results of operations or financial conditions of the Company or its
Subsidiaries. The Company has not taken any steps,
10
and does not currently expect to take any steps, to seek protection pursuant to
any bankruptcy law.
h. ABSENCE OF LITIGATION. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company, the Common Stock or any of the Subsidiaries, except where
any of the foregoing would not result, either individually or in the aggregate,
in a Material Adverse Effect and except as set forth on SCHEDULE 3(h).
i. ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF PREFERRED
SHARES. The Company acknowledges and agrees that each of the Buyers is acting
solely in the capacity of an arm's length purchaser with respect to the Company
in connection with the Transaction Documents and the Certificate of Designations
and the transactions contemplated hereby and thereby. The Company further
acknowledges that each Buyer is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction
Documents and the Certificate of Designations and the transactions contemplated
hereby and thereby and any advice given by any of the Buyers or any of their
respective representatives or agents in connection with the Transaction
Documents and the Certificate of Designations and the transactions contemplated
hereby and thereby is merely incidental to such Buyer's purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
j. NO GENERAL SOLICITATION. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
k. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated, nor will
the Company or any of its Subsidiaries take any action or steps that would
require registration of any of the Securities under the 1933 Act or cause the
offering of the Securities to be integrated with other offerings.
l. EMPLOYEE RELATIONS. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. Except as
set forth on SCHEDULE 3(l), none of the Company's or its Subsidiaries' employees
is a member of a union which relates to such employee's relationship with the
Company, neither the Company nor any of its Subsidiaries is a party to a
collective bargaining agreement.
11
m. INTELLECTUAL PROPERTY RIGHTS. The Company and its
Subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and other intellectual property rights necessary
to conduct their respective businesses as now conducted, except where the
failure to own or possess such rights would not result, either individually or
in the aggregate, in a Material Adverse Effect. Except as set forth on SCHEDULE
3(m)(i), the Company and its Subsidiaries own or possess adequate rights or
licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and other
intellectual property rights necessary to conduct their respective businesses as
now, or as contemplated to be, conducted, except where the failure to own or
possess such rights would not result, either individually or in the aggregate,
in a Material Adverse Effect. There is no infringement by the Company or its
Subsidiaries of trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, trade secrets or other intellectual property rights of others, or of
any development of similar or identical trade secrets or technical information
by others and, except as set forth on SCHEDULE 3(m)(ii), there is no claim,
action or proceeding being made or brought against, the Company or its
Subsidiaries regarding its trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, trade secrets, or infringement of other intellectual property rights,
except where any of the foregoing would not result, either individually or in
the aggregate, in a Material Adverse Effect. The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties.
n. ENVIRONMENTAL LAWS. The Company and its Subsidiaries (i)
are in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where, in each of the
three foregoing cases, the failure to so comply would not result, either
individually or in the aggregate, in a Material Adverse Effect.
o. TITLE. The Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except (i) such as are set forth on SCHEDULE 3(o), (ii)
such as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company and
any of its Subsidiaries, (iii) such liens or encumbrances against any landlord's
or owner's interest in any leased property or (iv) for taxes not yet due and
payable. Any real property and facilities held under lease by the Company and
any of its Subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and facilities by the Company
and its Subsidiaries.
12
p. INSURANCE. The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged.
q. REGULATORY PERMITS. Except the absence of which would not
result, either individually or in the aggregate, in a Materially Adverse Effect,
the Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
r. INTERNAL ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability and (iii) access to assets or incurrence of
liability is permitted only in accordance with management's general or specific
authorization.
s. TAX STATUS. Except as set forth on SCHEDULE 3(s), the
Company and each of its Subsidiaries (i) has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes), (ii)
other than taxes that in an aggregate amount would not be material (and the
nonpayment of which would not have a Material Adverse Effect), has paid all
taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and for which the Company has made
appropriate reserves for on its books, and (iii) other than accruals for taxes
in an aggregate amount that would not be material (and the nonpayment of which
would not have a Material Adverse Effect), has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations (referred to in clause
(i) above) apply. There are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction.
t. TRANSACTIONS WITH AFFILIATES. Except as set forth on
SCHEDULE 3(t) and in the SEC Documents filed with the SEC prior to the date of
this Agreement, and other than the grant of stock options issued under the
Company's 1999 Stock Option Plan or 2001 Stock Option Plan, as of the date
hereof, none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any such officer, director or employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.
13
u. APPLICATION OF TAKEOVER PROTECTIONS. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the state of its incorporation which is or could become applicable to the Buyers
as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company's issuance of the Securities and the Buyers'
ownership of the Securities.
v. RIGHTS AGREEMENT. The Company has amended the Rights
Agreement between the Company and Computershare Investor Services, LLC, as
Rights Agent (the "Rights Plan"), to ensure that (i) none of the Buyers is
intended to be or will be deemed to be an Acquiring Person within the meaning of
the Rights Plan because of the acquisition of the Securities (including the
Conversion Shares and the Warrant Preferred Shares) pursuant to this Agreement,
(ii) the acquisition of the Securities (including the Conversion Shares and the
Warrant Preferred Shares) pursuant to this Agreement, shall not, under any
circumstances, trigger a Distribution Date within the meaning of the Rights Plan
and (iii) the Securities (including the Conversion Shares and the Warrant
Preferred Shares) will not be included in determining whether any Buyer is an
Acquiring Person within the meaning of the Rights Plan; provided, however, that
only Securities (including the Conversion Shares and the Warrant Shares)
acquired pursuant to this Agreement shall be deemed excluded from the number of
shares of Common Stock deemed beneficially owned by each Buyer in determining
whether such Buyer is an Acquiring Person within the meaning of the Rights Plan.
w. RECENT DEVELOPMENTS. The Company has delivered to Oak true
and correct copies of (i) the Agreement and Plan of Merger and Reorganization,
dated as of April 5, 2002, by and between the Company, DVC Acquisition Company,
a wholly-owned subsidiary of the Company, and Viant Corporation, as in effect on
the date hereof (the "VIANT MERGER AGREEMENT"), and the schedules to the Viant
Merger Agreement, and (ii) the Combination Agreement, dated as of March 12,
2002, by and between the Company and Delano Technology Corporation, as in effect
on the date hereof (the "DELANO MERGER AGREEMENT"), and the schedules to the
Delano Merger Agreement. To the knowledge of the Company, as of the date hereof,
there are no material breaches by Viant Corporation or Delano Technology
Corporation of any of their respective representations or warranties under the
Viant Merger Agreement or Delano Merger Agreement, as the case may be.
x. INVESTMENT COMPANY. The Company is not, and after giving
effect to the offering and sale of the Securities hereunder and the application
of the proceeds thereof as described in this Agreement will not be, an
"investment company" as such term is defined in the Investment Company Act of
1940, as amended.
y. FULL DISCLOSURE. No representation or warranty of the
Company in this Agreement omits to state a material fact necessary to make the
statements herein, in light of the circumstances in which they were made, not
misleading.
4. COVENANTS.
14
a. BEST EFFORTS. Subject to any party's right to terminate
this Agreement pursuant to Section 8, each party shall use its best efforts to
timely satisfy each of the conditions to be satisfied by it as provided in
Section 6 (in the case of the Buyers) and Section 7 (in the case of the Company)
of this Agreement; provided, however, nothing in this Section 4(a) shall be
deemed to require the Mandatory Closing Buyers to purchase Mandatory Preferred
Shares unless and until the conditions set forth in Section 7(b) are satisfied
or waived.
b. FORM D AND BLUE SKY. The Company agrees to file a Form D
with respect to the Securities as required under Regulation D. The Company
shall, on or before each of the Closing Dates, take such action as the Company
shall reasonably determine is necessary in order to obtain an exemption for or
to qualify the Securities for sale to the Buyers at each of the Closings
pursuant to this Agreement under applicable securities or "Blue Sky" laws of the
states of the United States, and shall provide evidence of any such action so
taken to the Buyers on or prior to the Closing Dates. The Company shall make all
filings and reports relating to the offer and sale of the Securities to the
Buyers required under applicable securities or "Blue Sky" laws of the states of
the United States following each of the Closing Dates.
c. REPORTING STATUS. Until the earlier of (i) the date which
is one year after the date as of which all of the Investors (as that term is
defined in the Registration Rights Agreement) (or permitted transferees thereof)
may sell the Conversion Shares pursuant to Rule 144 promulgated under the 1933
Act (or successor thereto) or (ii) three (3) years from the date hereof (the
"REPORTING PERIOD"), the Company shall file all reports required to be filed
with the SEC pursuant to the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would otherwise permit such
termination, other than as the result of a merger or consolidation or sale or
transfer of all or substantially all of the Company's assets where the Company
is in compliance with Section 4(l) of this Agreement.
d. USE OF PROCEEDS. The Company will use the proceeds from the
sale of the Preferred Shares for general working capital.
e. FINANCIAL INFORMATION. The Company agrees to send the
following to each Buyer during the Reporting Period: (i) unless the following
are filed with the SEC through EDGAR and are available to the public through
EDGAR, within two (2) days after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act; and (ii) on the same day as the
release thereof copies of any notices and other information made available or
given to the stockholders of the Company generally, contemporaneously with the
making available or giving thereof to the stockholders.
f. RESERVATION OF SHARES. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 100% of the number of shares of Common Stock needed to
provide for the issuance of the shares of Common Stock upon conversion of all
outstanding Preferred Shares and all Warrant Preferred Shares issuable upon
exercise of all outstanding Warrants.
15
g. LISTING. The Company shall use its best efforts to maintain
the Common Stock's authorization for quotation on the Nasdaq National Market
(the "PRINCIPAL MARKET") or to obtain and maintain a listing on The American
Stock Exchange, Inc. (as applicable, the "PRINCIPAL MARKET"). The Company shall
pay all fees and expenses in connection with satisfying its obligations under
this Section 4(g).
h. EXPENSES. At the applicable Closing, the Company shall
reimburse Oak for Oak's reasonable legal fees and expenses actually incurred of
one counsel in due diligence and negotiating and preparing the Transaction
Documents and consummating the transactions contemplated thereby up to an
aggregate of $75,000 for all payments pursuant to this sentence and which amount
may be withheld by such Buyer from its Purchase Price to be paid at the
applicable Closing. The Company will pay all other expenses of the Company
associated with the transactions contemplated by this Agreement, including,
without limitation, fees and expenses associated with any filings or other
actions necessary under the HSR Act (as defined in Section 6(a)).
i. FILING OF FORM 8-K. On or before the first (1st) Business
Day following the Initial Closing Date the Company shall file a Form 8-K with
the SEC (the "INITIAL 8-K") describing the terms of the transactions
contemplated by the Transaction Documents and including as exhibits to such Form
8-K this Agreement, the Certificate of Designations, the Registration Rights
Agreement and the Form of Warrant, in the form required by the 1934 Act. The
Company shall file a press release or other announcement of this Agreement or
the transactions contemplated hereby concurrently with the filing of the Initial
8-K with the SEC. On or before the first (1st) Business Day following the
Mandatory Closing Date, the Company shall file a Form 8-K with the SEC
describing the transaction consummated or proposed on such date.
j. TRANSACTIONS WITH AFFILIATES. So long as any Preferred
Shares or Warrants are outstanding, the Company shall not, and shall cause each
of its Subsidiaries not to, enter into, amend, modify or supplement any
agreement, transaction, commitment or arrangement with any of its or any
Subsidiary's officers, directors, persons who were officers or directors at any
time during the previous two years, stockholders who beneficially own 5% or more
of the Common Stock, or affiliates of the Company or its Subsidiaries or with
any entity in which any such entity or individual owns a 5% or more beneficial
interest (each a "RELATED PARTY"), except for (a) customary employment
arrangements and benefit programs on reasonable terms, (b) any agreement,
transaction, commitment or arrangement on an arms-length basis on terms no less
favorable than terms which would have been obtainable from a person other than
such Related Party, (c) any agreement, transaction, commitment or arrangement
which is approved by a majority of the disinterested directors of the Company,
or (d) except as set forth on SCHEDULE 4(j). For purposes hereof, any director
who is also an officer of the Company or any Subsidiary shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "AFFILIATE" for purposes hereof means, with respect
to any person or entity, another person or entity that, directly or indirectly,
(i) has a 5% or more equity interest in that person or entity, (ii) has 5% or
more common ownership with that person or entity, (iii) controls that person or
entity, or (iv) shares common control with that person or entity. "CONTROL" or
"CONTROLS" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
16
k. PROXY STATEMENT. The Company shall provide each stockholder
entitled to vote at the next meeting of stockholders of the Company, which the
Company shall cause to occur as soon as commercially reasonable after the
Initial Closing Date, but in any event on or before July 31, 2002 (the
"STOCKHOLDER MEETING DEADLINE"), a proxy statement, which has been previously
reviewed by Oak and a counsel of their choice (and with respect to which the
Company has used its best efforts to accept the comments of such Buyers and
counsel), soliciting each such stockholder's affirmative vote at such
stockholder meeting for approval of the Company's issuance of Conversion Shares
in excess of the Exchange Cap (as defined in the Certificate of Designations) in
accordance with applicable law and the rules and regulations of the Principal
Market (such affirmative approval being referred to herein as the "STOCKHOLDER
APPROVAL"), and the Company shall solicit its stockholders' approval of such
issuance of the Securities. Such solicitation shall include the recommendation
of the Board of Directors in favor of Stockholder Approval, unless the Board of
Directors determines in good faith after consultation with counsel to the
Company that making such recommendation would be inconsistent with the Board of
Directors' fiduciary duties under applicable law, in which case, the Company
shall submit such matter to the Company's stockholders without such
recommendation. The Company shall promptly notify the Buyers of any comments by
the SEC on such proxy statement and shall provide the Buyers with a copy of such
comments. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(g) and reimburse the Buyers for
the fees and expenses of one counsel to the Buyers in connection with such
counsel's review of the proxy statement referred in the first sentence of this
Section 4(k).
l. CORPORATE EXISTENCE. So long as any Buyer beneficially owns
any Preferred Shares or Warrants, the Company shall maintain its corporate
existence and shall not sell all or substantially all of the Company's assets,
(x) except in the event of a merger or consolidation or sale or transfer of all
or substantially all of the Company's assets, where the surviving or successor
entity in such transaction (i) assumes the Company's obligations hereunder and
under the agreements and instruments entered into in connection herewith and
(ii) is a publicly traded corporation whose common stock is quoted on or listed
for trading on the Nasdaq National Market, the Nasdaq SmallCap Market, The
American Stock Exchange, Inc. or The New York Stock Exchange, Inc. and (y) the
Company complies with Section 5 of the Certificate of Designations (if
applicable).
m. LOCK-UP AGREEMENT. Each of the Buyers, severally and not
jointly, hereby agrees that from the date hereof until the date which is one
year after the Initial Closing Date, such Buyer will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, any of the
Securities (collectively, the "RESTRICTED SECURITIES"), enter into a transaction
that would have the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Restricted Securities, whether any such
aforementioned transaction is to be settled by delivery of the Restricted
Securities or other securities, in cash or otherwise, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of the Company. The foregoing sentence (i) shall not apply (A)
to dispositions to the Company pursuant to the net exercise provisions of the
Warrant, (B) to transactions relating to the Restricted Securities acquired by
the such Buyer (I) prior to the execution of this Agreement or (II) in the open
market after the date of this Agreement, or (C) with respect to transfers to
family
17
members, Affiliates, partners, members, former partners or members or
shareholders of such Buyer in private transactions in which the transferee
agrees to be bound by the provisions of this Section 4(m) as if such transferee
were a Buyer and (ii) shall expire, for each Buyer, in its entirety (y)
immediately before the acquisition of the Company by another person or entity,
whether by merger, asset sale or otherwise and (z) immediately (I) upon the
breach by the Company of any material obligation to the Buyers in the
Transaction Documents or the Certificate of Designations, unless such breach is
capable of being and is cured within ten (10) Business Days of written notice to
the Company of such breach from the Buyers, (II) upon the failure to elect
either Oak nominee to the Board of Directors of the Company in accordance with
Section 7(d) of the Certificate of Designations (if Oak has exercised its right
to elect such director), (III) upon Oak reasonably concluding that any
representation or warranty set forth in Section 3 was materially untrue when
made, and such breach has had or is reasonably likely to have a materially
adverse effect on the value of the Buyers' investment in the Company pursuant to
this Agreement, and Oak has notified the Company in writing of such conclusion
and (IV) upon a material breach by the Company of any of the protective
provisions of the Certificate of Designations, unless such breach is capable of
being and is cured within ten (10) Business Days of written notice to the
Company of such breach from the Buyers.
n. RIGHTS OF REDEMPTION.
(i) TRIGGERING EVENT. Each of the events listed on
SCHEDULE 4(n) to this Agreement shall constitute a "TRIGGERING EVENT":
Within five (5) Business Days of the occurrence of a Triggering Event,
the Company will give notice to all Buyers of such occurrence (the
"TRIGGER NOTICE").
(ii) REDEMPTION RIGHT. If any Buyer of Preferred
Shares hereunder becomes aware of a Triggering Event, such Buyer may
require the Company to redeem all or any of the Preferred Shares then
held by such Buyer by delivering written notice to the Company within
thirty (30) days after the date of the Trigger Notice (the "REDEMPTION
NOTICE"), which Redemption Notice shall indicate the number of
Preferred Shares that such Buyer is electing to redeem hereunder. Each
Preferred Share subject to redemption by the Company pursuant to this
Section 4(n) shall be redeemed by the Company at a price per Preferred
Share equal to the Liquidation Preference (as defined in the
Certificate of Designations) of such Preferred Share as in effect on
the date of the Redemption Notice (the "REDEMPTION PRICE"); provided
that if a Buyer has delivered a Redemption Notice to the Company as a
result of a Disposition Triggering Event (as defined on Schedule
4(n)(i)(C)), the Company shall only be required, in the aggregate, to
redeem from all Buyers up to that number of Preferred Shares having an
aggregate Redemption Price equal to 50% of the applicable Disposition
Value. If such amount is insufficient to redeem all Preferred Shares
subject to a Redemption Notice, the Company shall redeem shares pro
rata from the Buyers that have given a Redemption Notice (the
"REDEEMING BUYERS") based upon the aggregate number of outstanding
Preferred Shares then held by each such Redeeming Buyer relative to the
aggregate number of outstanding Preferred Shares then held by all
Redeeming Buyers.
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(iii) MECHANICS. Each Redeeming Buyer shall promptly
submit to the Company such Redeeming Buyer's Preferred Stock
Certificates representing the Preferred Shares which such Redeeming
Buyer has elected to have so redeemed (or a lost stock affidavit
therefor reasonably acceptable to the Company). The Company shall
deliver the applicable Redemption Price to a Redeeming Buyer from whom
the Company has received a Redemption Notice within 45 days after the
date of the Trigger Notice; provided that such Redeeming Buyer has
delivered to the Company the Preferred Stock Certificates representing
the Preferred Shares being redeemed (or a lost stock affidavit therefor
reasonably acceptable to the Company). In the event of a redemption of
less than all of the Preferred Shares represented by a particular
Preferred Stock Certificate, the Company shall promptly cause to be
issued and delivered to the Redeeming Buyer holding such Preferred
Shares a preferred stock certificate representing the remaining
Preferred Shares which have not been redeemed.
(iv) REDEMPTION WHEN THERE IS MORE THAN ONE REDEEMING
BUYER. Notwithstanding anything in this Section 4(n) to the contrary,
if the Company receives more than one Redemption Notice and the Company
is unable to redeem all of the Preferred Shares submitted for
redemption pursuant to the Redemption Notices, then the Company shall
redeem a pro rata amount from each Redeeming Buyer based on the number
of Preferred Shares submitted for redemption by each such Redeeming
Buyer and redeem from each such Redeeming Buyer from time to time a pro
rata amount of the balance of the Preferred Shares so tendered for
redemption as soon as the Company has funds legally available for such
purpose. As long as any redemption obligation hereunder is continuing,
the Company will not declare or pay any dividends, repurchase any
shares of outstanding capital stock (except pursuant to Section 6(g) of
the Certificate of Designations and except repurchases from employees,
directors or consultants at cost pursuant to contracts approved by the
Board of Directors) or make any other distribution with respect to its
capital stock.
o. After the Initial Closing Date, and until such time as Oak
designates a nominee to the Board of Directors pursuant to the Certificate of
Designations, the Company will allow an Oak designee to attend all meetings of
the Board of Directors and to receive all materials distributed to members of
the Board of Directors in preparation for such meetings or at such meetings. The
Company will pay the reasonable costs and expenses of the Oak designee
associated with such attendance.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its
transfer agent in the form attached hereto as EXHIBIT E (the "IRREVOCABLE
TRANSFER AGENT INSTRUCTIONS"), and any subsequent transfer agent, to issue
certificates, registered in the name of each Buyer or its
19
respective nominee(s), for the Conversion Shares in such amounts as specified
from time to time by each Buyer to the Company upon conversion of the Preferred
Shares.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
a. INITIAL CLOSING DATE. The obligation of the Company to
issue and sell the Initial Preferred Shares to each Buyer at the Initial Closing
is subject to the satisfaction, at or before the Initial Closing Date, of each
of the following conditions, provided these conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole discretion
by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the
Transaction Documents to which it is a party and delivered the same to
the Company.
(ii) The Certificate of Designations shall have been
filed with the Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company
the Purchase Price (less the amounts withheld pursuant to Section 4(h)
in the case of Oak) for the Initial Preferred Shares being purchased by
such Initial Buyer at the Initial Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided
by the Company.
(iv) The representations and warranties of such Buyer
shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and
such Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by
such Buyer at or prior to the Initial Closing Date.
(v) The waiting period(s) (and any extension thereof)
under the Hart-Scott Rodino Antitrust Improvement Acts of 1976 (the
"HSR ACT"), if applicable, shall have expired or been terminated
without any condition attached to such expiration or termination.
b. MANDATORY CLOSING DATE. The obligation of the Company
hereunder to issue and sell the Mandatory Preferred Shares and the Warrants to
each Mandatory Buyer at the Mandatory Closing is subject to the satisfaction, at
or before such Mandatory Closing Date, of each of the following conditions,
provided that these conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion by providing each
Mandatory Buyer with prior written notice thereof:
(i) Such Mandatory Buyer shall have delivered to the
Company the Purchase Price for the Mandatory Preferred Shares and the
Warrants being purchased by such Mandatory Buyer at the Mandatory
Closing by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company.
20
(ii) The representations and warranties of such
Mandatory Buyer shall be true and correct in all material respects as
of the date when made and as of the Mandatory Closing Date as though
made at that time (except for representations and warranties that speak
as of a specific date), and such Mandatory Buyer shall have performed,
satisfied and complied in all material respects with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Mandatory Buyer at or
prior to the Mandatory Closing Date.
(iii) The waiting period(s) (and any extension
thereof) under the HSR Act, if applicable, shall have expired or been
terminated without any condition attached to such expiration or
termination.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
a. INITIAL CLOSING DATE.
(i) INITIAL BUYERS (OTHER THAN FOLLOW-ON INITIAL
BUYERS). The obligation of each Initial Buyer (other than a Follow-On
Initial Buyer) hereunder to purchase the Initial Preferred Shares from
the Company at the Initial Closing is subject to the satisfaction, at
or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for each such Initial
Buyer's sole benefit and may be waived by such Initial Buyer at any
time in its sole discretion by providing the Company with prior written
notice thereof:
(A) The Company shall have executed each of
the Transaction Documents and delivered the same to such
Initial Buyer.
(B) The Certificate of Designations, shall
have been filed with the Secretary of State of the State of
Delaware, and a copy thereof certified by such Secretary of
State shall have been delivered to such Initial Buyer.
(C) The representations and warranties of
the Company shall be true and correct in all material respects
as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties
that speak as of a specific date and except to the extent that
any of such representations and warranties is already
qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct
without further qualification) and the Company shall have
performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied
with by the Company at or prior to the Initial Closing Date.
Such Initial Buyer shall have received a certificate, executed
by the Chief Executive Officer or Chief Financial Officer of
the Company, dated as of the Initial Closing Date and
including an update as of the Initial Closing Date of the
representation contained in Section 3(c) above.
Notwithstanding anything in this Agreement to the contrary,
the parties hereto hereby agree that neither the consummation
nor the failure to consummate the transactions contemplated by
either the Viant
21
Merger Agreement or the Delano Merger Agreement shall be
deemed to be (i) a material adverse change pursuant to Section
3(g) or (ii) a breach of any of the representations and
warranties made by the Company pursuant to Section 3 of this
Agreement.
(D) Such Initial Buyer shall have received
the opinion of Katten Muchin Zavis Rosenman dated as of the
Initial Closing Date, in form, scope and substance reasonably
satisfactory to such Initial Buyer and in substantially the
form of EXHIBIT D attached hereto.
(E) The Company shall have executed and
delivered to such Initial Buyer the Preferred Stock
Certificates (in such denominations as such Initial Buyer
shall request) for the Initial Preferred Shares being
purchased by such Initial Buyer at the Initial Closing.
(F) The Board of Directors of the Company
shall have adopted resolutions consistent with Section
3(b)(ii) above and in a form reasonably acceptable to such
Initial Buyer (the "RESOLUTIONS").
(G) As of the Initial Closing Date, the
Company shall have reserved out of its authorized and unissued
Common Stock, solely for the purpose of effecting the
conversion of the Initial Preferred Shares, at least 3,825,000
shares of Common Stock.
(H) The Irrevocable Transfer Agent
Instructions shall have been delivered to and acknowledged in
writing by the Company's transfer agent and the Company shall
deliver a copy thereof to such Initial Buyer.
(I) The Company shall have delivered to such
Initial Buyer a certificate evidencing the incorporation and
good standing of the Company in Delaware issued by the
Secretary of State of the State of Delaware as of a date
within ten (10) days of the Initial Closing Date.
(J) The Company shall have delivered to such
Initial Buyer a certified copy of the Certificate of
Incorporation as certified by the Secretary of State of the
State of Delaware as of a date within ten days of the Initial
Closing Date.
(K) The Company shall have delivered to such
Initial Buyer a secretary's certificate, dated as the Closing
Date, certifying as to (A) the Resolutions, (B) the
Certificate of Incorporation and (C) the Bylaws, each as in
effect at the Initial Closing.
(L) [Intentionally Omitted]
22
pursuant to which each such person agrees to vote all shares
of Common Stock held by such person in favor of the matters
described in Section 4(k).
(M) The waiting period(s) (and any extension
thereof) under the HSR Act, if applicable, shall have expired
or been terminated without any condition attached to such
expiration or termination.
(N) If requested by Oak, an Oak nominee
shall have been appointed to serve on the Company's Board of
Directors effective as of the Initial Closing Date, and, if
requested by Oak, such nominee and the Company shall have
entered into an indemnification agreement, effective as of the
Initial Closing Date and in a form acceptable to Oak.
(ii) FOLLOW-ON INITIAL BUYERS. The obligation of each
Follow-On Initial Buyer hereunder to purchase the Initial Preferred
Shares from the Company as of the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Deadline Date, of each
of the following conditions, provided that these conditions are for
each Follow-On Initial Buyer's sole benefit and may be waived by such
Follow-On Initial Buyer at any time in its sole discretion by providing
the Company with prior written notice thereof:
(A) The Company shall have executed each of
the Transaction Documents and delivered the same to such
Follow-On Initial Buyer.
(B) The Initial Closing shall have occurred.
(C) Such Follow-On Initial Buyer shall have
received a copy of the opinion of Katten Muchin Zavis Rosenman
delivered to the Initial Buyers at the Initial Closing dated
as of the Initial Closing Date.
(D) Such Follow-On Initial Buyer shall have
received a copy of the secretary's certificate and officer's
certificate of the Company delivered to the Initial Buyers at
the Initial Closing, each dated as of the Initial Closing
Date.
(E) The Company shall have executed and
delivered to such Follow-On Initial Buyer the Preferred Stock
Certificates (in such denominations as such Follow-On Initial
Buyer shall request) for the Initial Preferred Shares being
purchased by such Follow-On Initial Buyer at the Initial
Closing.
b. MANDATORY CLOSING DATE. The obligation of each Mandatory
Buyer hereunder to purchase the Mandatory Preferred Shares and the Warrants from
the Company at the Mandatory Closing is subject to the satisfaction, at or
before the Mandatory Closing Date, of each of the following conditions, provided
that these conditions are for each Mandatory Buyer's sole benefit and may be
waived by such Mandatory Buyer at any time in its sole discretion:
(i) The Company shall have complied with and
satisfied all of the requirements of Section 1(c).
23
(ii) The representations and warranties of the
Company shall be true and correct in all material respects as of the
date when made and as of the Mandatory Closing Date as though made at
that time (except for the representation related to capitalization set
forth in Section 3(c) which shall be true as of the date of this
Agreement and except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above,
in which case, such representations and warranties shall be true and
correct without further qualification) (provided that any material
adverse development, change or amendment after the date hereof in any
matter set forth on the Disclosure Letter or set forth in the 2002
Filings will not qualify as or otherwise constitute an exception for
purposes of determining whether any representations and warranties of
the Company are true and correct as of the Mandatory Closing Date) and
the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or
complied with by the Company at or prior to the Mandatory Closing Date.
Such Mandatory Buyer shall have received a certificate, executed by the
Chief Executive Officer or Chief Financial Officer of the Company,
dated as of the Mandatory Closing Date and including an update as of
the Mandatory Closing Date of the representation contained in Section
3(c) above. Notwithstanding anything in this Agreement to the contrary,
the parties hereto hereby agree that neither the consummation nor the
failure to consummate the transactions contemplated by either the Viant
Merger Agreement or the Delano Merger Agreement shall be deemed to be
(i) a material adverse change pursuant to Section 3(g) or (ii) a breach
of any of the representations and warranties made by the Company
pursuant to Section 3 of this Agreement.
(iii) Such Mandatory Buyer shall have received the
opinion of Katten Muchin Zavis Rosenman dated as of the Mandatory
Closing Date, in form, scope and substance reasonably satisfactory to
such Mandatory Buyer and in substantially the form of EXHIBIT D
attached hereto.
(iv) The Company shall have executed and delivered to
such Mandatory Buyer the Preferred Stock Certificates and the Warrants
(in such denominations as such Mandatory Buyer shall request) for the
Mandatory Preferred Shares and the Warrants being purchased by such
Mandatory Buyer at the Mandatory Closing.
(v) The Board of Directors of the Company shall have
adopted, and shall not have amended, the Resolutions.
(vi) The Irrevocable Transfer Agent Instructions
shall remain in effect as of the Mandatory Closing Date and the Company
shall cause its Transfer Agent to deliver a letter to the Mandatory
Buyers to that effect.
(vii) The Company shall have delivered to such
Mandatory Buyer a certificate evidencing the incorporation and good
standing of the Company in Delaware issued by the Secretary of State of
the State of Delaware as of a date within ten (10) days of the
Mandatory Closing Date.
24
(viii) The Company shall have delivered to such
Mandatory Buyer a certified copy of its Certificate of Incorporation as
certified by the Secretary of State of the State of Delaware within ten
(10) days of the Mandatory Closing Date.
(ix) The Company shall have delivered to such
Mandatory Buyer a secretary's certificate certifying as to (A) the
Resolutions, (B) the Certificate of Incorporation and (C) the Bylaws,
each as in effect at the Mandatory Closing.
(x) The Company shall have delivered to such
Mandatory Buyer a letter from the Company's transfer agent certifying
the number of shares of Common Stock outstanding as of a date within
five (5) days of the Mandatory Closing Date.
(xi) The waiting period(s) (and any extension
thereof) under the HSR Act, if applicable, shall have expired or been
terminated without any condition attached to such expiration or
termination.
(xii) At Oak's election, an additional Oak nominee
(or two Oak nominees if Oak did not elect a nominee at the Initial
Closing or thereafter) shall have been appointed to serve on the
Company's Board of Directors effective as of the Mandatory Closing
Date, and such nominee(s) and the Company shall have entered into an
indemnification agreement in form acceptable to Oak, effective as of
the Mandatory Closing Date.
(xiii) The Company shall not have materially breached
the Transaction Documents or the Certificate of Designations.
(xiv) No Triggering Event shall have occurred.
8. GOVERNING LAW; MISCELLANEOUS.
a. GOVERNING LAW; JURISDICTION; JURY TRIAL. The corporate laws
of the State of Delaware shall govern all issues concerning the relative rights
of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of Delaware, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting in the Delaware, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any
25
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY.
b. COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective, with respect to a particular party, when
counterparts have been signed by such party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.
c. HEADINGS. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
instruments referenced herein supersedes all other prior oral or written
agreements between each Buyer, the Company, their affiliates and persons acting
on their behalf with respect to the matters discussed herein (including the term
sheet related hereto), and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. This Agreement may only be
amended by an instrument in writing signed by the Company and the holders of at
least two-thirds (2/3) of the Initial Preferred Shares on the Initial Closing
Date or, if prior to the Initial Closing Date, the Buyers listed on the Schedule
of Buyers as being obligated to purchase at least two-thirds (2/3) of the
Initial Preferred Shares, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
f. NOTICES. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); (iii) one (1) Business Day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same; or (iv) five (5) days
after deposit in the U.S. Mail. The addresses and facsimile numbers for such
communications shall be:
26
If to the Company:
divine, inc.
1301 North Elston Avenue
Chicago, Illinois 60622
Facsimile: (773) 394-6603
Attention: Jude M. Sullivan
With a copy to:
Katten Muchin Zavis Rosenman
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Facsimile: (312) 902-1061
Attention: Robert Brantman
If to the Transfer Agent:
Computershare Investor Services LLC
Two North LaSalle Street
Second Floor
Chicago, Illinois 60602
Facsimile: (312) 601-4357
Attention: Bruce Hartney
If to a Buyer, to it at the address and facsimile number set forth on the
Schedule of Buyers, with copies to such Buyer's representatives as set forth on
the Schedule of Buyers, or at such other address and/or facsimile number and/or
to the attention of such other person as the recipient party has specified by
written notice given to each other party five (5) days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.
g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Preferred Shares. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least two-thirds (2/3) of the Preferred
Shares and the Conversion Shares then outstanding (on an as converted basis),
including by merger or consolidation, except pursuant to a Change of Control (as
defined in Section 5(c) of the Certificate of Designations) with respect to
which the Company is in compliance with Section 4(l) of this Agreement. No Buyer
shall assign any of its rights hereunder without the consent of the Company.
27
h. NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
i. SURVIVAL. Unless this Agreement is terminated under Section
8(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, and the agreements and covenants set forth in Sections 4, 5
and 8 shall survive the Closings; provided, however, that the covenants of the
Company set forth in Sections 4, 5 and 8 shall terminate at such time as all of
the Preferred Shares issued pursuant to this Agreement shall have been converted
into Conversion Shares registered under a Registration Statement (as defined in
the Registration Rights Agreement) (provided that such termination shall apply
only to events occurring after such date). Each Buyer shall be responsible only
for its own representations, warranties, agreements and covenants hereunder.
j. PUBLICITY. The Company and each Buyer shall have the right
to approve before issuance any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of any Buyer, to make
any press release or other public disclosure with respect to such transactions
as is required by applicable law and regulations (although Oak shall be
consulted by the Company (and be given a reasonable opportunity to comment) in
connection with any such press release or other public disclosure prior to its
release and shall be provided with a copy thereof).
k. FURTHER ASSURANCES. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. TERMINATION. In the event that the Initial Closing shall
not have occurred with respect to a Buyer on or before ten (10) Business Days
from the date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6(a) and 7(a) above (and the nonbreaching
party's failure to waive such unsatisfied condition(s)), the nonbreaching party
shall have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party. Oak will have the option to terminate the obligations of all
parties with respect to the Mandatory Closing under Sections 1(a), 1(c), 6(b)
and 7(b) if the Mandatory Closing does not occur on or before August 7, 2002,
provided that such option shall not be available to Oak if Oak has materially
breached or otherwise not complied with its obligations under this Agreement and
such breach or failure to comply is the cause of the failure of the Mandatory
Closing to occur on or before such date.
m. PLACEMENT AGENT. The Company acknowledges that it has not
engaged a placement agent in connection with the sale of the Preferred Shares
and the related Warrants. The Company shall be responsible for the payment of
any placement agent's fees or broker's commissions relating to or arising out of
the transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including,
28
without limitation, attorneys' fees and out of pocket expenses) arising in
connection with any such claim.
n. NO STRICT CONSTRUCTION. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. REMEDIES. Each Buyer and each holder of the Securities
shall have all rights and remedies set forth in the Transaction Documents and
the Certificate of Designations and all rights and remedies which such holders
have been granted at any time under any other agreement or contract and all of
the rights which such holders have under any law. Any person having any rights
under any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
p. PAYMENT SET ASIDE. To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to the Registration
Rights Agreement, the Certificate of Designations or Warrants or the Buyers
enforce or exercise their rights hereunder or thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, by a trustee, receiver or any other person under any
law (including, without limitation, any bankruptcy law, state or federal law,
common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or setoff had not occurred.
* * * * * *
29
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY:
DIVINE, INC.
By: /s/ Jude M. Sullivan
----------------------------------------
Name: Jude M. Sullivan
Title: Senior Vice President and
General Counsel
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK INVESTMENT PARTNERS IX, LIMITED
PARTNERSHIP
/s/ Fredric W. Harman
--------------------------------------------
Fredric W. Harman
Managing Member of Oak Associates IX, LLC
The General Partner of Oak Investment
Partners IX, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK IX AFFILIATES FUND, LIMITED PARTNERSHIP
/s/ Fredric W. Harman
--------------------------------------------
Fredric W. Harman
Managing Member of Oak IX Affiliates, LLC
The General Partner of Oak IX Affiliates
Fund, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK IX AFFILIATES FUND-A, LIMITED
PARTNERSHIP
/s/ Fredric W. Harman
--------------------------------------------
Fredric W. Harman
Managing Member of Oak IX Affiliates, LLC
The General Partner of Oak IX Affiliates
Fund-A, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK INVESTMENT PARTNERS X LIMITED
PARTNERSHIP
/s/ Fredric W. Harman
--------------------------------------------
Fredric W. Harman
Managing Member of Oak Associates X, LLC
The General Partner of Oak Investment
Partners X, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK X AFFILIATES FUND, LIMITED PARTNERSHIP
/s/ Fredric W. Harman
--------------------------------------------
Fredric W. Harman
Managing Member of Oak X Affiliates, LLC
The General Partner of Oak X Affiliates
Fund, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
--------------------------------------------
Peter Lynch
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
/s/ Andrew J. Filipowski
--------------------------------------------
Andrew J. Filipowski
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
--------------------------------------------
By:
----------------------------------------
Name:
Its:
Exhibit 4.2
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B)
AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
divine, inc.
WARRANT TO PURCHASE SERIES B CONVERTIBLE PREFERRED STOCK
Number of Shares:
----------------
Date of Issuance: , 2002
-------------------
divine, inc., a Delaware corporation (the "COMPANY"), hereby certifies that, for
Ten United States Dollars ($10.00) and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged,
__________________, the registered holder hereof or its permitted assigns, is
entitled, subject to the terms and conditions set forth herein, to purchase from
the Company upon surrender of this Warrant, at any time or times during the
period commencing on the Date of Issuance set forth above (the "DATE OF
ISSUANCE") and ending on the Expiration Date ______________ (_________) fully
paid, nonassessable shares of the Series B Convertible Preferred Stock, par
value $0.001 per share ("SERIES B CONVERTIBLE PREFERRED STOCK"), of the Company
(the "WARRANT SHARES") at the purchase price per share equal to the Warrant
Exercise Price.
Section 1. SECURITIES PURCHASE AGREEMENT; DEFINITIONS.
(a) SECURITIES PURCHASE AGREEMENT. This Warrant is one of the
Warrants issued pursuant to that certain Securities Purchase Agreement, dated as
of May 29, 2002, by and among the Company and the Persons (as defined below)
identified on the Schedule of Buyers attached thereto (as such agreement may be
amended from time to time as provided in such agreement, the "SECURITIES
PURCHASE AGREEMENT").
(b) DEFINITIONS. In addition to the capitalized terms elsewhere
defined herein,
the following terms, when used in this Warrant, shall have the following
meanings:
(i) "5 DAY MARKET PRICE" means, as of any date of determination,
the average of the daily Market Price of the Common Stock for the 5
consecutive trading days ending on the trading day immediately prior to the
date upon which such determination is being made.
(ii) "ADJUSTED CONVERSION PRICE" means, with respect to any
Warrant Share, as of any date of determination, the Adjusted Conversion
Price of such Warrant Share in effect as of such date of determination, as
defined, and provided for, in the Certificate of Designations.
(iii) "BUSINESS DAY" means any day other than Saturday, Sunday or
other day on which commercial banks in the City of New York, New York are
authorized or required by law to remain closed.
(iv) "CERTIFICATE OF DESIGNATIONS" means the Company's
Certificate of Designations, Preferences and Rights of the Series B
Convertible Preferred Stock.
(v) "CLASS A COMMON STOCK" means the Company's Class A Common
Stock, par value $0.001 per share.
(vi) "CLASS C COMMON STOCK" means the Company's Class C Common
Stock, par value $0.001 per share.
(vii) "COMMON STOCK" means the Class A Common Stock and the Class
C Common Stock, collectively.
(viii) "EXPIRATION DATE" means the fifth anniversary of the Date
of Issuance of this Warrant or, if such anniversary date does not fall on a
Business Day or on a day on which trading takes place on the Principal
Market, then the next Business Day.
(ix) "INITIAL CONVERSION PRICE" has the meaning specified in
the Certificate of Designations.
(x) "LIQUIDATION PREFERENCE" means, with respect to any Warrant
Share, as of any date of determination, the Liquidation Preference of such
Warrant Share in effect as of such date of determination, as defined, and
provided for, in the Certificate of Designations.
(xi) "MANDATORY CLOSING" has the meaning specified in the
Securities Purchase Agreement.
(xii) "MANDATORY CLOSING DATE" has the meaning specified in the
Securities Purchase Agreement.
2
(xiii) "MANDATORY CONVERSION EVENT" has the meaning specified in
the Certificate of Designations.
(xiv) "MARKET PRICE" means, with respect to the Common Stock, on
any given day, (i) the price of the last trade, as reported on the Nasdaq
National Market, not identified as having been reported late to such
system, or (ii) if the Common Stock is so quoted, but not so traded, the
average of the last bid and ask prices, as those prices are reported on the
Nasdaq National Market, or (iii) if the Common Stock is not listed or
authorized for trading on the Nasdaq National Market or any comparable
system, the average of the closing bid and asked prices as furnished by two
members of the National Association of Securities Dealers, Inc. selected
from time to time by the Company for that purpose and reasonably acceptable
to Oak. If the Common Stock is not listed and traded in a manner that the
quotations referred to above are available for the period required
hereunder, the Market Price per share of Common Stock shall be deemed to be
the fair value per share of such security as mutually agreed upon by the
Corporation and Oak.
(xv) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, other entity, an
unincorporated organization and a government or any department or agency
thereof.
(xvi) "PRINCIPAL MARKET" means the Nasdaq National Market or if
the Common Stock is not traded on the Nasdaq National Market, then the
principal securities exchange or trading market for the Common Stock.
(xvii) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(xviii) "WARRANTS" means this Warrant, the other Warrants issued
pursuant to the Securities Purchase Agreement and all Warrants issued in
exchange, transfer or replacement of this Warrant and such other Warrants.
(xix) "WARRANT EXERCISE PRICE" with respect to any Warrant Share,
shall be equal to $1,000, subject to adjustment as hereinafter provided.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time during the Company's normal business hours (i.e.,
on or after the Company's opening of business but prior to the Company's close
of business) on any Business Day during the period commencing on the Date of
Issuance and ending on the Expiration Date by (i) delivery of a written notice,
in the form of the subscription form attached as EXHIBIT A hereto (the "EXERCISE
NOTICE"), of such holder's election to exercise this Warrant, which notice shall
specify the number of Warrant Shares to be purchased, (ii) (A) payment to the
Company of an amount equal to the Warrant Exercise Price multiplied by the
number of Warrant Shares as to which this Warrant is being exercised (the
"AGGREGATE EXERCISE PRICE") by wire transfer of immediately available funds (or
by certified or cashier's check if the Company has not provided the holder of
3
this Warrant with wire transfer instructions for such payment) or (B) by
notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 2(d), and (iii) the surrender to a
common carrier for overnight delivery to the Company as soon as practicable
following such date, of this Warrant (or an indemnification undertaking, in form
and substance acceptable to the Company, with respect to this Warrant in the
case of its loss, theft or destruction); provided, that if such Warrant Shares
are to be issued in any name other than that of the registered holder of this
Warrant, such issuance shall be deemed a transfer and the provisions of Section
4(m) of the Securities Purchase Agreement and Sections 6 and 7 of this Warrant
shall be applicable. In the event of any exercise of the rights represented by
this Warrant in compliance with this Section 2(a), the Company shall as promptly
as practicable, but in any event within ten (10) Business Days (the "WARRANT
SHARE DELIVERY DATE") following the date of its receipt of the Exercise Notice,
the Aggregate Exercise Price (or notice of Cashless Exercise) and this Warrant
(or an indemnification undertaking with respect to this Warrant in the case of
its loss, theft or destruction) (the "EXERCISE DELIVERY DOCUMENTS") issue and
deliver to the address specified in the Exercise Notice, a certificate,
registered in the name of the holder or its designee, for the number of Warrant
Shares to which the holder shall be entitled. Upon delivery of the Exercise
Notice and Aggregate Exercise Price referred to in clause (ii)(A) above or
notification to the Company of a Cashless Exercise referred to in Section 2(d),
the holder of this Warrant shall be deemed for all corporate purposes to have
become the holder of record of the Warrant Shares with respect to which this
Warrant has been exercised, irrespective of the date of delivery of this Warrant
as required by clause (iii) above or the certificates evidencing such Warrant
Shares.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than five (5) Business Days after any exercise (the
"WARRANT DELIVERY DATE") and at its own expense, issue a new Warrant identical
in all respects to this Warrant exercised except it shall represent rights to
purchase the number of Warrant Shares purchasable immediately prior to such
exercise under this Warrant, less the number of Warrant Shares with respect to
which such Warrant is exercised.
(c) In the event that any exercise of this Warrant, whether as a
Cashless Exercise or otherwise, requires the Company to issue fractional Warrant
Shares hereunder, the Company shall issue such fractional Warrant Shares at the
same time and in the same manner as the Company issues whole Warrant Shares
hereunder.
(d) The holder of this Warrant may, at its election exercised in its
sole discretion, exercise this Warrant in whole or in part and, in lieu of
making the cash payment otherwise contemplated to be made to the Company upon
such exercise in payment of the Aggregate Exercise Price, elect instead to
receive upon such exercise the "Net Number" of Warrant Shares determined
according to the following formula (a "CASHLESS EXERCISE"):
Net Number = A - B
For purposes of the foregoing formula:
4
A= the total number of shares with respect to which this
Warrant is then being exercised.
(A x C)
B= A x ---------------------------
((A x D) divided by E)) x F
C=the Warrant Exercise Price then in effect for the
applicable Warrant Shares at the time of such exercise.
D=the Liquidation Preference then in effect for the
applicable Warrant Shares at the time of said exercise.
E=the Adjusted Conversion Price then in effect for the
applicable Warrant Shares at the time of said exercise.
F=the Market Price per share for the Common Stock at the
time of said exercise.
(e) Notwithstanding anything contained herein to the contrary, this
Warrant shall be automatically exercised (and be deemed to have been
automatically exercised) (unless the holder gives notice to the Company to the
contrary, in the case of (ii) or (iii) below), on a Cashless Exercise basis,
without any action by or on the part of the holder hereof on the Business Day,
(i) on which a Mandatory Conversion Event occurs, immediately prior to the
occurrence of such Mandatory Conversion Event, (ii) of the Expiration Date and
(iii) immediately before a liquidation, dilution or winding up of the Company
(including, without limitation, a deemed liquidation under Section 5(c) of the
Certificate of Designations.
Section 3. REPRESENTATIVES, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company hereby represents, warrants, covenants and agrees as follows:
(a) This Warrant is, and any Warrants issued in substitution for or
replacement of this Warrant will upon issuance be, duly authorized and validly
issued.
(b) All Warrant Shares which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance and the payment of the
Warrant Exercise Price therefor to the Company, either pursuant to a Cashless
Exercise or otherwise, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof.
(c) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance
5
of any of the terms to be observed or performed by it hereunder, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may reasonably be requested by
the holder of this Warrant in order to protect the exercise privilege of the
holder of this Warrant against dilution or other impairment, consistent with the
tenor and purpose of this Warrant.
(d) This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.
Section 4. TAXES. The Company shall pay any and all taxes which may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed to be the holder of shares of
capital stock of the Company for any purpose, nor shall anything contained in
this Warrant be construed to confer upon the holder hereof, as such, any of the
rights of a stockholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of this
Warrant.
Section 6. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The holder of this
Warrant, by the acceptance hereof, (i) represents and warrants that it is
acquiring this Warrant and the Warrant Shares issuable upon exercise of this
Warrant for its own account for investment only and not with a view towards, or
for resale in connection with, the public sale or distribution of this Warrant
or the Warrant Shares, and (b) acknowledges and agrees that this Warrant and the
Warrant Shares issuable upon exercise of this Warrant (i) have not been
registered under the Securities Act or any other applicable securities laws and,
as such, may only be sold, transferred or otherwise disposed of in sales
registered or exempted under the Securities Act and such other applicable
securities laws and (ii) are subject to the restrictions on sales, pledges,
distributions, offers for sale, transfers or other dispositions set forth in
Section 4(m) of the Securities Purchase Agreement. The holder of this Warrant
further represents, by acceptance hereof, that, as of the Date of Issuance of
this Warrant, such holder is an "accredited investor" as such term is defined in
Rule 501(a)(3) of Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act (an "ACCREDITED INVESTOR"). Upon exercise of
this Warrant, other than pursuant to a Cashless Exercise, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, representations and warranties concerning the Warrant Shares in
substantially the form of the first sentence of this Section 6. If such holder
cannot make such representations and warranties because they would be factually
incorrect, it shall be a condition to such holder's exercise of this Warrant,
other than pursuant to a Cashless Exercise, that the Company receive such other
representations and warranties as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of this
Warrant shall not violate any United States or state securities laws.
6
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
the holder hereof), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of any transferee of this Warrant with
respect to which the Company has received written notice in accordance with
Section 11 of this Warrant. The Company may treat the person in whose name any
Warrant is registered on the register as the owner and holder thereof for all
purposes, notwithstanding any notice to the contrary, but in all events
recognizing any transfers with respect to which the Company has received written
notice in accordance with this Section 7 and Section 11 of this Warrant.
(b) Subject to Section 4(m) of the Securities Purchase Agreement and
Sections 6 and 7 of this Warrant, this Warrant and the rights granted hereunder
shall be assignable by the holder hereof without the consent of the Company.
Section 8. REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE; SUBDIVISION OR COMBINATION OF SERIES B CONVERTIBLE
PREFERRED STOCK.
(a) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction which is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "ACQUIRING ENTITY") a written agreement (in form and substance
satisfactory to the holders of Warrants representing a majority of the Warrant
Shares obtainable upon exercise of the Warrants then outstanding) to deliver to
each holder of Warrants in exchange for such Warrants, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in form
and substance to this Warrant and satisfactory to the holders of the Warrants
(including, a proportionally adjusted Warrant Exercise Price based upon the
terms and conditions of such consolidation, merger or sale, and exercisable for
a corresponding number of Warrant Shares acquirable and receivable upon exercise
of the Warrants (without regard to any limitations on exercises), if the value
so reflected is less than the Warrant Exercise Price in effect immediately prior
to such consolidation, merger or sale). Prior to the consummation of any other
Organic Change, the Company shall make appropriate provision (in form and
substance satisfactory to the holders of Warrants representing a majority of the
Warrant Shares obtainable upon exercise of the Warrants then outstanding) to
insure that each of the holders of the Warrants will thereafter have the right
to acquire and receive in lieu of or in addition to (as the case may be) the
Warrant Shares immediately theretofore acquirable and receivable upon the
exercise of such holder's Warrants (without regard to any limitations on
exercises), such shares of stock, securities or assets that would have been
issued or payable in
7
such Organic Change with respect to or in exchange for the number of Warrant
Shares which would have been acquirable and receivable upon the exercise of such
holder's Warrant as of the date of such Organic Change (without taking into
account any limitations or restrictions on the exerciseability of this Warrant).
(b) If the Company at any time after the Date of Issuance of this
Warrant subdivides (whether by any stock split, stock dividends or otherwise)
its outstanding shares of Series B Convertible Preferred Stock into a greater
number of shares, the Warrant Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced (and the number of Warrant Shares
proportionately increased), and if the Company at any time after the Date of
Issuance of this Warrant combines (whether by reverse stock split or otherwise)
its outstanding shares of Series B Convertible Preferred Stock into a smaller
number of shares, the Warrant Exercise Price in effect immediately prior to such
combination will be proportionately increased (and the number of Warrant Shares
proportionately decreased).
Section 9. INITIAL CONVERSION PRICE OF WARRANT SHARES. The Initial
Conversion Price of the Warrant Shares issuable upon exercise of this Warrant
shall be the amount specified in the Certificate of Designations, subject to
adjustment as provided for therein.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt
of an indemnification undertaking (or in the case of a mutilated Warrant, the
Warrant) reasonably acceptable to the Company, issue a new Warrant of like
denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); (iii) one (1) Business Day after deposit
with a nationally recognized overnight delivery service; or (iv) five (5)
Business Days after deposit in the U.S. mail, return receipt requested, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company:
divine, inc.
1301 North Elston Avenue
Chicago, Illinois 60622
Facsimile: (773) 394-6603
Attention: Jude M. Sullivan
With copy to:
Katten Muchin Zavis Rosenman
525 West Monroe Street
8
Suite 1600
Chicago, Illinois 60661-3693
Facsimile: (312) 902-1061
Attention: Robert Brantman
If to a holder of this Warrant, to the address and facsimile number set forth
for such holder on the Schedule of Buyers to the Securities Purchase Agreement,
with copies to such holder's representatives as set forth on such Schedule of
Buyers, or at such other address and/or facsimile number and/or to the attention
of such other person as the recipient party has specified by written notice to
the other party five (5) days prior to the effectiveness of such change. Written
confirmation of receipt or deposit in the U.S. mail, as the case may be, (A)
given by the recipient of such notice, consent, waiver or other communication,
(B) mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission, (C) provided by a nationally recognized overnight
delivery service or (D) the date stamped return receipt received by the Company
shall be rebuttable evidence of personal service, receipt by facsimile, receipt
from a nationally recognized overnight delivery service or deposit in the U.S.
mail in accordance with clause (i), (ii), (iii) or (iv) above, respectively.
Section 12. AMENDMENTS AND WAIVERS. Except as otherwise provided herein,
the provisions of this Warrant and of the other outstanding Warrants may be
amended or waived if the Company has obtained the written consent of the holders
of Warrants representing a majority of the Warrant Shares obtainable upon
exercise of the Warrants then outstanding.
Section 13. EXPIRATION DATE. This Warrant, in all events, shall be wholly
void and of no force or effect whatsoever after the Company's normal close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 hereof shall continue in full
force and effect after such date as to any Warrant Shares or other securities
issued upon the exercise of this Warrant.
Section 14. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Delaware shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of Delaware, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Delaware.
9
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
Jude M. Sullivan, its Senior Vice President and General Counsel, as of the ___
day of ______________, 2002.
DIVINE, INC.
By:
----------------------------------------
Name: Jude M. Sullivan
Title: Senior Vice President and
General Counsel
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
divine, inc.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Series B Convertible Preferred Stock
("WARRANT SHARES") of divine, inc., a Delaware corporation (the "COMPANY"),
evidenced by the attached Warrant (the "WARRANT"). Capitalized terms used herein
and not otherwise defined shall have the respective meanings set forth in the
Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of the
Warrant Exercise Price shall be made as:
____________ "Cash Exercise" with respect to _________________
Warrant Shares; and/or
____________ "Cashless Exercise" with respect to ________________
Warrant Shares (to the extent permitted by the terms
of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in the
sum of $___________________ to the Company in accordance with the terms of the
Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: ________________, ______
- ---------------------------
Name of Registered Holder
By:
Name:
Title:
A-1
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of Series B Convertible Preferred Stock of divine, inc., a
Delaware corporation, represented by warrant certificate no. _____, standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint ______________, attorney to
transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated: _________, 200_
----------------------------------
Name:
---------------------------
Title:
---------------------------
B-1
Exhibit 4.3
AMENDMENT No. 3
TO
RIGHTS AGREEMENT
THIS AMENDMENT No. 3 TO RIGHTS AGREEMENT (the "Amendment"), dated as of
May 29, 2002, is between divine, inc., a Delaware corporation formerly known as
divine interVentures, inc. (the "Company"), and Computershare Investor Services,
LLC, a Delaware limited liability company (the "Rights Agent").
RECITALS
A. The Company and the Rights Agent are parties to a Rights
Agreement dated as of February 12, 2001, as amended by Amendment No. 1 dated as
of July 8, 2001, and Amendment No. 2 dated as of August, 15, 2001 (as amended,
the "Rights Agreement");
B. Pursuant to Section 27 of the Rights Agreement, the Company
and the Rights Agent may supplement or amend the Rights Agreement from time to
time in accordance with the provisions of Section 27 thereof;
C. The Company has entered into a Securities Purchase
Agreement dated on or about May 28, 2002 (the "Securities Purchase Agreement")
pursuant to which the Company will issue shares of its Series B Convertible
Preferred Stock (the "Series B Preferred Stock") to certain persons identified
therein as "Buyers" (including, but not limited to, Oak Investment Partners X,
Limited Partnership; Oak X Affiliates Fund, Limited Partnership; Oak Investment
Partners IX, Limited Partnership; Oak IX Affiliates Fund, Limited Partnership;
and Oak IX Affiliates Fund-A, Limited Partnership);
D. The Board of Directors of the Company has determined that
the issuance and sale of its Series B Preferred Stock and the other transactions
contemplated by the Securities Purchase Agreement are fair to and in the best
interests of the Company and its stockholders; and
E. The Board of Directors of the Company has determined that
it is desirable to amend the Rights Agreement in connection with the
transactions contemplated by the Securities Purchase Agreement.
AGREEMENTS
Accordingly, the parties agree as follows:
1. AMENDMENT OF SECTION l(a). The definition of "Acquiring
Person" in Section l(a) of the Rights Agreement is hereby amended and restated
in its entirety as follows:
(a) "ACQUIRING PERSON" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the shares of Common Stock then outstanding, but shall not
include (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee
benefit plan of the Company, or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan, (iv) any Person who becomes the Beneficial Owner of
fifteen percent (15%) or more of the shares of Common Stock then outstanding as
a result of a reduction in the number of shares of Common Stock outstanding due
to the repurchase of shares of Common Stock by the Company unless and until such
Person, after becoming aware that such
1
Person has become the Beneficial Owner of fifteen percent (15%) or more of the
then outstanding shares of Common Stock, acquires beneficial ownership of
additional shares of Common Stock representing one percent (1%) or more of the
shares of Common Stock then outstanding, (v) any Person who is or becomes a
party to that certain Securities Purchase Agreement, dated on or about May 28,
2002, by and among the Company and the Persons identified therein as "Buyers"
(including, but not limited to, Oak Investment Partners X, Limited Partnership;
Oak X Affiliates Fund, Limited Partnership; Oak Investment Partners IX, Limited
Partnership; Oak IX Affiliates Fund, Limited Partnership; Oak IX Affiliates
Fund-A, Limited Partnership; and their Affiliates or Associates), but only to
the extent such Person would become an Acquiring Person due to the Beneficial
Ownership of Common Stock issued or issuable upon conversion of Series B
Convertible Preferred Stock issued pursuant to such Securities Purchase
Agreement, or (vi) any Person which beneficially owns 10% or more of the shares
of Common Stock outstanding on February 12, 2001, unless and until such time as
such Person together with its Affiliates and Associates, directly or indirectly,
becomes the Beneficial Owner of 20% or more of the shares of Common Stock then
outstanding, in which event such Person shall immediately become an Acquiring
Person.
2. EFFECTIVENESS. This Amendment shall be deemed effective as
of May 29, 2002, as if executed on such date. Except as amended hereby, the
Rights Agreement shall remain in full force and effect and shall be otherwise
unaffected hereby.
3. MISCELLANEOUS. This Amendment shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be governed by and construed in accordance with the laws of the State of
Delaware applicable to contracts to be made and performed entirely within the
State of Delaware. This Amendment may be executed in any number of counterparts,
each of such counterparts shall for all purposes be deemed to be an original,
and all such counterparts shall together constitute but one and the same
instrument. If any term, provision, covenant, or restriction of this Amendment
is held by a court of competent jurisdiction or other authority to be invalid,
void, or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Amendment shall remain in full force and effect and shall
in no way be affected, impaired, or invalidated.
[The remainder of this page has been intentionally left blank.]
2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
DIVINE, INC.
By /s/ Michael P. Cullinane
-------------------------------------------
Name: Michael P. Cullinane
Title: Executive Vice President, Chief
Financial Officer, and Treasurer
COMPUTERSHARE INVESTOR SERVICES, LLC
By /s/ Tod C. Shafer
-------------------------------------------
Name: Tod C. Shafer
Title: Relationship Manager
3
Exhibit 10.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of May 31, 2002,
is by and among divine, inc., a Delaware corporation, with headquarters located
at 1301 North Elston Avenue, Chicago, Illinois 60622 (the "COMPANY"), and the
undersigned buyers (each, a "BUYER" and collectively, the "BUYERS").
RECITALS
A. In connection with, and pursuant to, that certain Securities Purchase
Agreement dated as of May 29, 2002 by and among the parties hereto (the
"SECURITIES PURCHASE AGREEMENT"), the Company has agreed, upon the terms and
subject to the conditions of the Securities Purchase Agreement, to issue and
sell to the Buyers at the Initial Closing shares of Series B Convertible
Preferred Stock, par value $0.001 per share (the "SERIES B PREFERRED STOCK"), of
the Company (the "INITIAL PREFERRED SHARES"), which shall be convertible into
shares of Class A Common Stock, par value $0.001 per share (the "COMMON STOCK"),
of the Company (as converted, the "INITIAL CONVERSION SHARES") in accordance
with the terms of the Company's Certificate of Designations, Preferences and
Rights of the Series B Convertible Preferred Stock (the "CERTIFICATE OF
DESIGNATIONS"). Capitalized terms used, and not otherwise defined, herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
B. In connection with, and pursuant to the Securities Purchase Agreement,
the Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers shares of the
Company's Series B Preferred Stock (the "MANDATORY PREFERRED SHARES"), which
shall be convertible into shares of Common Stock (as converted, the "MANDATORY
CONVERSION SHARES") in accordance with the terms of the Certificate of
Designations, and warrants (the "WARRANTS") to purchase shares of the Company's
Series B Preferred Stock (as exercised, the "WARRANT PREFERRED SHARES"), which
Warrant Preferred Shares shall be convertible into shares of Common Stock (as
converted, the "WARRANT CONVERSION SHARES") in accordance with the terms of the
Certificate of Designations.
C. To induce the Buyers to execute, deliver and perform the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 ACT"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the Buyers
hereby agree as follows:
1. DEFINITIONS.
In addition to the capitalized terms elsewhere defined herein, the
following terms, when used herein, shall have the following meanings, unless the
context otherwise requires:
a. "ADDITIONAL REGISTRABLE SECURITIES" means (i) the Warrant
Conversion Shares issued or issuable upon conversion of the Warrant Preferred
Shares and (ii) any shares of capital stock issued or issuable with respect to
the Warrant Conversion Shares as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise; PROVIDED, HOWEVER,
that Additional Registrable Securities shall not include any such shares (a)
which have been disposed of pursuant to an effective registration statement
under the 1933 Act, (b) sold or otherwise transferred in a transaction in which
the rights under the provisions of this Agreement have not been assigned, or (c)
which have been sold under Rule 144.
b. "ADDITIONAL REGISTRATION STATEMENT" means a registration statement
or registration statements of the Company filed under the 1933 Act covering the
Additional Registrable Securities.
c. "EFFECTIVENESS DEADLINE" means the Initial Effectiveness Deadline
and the Additional Effectiveness Deadline, as applicable.
d. "FILING DEADLINE" means the Initial Filing Deadline or any
Additional Filing Deadline, as applicable.
e. "INITIAL REGISTRABLE SECURITIES" means (i) the Initial Conversion
Shares issued or issuable upon conversion of the Initial Preferred Shares, (ii)
the Mandatory Conversion Shares issued or issuable upon conversion of the
Mandatory Preferred Shares and (iii) any shares of capital stock issued or
issuable with respect to the Initial Conversion Shares and the Mandatory
Conversion Shares as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise; PROVIDED, HOWEVER,
that Initial Registrable Securities shall not include any such shares (a) which
have been disposed of pursuant to an effective registration statement under the
1933 Act, (b) sold or otherwise transferred in a transaction in which the rights
under the provisions of this Agreement have not been assigned, or (c) which have
been sold under Rule 144.
f. "INITIAL REGISTRATION STATEMENT" means a registration statement or
registration statements of the Company filed under the 1933 Act covering the
Initial Registrable Securities.
g. "INVESTOR" means a Buyer, any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 8(b) and
any transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with Section 8(b).
h. "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, other entity, an
unincorporated organization and a governmental or any department or agency
thereof.
i. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for
2
offering securities on a continuous or delayed basis ("RULE 415"), and the
declaration or ordering of effectiveness of such Registration Statement(s) by
the SEC.
j. "REGISTRABLE SECURITIES" means the Initial Registrable Securities
and the Additional Registrable Securities, as applicable.
k. "REGISTRATION STATEMENT" means the Initial Registration Statement
and the Additional Registration Statement, as applicable.
l. "RULE 144" means Rule 144 promulgated by the SEC.
m. "SEC" means the United States Securities and Exchange Commission.
2. REGISTRATION.
a. MANDATORY REGISTRATION.
(i) INITIAL MANDATORY REGISTRATION. The Company shall prepare,
and, as soon as reasonably practicable but in no event later than the
earlier of (i) 45 days prior to the first anniversary of the Initial
Closing Date or (ii) 30 days after the expiration of the lock-up provisions
set forth in Section 4(m) of the Securities Purchase Agreement pursuant to
Section 4(m)(i)(2) therein (the "LOCK-UP EXPIRATION") if Form S-3 is
available for the Initial Registration Statement or 60 days after the
Lock-Up Expiration if Form S-3 is unavailable for such registration (the
"INITIAL FILING DEADLINE"), file with the SEC the Initial Registration
Statement on Form S-3 covering the resale of all of the Initial Registrable
Securities. In the event that Form S-3 is unavailable for such a
registration, the Company shall use such other form as is available for
such a registration, subject to the provisions of Section 2(d). The Initial
Registration Statement prepared pursuant hereto shall register for resale
at least that number of shares of Common Stock equal to the aggregate
number of Initial Registrable Securities issued and outstanding or deemed
issued and outstanding on an as-converted basis as of the trading day
immediately preceding the date the Initial Registration Statement is
initially filed with the SEC (as if all of the Initial Preferred Shares and
the Mandatory Preferred Shares then issuable under the Securities Purchase
Agreement were issued and outstanding on such date), subject to adjustment
as provided in Section 2(e). The Company shall use its best efforts to have
the Initial Registration Statement declared effective by the SEC as soon as
reasonably practicable, but in no event later than the first anniversary of
the Initial Closing Date (the "INITIAL EFFECTIVENESS DEADLINE").
(ii) ADDITIONAL MANDATORY REGISTRATION. The Company shall
prepare, and, as soon as practicable but in no event later than the later
of (i) the date which is 30 days after the exercise date of any Warrants if
Form S-3 is available for such registration and 60 days after the exercise
date of any Warrants if Form S-3 is unavailable for such registration and
(ii) the earlier of (x) 30 days after the Lock-Up Expiration if Form S-3 is
available for such registration or 60 days after the Lock-Up Expiration if
Form S-3 is unavailable for such registration and (y) the first anniversary
of the Initial Closing Date (each, an "ADDITIONAL FILING DEADLINE"), file
with the SEC an Additional Registration
3
Statement on Form S-3 covering the resale of all of the Additional
Registrable Securities relating to such exercised Warrants. In the event
that Form S-3 is unavailable for such a registration, the Company shall use
such other form as is available for such a registration, subject to the
provisions of Section 2(d). Each such Additional Registration Statement
prepared pursuant hereto shall register for resale at least that number of
shares of Common Stock equal to the aggregate number of Additional
Registrable Securities relating to such exercised Warrants issued and
outstanding or deemed issued and outstanding on an as-converted basis as of
the trading day immediately preceding the date the Additional Registration
Statement is initially filed with the SEC subject to adjustment as provided
in Section 2(e). The Company shall use its best efforts to have each such
Additional Registration Statement declared effective by the SEC as soon as
practicable, but in no event later than the later of (i) the date which is
90 days after the exercise date of the applicable Warrants and (ii) the
first anniversary of the Mandatory Closing Date (each an "ADDITIONAL
EFFECTIVENESS DEADLINE").
b. [INTENTIONALLY OMITTED]
c. LEGAL COUNSEL. Subject to Section 5 hereof, the Buyers holding a
majority of the Registrable Securities, Preferred Shares and Warrants (on an as
converted, as exercised basis) shall have the right to select one legal counsel
to review and oversee any offering pursuant to this Section 2 ("LEGAL COUNSEL"),
which shall be Wilson Sonsini Goodrich & Rosati or such other counsel as
thereafter designated by the holders of a majority of the Registrable
Securities. The Company shall reasonably cooperate with Legal Counsel in
performing the Company's obligations under this Agreement.
d. INELIGIBILITY FOR FORM S-3. In the event that Form S-3 is not
available for the registration of the resale of Registrable Securities
hereunder, the Company shall (i) register the resale of the Registrable
Securities on another appropriate form reasonably acceptable to the holder of a
majority of the Registrable Securities and (ii) undertake to register the
Registrable Securities on Form S-3 as soon as such form is available, provided
that the Company shall maintain the effectiveness of the Registration Statement
then in effect until such time as a Registration Statement on Form S-3 covering
the Registrable Securities has been declared effective by the SEC.
e. SUFFICIENT NUMBER OF SHARES REGISTERED. In the event that the
number of shares available under a Registration Statement filed pursuant to
Section 2(a) is insufficient to cover all of the Registrable Securities required
to be covered by such Registration Statement, the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
available therefor, if applicable), or both, so as to cover at least 110% of the
aggregate number of the Registrable Securities required to be covered by such
Registration Statement as of the trading day immediately preceding the date of
the filing of such amendment or new Registration Statement, in each case, as
soon as practicable, but in any event not later than fifteen (15) days after the
necessity therefor arises. The Company shall use it best efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof.
4
f. EFFECT OF FAILURE TO FILE AND OBTAIN AND MAINTAIN EFFECTIVENESS OF
REGISTRATION STATEMENT. If (i) a Registration Statement covering Registrable
Securities required to be filed by the Company pursuant to this Agreement is not
declared effective by the SEC on or before the applicable Effectiveness Deadline
or (ii) on any day after the Registration Statement has been declared effective
by the SEC sales of the Registrable Securities required to be included on such
Registration Statement cannot be made (other than during an Allowable Grace
Period (as defined in Section 3(m))) pursuant to the Registration Statement
(including, without limitation, because of a failure to keep the Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to the Registration Statement or to register sufficient shares
of Common Stock), then, as partial relief for the damages to any holder by
reason of any such delay in or reduction of its ability to sell the underlying
shares of Common Stock (which remedy shall not be exclusive of any other
remedies available at law or in equity), the Company shall pay to each Buyer
then holding Registrable Securities (or Preferred Shares or Warrants that are
exercisable for, directly or indirectly, Registrable Securities) covered by such
Registration Statement an amount in cash equal to two percent (2%) of the
portion of the Purchase Price attributable to such Registrable Securities (or
Preferred Shares or Warrants that are exercisable for, directly or indirectly,
Registrable Securities) then held by such Buyer, for each thirty (30) day period
the applicable Registration Statement is not effective or available (other than
during an Allowable Grace Period) for the sale of at least all the Registrable
Securities required to be included on such Registration Statement (or a lesser
pro rata payment amount if such period is less than thirty (30) days); provided
however, that notwithstanding anything in this Agreement to the contrary, the
parties hereto hereby agree that, with respect to any underwritten registration
hereunder, the applicable Effectiveness Deadline and Allowable Grace Period, as
the case may be, shall be automatically extended to the extent a delay is caused
by the underwriter or the underwriting process, including, but not limited to,
any failure to register any Registrable Securities in said registration as a
result of an underwriter's cut-back under Section 2(h) hereof. The payments to
which a holder shall be entitled pursuant to this Section 2(f) are referred to
herein as "REGISTRATION DELAY PAYMENTS." Registration Delay Payments shall be
paid on the earlier of (I) the last day of the calendar month during which such
Registration Delay Payments are incurred and (II) the third Business Day after
the event or failure giving rise to the Registration Delayed Payments is cured.
g. SELECTION OF UNDERWRITERS. The Buyers holding a majority of the
Registrable Securities, Preferred Shares and Warrants (on an as converted, as
exercised basis) shall have the right to select an underwriter(s), if any, for
the Registrable Securities to be registered pursuant to Section 2(a), subject to
the Company's written approval of such underwriter, such written approval not to
be unreasonably withheld.
h. In the event that a registration hereunder is underwritten, if a
representative of the underwriters advises the Investors in writing that
marketing factors require a limitation of the number of securities to be
underwritten (including Registrable Securities) because the number of securities
to be underwritten is likely to have an adverse effect on the price, timing or
the distribution of securities to be offered, then the number of securities that
may be included in the underwriting shall be allocated, first, to the Investors
on a pro rata basis based on the total number of Registrable Securities held by
the Investors and second to the Company and other holders of registration rights
to the extent they are participating in such offering. Any
5
Registrable Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to file a Registration
Statement with the SEC pursuant to Section 2(a) or 2(e), the Company will use
its best efforts to effect the registration of the Registrable Securities
covered by such Registration Statement in accordance with the intended method of
disposition thereof and, pursuant thereto, the Company shall have the following
obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the applicable Registrable Securities
(but in no event later than the applicable Filing Deadline) and use its best
efforts to cause such Registration Statement relating to the applicable
Registrable Securities to become effective as soon as practicable after such
filing (but in no event later than the applicable Effectiveness Deadline). The
Company shall use its best efforts to keep each Registration Statement effective
pursuant to Rule 415 at all times until the earlier of (i) the date as of which
the Investors may sell all of the Registrable Securities covered by such
Registration Statement without restriction pursuant to Rule 144(k) (or successor
thereto) promulgated under the 1933 Act or (ii) the date on which the Investors
shall have sold all the Registrable Securities covered by such Registration
Statement (each, a "REGISTRATION PERIOD"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 ACT"), the Company shall have incorporated such report by reference into
the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall permit Legal Counsel to review and comment upon
(i) the Initial Registration Statement and any Additional Registration Statement
prior to its filing
6
with the SEC and (ii) all other Registration Statements and all amendments and
supplements to all Registration Statements (except for Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any
similar or successor reports) prior to their filing with the SEC. The Company
shall not submit a request for acceleration of the effectiveness of a
Registration Statement or any amendment or supplement thereto without the prior
approval of Legal Counsel, which consent shall not be withheld unless Legal
Counsel has reasonable objections to disclosures in the Registration Statement
relating to (I) the Registrable Securities, the Preferred Shares or the Warrants
or (II) the Investors. The Company shall furnish to Legal Counsel, without
charge, (i) any correspondence from the SEC or the staff of the SEC to the
Company or its representatives relating to any Registration Statement, (ii)
promptly after the same is prepared and filed with the SEC, one copy of any
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto. The Company shall reasonably cooperate with
Legal Counsel in performing the Company's obligations pursuant to this Section
3.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, all
exhibits and each preliminary prospectus, (ii) upon the effectiveness of any
Registration Statement, such number of copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) as they may reasonably
request and (iii) such other documents, including copies of any preliminary or
final prospectus, as such Investor may reasonably request from time to time in
order to facilitate the disposition of the Registrable Securities owned by such
Investor.
e. The Company shall use its best efforts to cause such Registrable
Securities to be registered with or approved by such other governmental agencies
or authorities as may be necessary to consummate the disposition of such
Registrable Securities pursuant to a Registration Statement; provided, however,
that the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(e), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction.
f. The Company shall notify Legal Counsel and each Investor in writing
of the happening of any event, as promptly as practicable after becoming aware
of such event, as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain any
material, nonpublic information), and promptly prepare a supplement or amendment
to such Registration Statement to correct such untrue statement or omission, and
deliver such number of copies of
7
such supplement or amendment to Legal Counsel and each Investor as Legal Counsel
or such Investor may reasonably request. The Company shall also promptly notify
Legal Counsel and each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to Legal Counsel and each
Investor by facsimile on the same day of such effectiveness and by overnight
mail), (ii) of any request by the SEC for amendments or supplements to a
Registration Statement or related prospectus or related information, and (iii)
of the Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
h. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, as the Investors may reasonably request and registered in
such names as the Investors may request.
i. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of the applicable
Registration Statement.
j. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
k. Within five (5) Business Days after a Registration Statement which
covers applicable Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as EXHIBIT A.
l. The Company shall take all other actions reasonably necessary to
expedite and facilitate disposition by Investors of Registrable Securities
pursuant to a Registration Statement.
m. Notwithstanding anything to the contrary in Section 3(g), at any
time after the applicable Registration Statement has been declared effective by
the SEC, the Company may suspend the use or effectiveness of any Registration
Statement (a "GRACE PERIOD") (and the Investors hereby agree not to offer or
sell any Registrable Securities pursuant to such
8
Registration Statement during such Grace Period) if there is material non-public
information about the Company that the Company reasonably determines not to be
in the best interests of the Company to disclose and that the Company is not
otherwise required to disclose; provided, that the Company shall promptly (i)
notify the Investors in writing of such suspension and the date on which the
Grace Period will begin and (ii) notify the Investors in writing of the date on
which the Grace Period ends; and, provided further, that no Grace Period shall
exceed forty-five (45) consecutive days and during any 365 day period such Grace
Periods shall not exceed an aggregate of ninety (90) days provided that no Grace
Period arising out of the same set of facts, circumstances or transactions shall
be permitted for consecutive forty-five (45) day periods of days (an "ALLOWABLE
GRACE PERIOD"). For purposes of determining the length of a Grace Period above,
the Grace Period shall begin on and include the date the holders receive the
notice referred to in clause (i) and shall end on and include the later of the
date the holders receive the notice referred to in clause (ii) and the date
referred to in such notice. The provisions of Section 3(g) hereof shall not be
applicable during any Allowable Grace Period. Upon expiration of the Grace
Period, the Company shall again be bound by the first sentence of Section 3(f)
with respect to the information giving rise thereto unless such material
non-public information is no longer applicable.
n. In the event of any underwritten public offering, the Company shall
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering. Each
Investor participating in such underwriting shall also enter into and perform
its obligations pursuant to such an agreement.
o. The Company shall obtain opinions of counsel to the Company and
updates thereof (which counsel and opinions (in form, scope and substance) shall
be reasonably satisfactory to the managing underwriters, if any) in customary
form addressed to the Investors and the underwriters, if any, covering such
matters as are customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by the Investors
and such underwriters (it being agreed that the matters to be covered by such
opinion or a written statement by such counsel delivered in connection with such
opinions shall include, without limitation, an opinion, subject to reasonable
and customary qualifications as of the date of the opinion and as of the
effective date of the Registration Statement relating to the registration or
most recent post-effective amendment thereto, as the case may be, regarding the
absence from such registration statement and the prospectus included therein, as
then amended or supplemented, including the documents incorporated by reference
therein, of an untrue statement of a material fact or the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading).
p. The Company shall obtain "comfort letters" and updates thereof from
the independent public accountants of the Company (and, if necessary, any other
independent public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and financial
data are, or are required to be, included in the Registration Statement),
addressed to the Investors and the underwriters, in customary form and covering
matters of the type customarily covered in comfort letters in connection with
primary underwritten offerings.
9
q. The Company shall deliver such other customary documents and
certificates as may be reasonably requested by the Investors and the managing
underwriters, if any, including those to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
r. Promptly after the filing of a Registration Statement hereunder,
the Company shall promptly secure the listing of all of the Registrable
Securities covered by such Registration Statement upon each national securities
exchange and automated quotation system, if any, upon which shares of Common
Stock shall be so listed (subject to notice of issuance) and shall maintain, so
long as any other shares of Common Stock shall be so listed, such listing of
such Registrable Securities.
4. OBLIGATIONS OF THE INVESTORS.
a. At least three (3) Business Days prior to the first anticipated
filing date of a Registration Statement, the Company shall notify each Investor
in writing of the information the Company reasonably requires from each such
Investor if such Investor elects to have any of such Investor's Registrable
Securities included in such Registration Statement. It shall be a condition
precedent to the obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Registrable Securities of a
particular Investor that such Investor shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor no longer holds any Registrable
Securities or has notified the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from such Registration
Statement.
c. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f) or receipt of notice that no supplement or amendment is
required and, if so directed by the Company, such Investor shall deliver to the
Company, or destroy all copies in such Investor's possession, any prospectus
covering such Registrable Securities current at the time of receipt of such
notice. Notwithstanding anything to the contrary, the Company shall cause its
transfer agent to deliver unlegended shares of Common Stock to a transferee of
an Investor in accordance with the terms of the Securities Purchase Agreement in
connection with any sale of Registrable Securities with respect to which an
Investor has entered into a contract for sale prior to the Investor's receipt of
a notice from the Company of the happening of any
10
event of the kind described in Section 3(g) or the first sentence of 3(f) and
for which the Investor has not yet settled.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees,
fees and disbursements of Legal Counsel (up to an aggregate of $10,000) in
connection with registration filing or qualification pursuant to Sections 2 and
3 of this Agreement and fees and disbursements of counsel for the Company shall
be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. The Company agrees to indemnify, to the fullest extent permitted by
law, each Investor participating in the registration, and each of its partners,
members, managers, officers and directors and each Person who controls such
holders (within the meaning of the 1933 Act) against all losses, claims,
damages, liabilities and expenses (including without limitation, attorneys'
fees) ("LIABILITIES") caused by (i) any untrue or alleged untrue statement of
material fact contained in any Registration Statement or any prospectus or
preliminary prospectus or amendment thereof or supplement thereto, (ii) any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any violation
or alleged violation by the Company of the 1933 Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the 1933 Act, 1934
Act, or any state securities law, in each case in connection with such
registration, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such Investor expressly for
use therein or by such Investor's failure to deliver a copy of the Registration
Statement or prospectus or any amendments or supplements thereof or thereto
after the Company has furnished such Investor with a sufficient number of copies
of the same. The payments required by this Section 6(a) will be made
periodically during the course of the investigation or defense, as and when
bills are received or expenses incurred.
b. Each Investor participating in a registration shall furnish to the
Company in writing such information and affidavits as the Company reasonably
requests relating to information about the Investor for use in connection with
any Registration Statement or any prospectus, preliminary prospectus, amendment
or supplement thereof or thereto relating thereto and, to the fullest extent
permitted by law, shall indemnify the Company, its directors and officers and
each Person who controls the Company (within the meaning of the 1933 Act)
against any Liabilities resulting from any untrue or alleged untrue statement of
material fact contained in such Registration Statement or any prospectus,
preliminary prospectus, amendment or supplement thereof or thereto, or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the
11
extent that such untrue statement or omission related to such Investor and is
contained in any information or affidavit so furnished in writing by such
Investor specifically for use in such Registration Statement or any prospectus,
preliminary prospectus, amendment or supplement thereof or thereto; PROVIDED
that the obligation to indemnify hereunder will be several, not joint and
several, among the Investors holding such Registrable Securities, and the
liability of each such Investor under this Section 6 shall be limited to the net
amount received by such Investor from the sale of Registrable Securities
pursuant to such Registration Statement.
c. PROCEDURE. Any Person entitled to indemnification hereunder shall
(i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification, provided any such failure shall not
relieve the indemnifying party of liability hereunder, except to the extent that
the indemnifying party is prejudiced or injured by such failure, and (ii) unless
in such indemnified party's reasonable judgment an actual or potential conflict
of interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party will not be subject to any
liability for any settlement made by the indemnified party without its consent
(but such consent will not be unreasonably withheld). An indemnifying party who
is not entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party an actual or potential conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect to which (x) any
indemnified party is or could have been a party and (y) indemnity has or could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
for claims that are the subject matter of such proceeding.
d. CONTRIBUTION. To the extent any indemnification by an indemnifying
party provided for in this Section 6 is prohibited or limited by law, the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such Liabilities in such proportion as is appropriate to reflect the relative
fault of the indemnifying party and the indemnified party in connection with the
statements or omissions which resulted in such Liabilities, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of material fact or omission or
alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section(d) were determined solely by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the
12
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
e. SURVIVAL. The indemnification and contribution provided for under
this Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified party or any officer,
director or controlling Person of such indemnified party and will survive the
transfer of securities.
7. COMPLIANCE WITH RULE 144. At the request of an Investor proposing to
sell securities in compliance with Rule 144, the Company will (i) forthwith
furnish to such Investor, upon request, a written statement of compliance with
the filing requirements of the SEC as set forth in Rule 144, as such rule may be
amended from time to time, and (ii) use its reasonable best efforts to make
available to the public and such Investor such information as will enable such
Investor to make sales pursuant to Rule 144.
8. MISCELLANEOUS.
a. OTHER REGISTRATION RIGHTS. The Company may hereafter grant to any
Person or Persons the right to request the Company to register any equity
securities of the Company, or any securities convertible or exchangeable into or
exercisable for such securities, without the prior written consent of the
holders of the Registrable Securities; provided, however, the securities held by
such Person or Persons may not have priority over Registrable Securities under
Section 2(h).
b. ASSIGNMENT OF REGISTRATION RIGHTS. The registration rights of the
Holder under this Agreement with respect to any Registrable Securities may be
assigned to any Person who acquires such Registrable Securities; PROVIDED that
(a) the Investor shall give the Company written notice at or prior to the time
of such assignment stating the name and address of the assignee and identifying
the shares with respect to which the rights under this Agreement are being
assigned; (b) such assignee shall agree in writing, in form and substance
reasonably satisfactory to the Company, to be bound to the same extent and in
the same capacity as the Investor by the provisions of this Agreement; and (c)
such assignee acknowledges, immediately following such assignment, the further
disposition of such securities by such assignee is restricted under the 1933
Act.
c. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto will bind and inure to the benefit of the
respective permitted successors and assigns of the parties hereto, whether so
expressed or not.
d. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
13
e. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience of reference only and do not constitute a part of,
and shall not be utilized in interpreting, this Agreement.
f. NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); (iii) one (1) Business Day after deposit
with a nationally recognized overnight delivery service or (iv) five (5) days
after deposit in the U.S. mail, return receipt requested, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
divine, inc.
1301 North Elston Avenue
Chicago, Illinois 60622
Facsimile: (773) 394-6603
Attention: Jude M. Sullivan
With a copy to:
Katten Muchin Zavis Rosenman
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Facsimile: (312) 902-1061
Attention: Robert J. Brantman, Esq.
If to Legal Counsel:
Wilson Sonsini Goodrich & Rosati
650 Pax Mill Road
Palo Alto, California 94304
Facsimile: (650) 403-6811
Attention: Robert G. Day
If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers attached hereto, with copies to such Buyer's representatives as set forth
on the Schedule of Buyers, or to such other address and/or facsimile number
and/or to the attention of such other person as the recipient party has
specified by written notice given to each other party five (5) days prior to the
effectiveness of such change. Written confirmation of receipt or deposit in the
U.S. mail, as the case may be, (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission, (C)
provided by a courier or overnight courier service shall be rebuttable evidence
of personal
14
service, receipt by facsimile or receipt from a nationally recognized overnight
delivery service or (D) by a signed return receipt in accordance with clause
(i), (ii), (iii), or (iv) above, respectively.
g. GOVERNING LAW. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of Delaware, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Delaware. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the State of Delaware, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
h. AMENDMENTS AND WAIVERS. The provisions of this Agreement may be
amended upon the written agreement of the Company and the Investors holding a
majority of the Registrable Securities, determined as if all of the Preferred
Shares and the Warrants then outstanding have been converted into or exercised
for Registrable Securities without regard to any limitations on conversion of
the Preferred Shares or the exercise of the Warrants. Any waiver, permit,
consent or approval of any kind or character on the part of any holders of any
provision or condition of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in writing.
i. FINAL AGREEMENT. This Agreement, constitutes the complete and
final agreement of the parties concerning the matters referred to herein and
supersedes all prior agreements and understandings.
j. EXECUTION. This Agreement may be executed in identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party
15
hereto by facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.
k. CONSENTS. All consents and other determinations to be made by the
Investors pursuant to this Agreement shall be made, unless otherwise specified
in this Agreement, by Investors holding a majority of the Registrable
Securities, determined as if all of the Preferred Shares and the Warrants then
outstanding have been converted into or exercised for Registrable Securities
without regard to any limitations on conversion of the Preferred Shares or the
exercise of the Warrants.
l. CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent and no
rules of strict construction will be applied against any party.
m. SUCCESSORS AND ASSIGNS. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
* * * * * *
16
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
COMPANY:
divine, inc.
By: Jude M. Sullivan
------------------------------
Name: Jude M. Sullivan
Title: Senior Vice President and
General Counsel
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK INVESTMENT PARTNERS IX, LIMITED
PARTNERSHIP
/s/ Fredric W. Harman
-------------------------------------------
Fredric W. Harman
Managing Member of Oak Associates IX, LLC
The General Partner of Oak Investment
Partners IX, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK IX AFFILIATES FUND, LIMITED PARTNERSHIP
/s/ Fredric W. Harman
-------------------------------------------
Fredric W. Harman
Managing Member of Oak IX Affiliates, LLC
The General Partner of Oak IX Affiliates
Fund, Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK IX AFFILIATES FUND-A, LIMITED PARTNERSHIP
/s/ Fredric W. Harman
---------------------------------------------------
Fredric W. Harman
Managing Member of Oak IX Affiliates, LLC
The General Partner of Oak IX Affiliates Fund-A,
Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK INVESTMENT PARTNERS X, LIMITED PARTNERSHIP
/s/ Fredric W. Harman
---------------------------------------------------
Fredric W. Harman
Managing Member of Oak Associates X, LLC
The General Partner of Oak Investment Partners X,
Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
OAK X AFFILIATES FUND, LIMITED PARTNERSHIP
/s/ Fredric W. Harman
---------------------------------------------------
Fredric W. Harman
Managing Member of Oak X Affiliates, LLC
The General Partner of Oak X Affiliates Fund,
Limited Partnership
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
---------------------------------------------------
Peter Lynch
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
/s/ Andrew J. Filipowski
---------------------------------------------------
Andrew J. Filipowski
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
BUYERS:
---------------------------------------------------
By:
-----------------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
ATTN: _________________
RE: divine, inc.
Ladies and Gentlemen:
We are counsel to divine, inc., a Delaware corporation (the "COMPANY"), and
have represented the Company in connection with that certain Securities Purchase
Agreement (the "PURCHASE AGREEMENT") entered into by and among the Company and
the buyers named therein (collectively, the "HOLDERS") pursuant to which the
Company issued to the Holders shares of its Series B Convertible Preferred
Stock, par value $0.001 per share, (the "PREFERRED SHARES") convertible into
shares of the Company's Class A Common Stock, par value $0.001 per share (the
"COMMON STOCK"), and warrants to purchase shares of the Series B Convertible
Preferred Stock of the Company (the "WARRANT PREFERRED SHARES"), subject to
adjustment (the "WARRANTS"). Pursuant to the Purchase Agreement, the Company
also has entered into a Registration Rights Agreement with the Holders (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed, subject
to the terms and conditions thereof, among other things, to register the
Registrable Securities (as defined in the Registration Rights Agreement),
including the shares of Common Stock issuable upon conversion of the Preferred
Shares and conversion of the Warrant Preferred Shares issued upon the exercise
of the Warrants, under the Securities Act of 1933, as amended (the "1933 ACT").
In connection with the Company's obligations under the Registration Rights
Agreement, on _____________, 200_, the Company filed a Registration Statement on
Form S-3 (File No. 333-_____________) (the "REGISTRATION STATEMENT") with the
Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities subject to the Conversion Notice attached hereto which names each of
the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities subject to the Conversion Notice attached hereto are available for
resale under the 1933 Act pursuant to the Registration Statement.
Very truly yours,
Katten Muchin Zavis Rosenman
By:
-----------------------------------
cc: [LIST NAMES OF HOLDERS]
EXHIBIT 99.1
NEWS RELEASE
www.divine.comNASDAQ
:DVIN
divine Contacts Media Inquiries: International Media:
Individual Investors: Susan Burke/Anne Schmitt Chris Blaik
Brenda Lee Johnson Direct: 773.394.6746/6827 Direct: +44 0 20 7070 9520
Direct: 773.394.6873 susan.burke@divine.com Chris.blaik@divine.com
Brenda.Johnson@divine.com anne.schmitt@divine.com
FOR IMMEDIATE RELEASE
DIVINE SECURES OVER $61 MILLION IN NEW EQUITY FINANCING LED BY
OAK INVESTMENT PARTNERS
divine Positioned for Profitable Growth
CHICAGO - May 30, 2002 - divine, inc., (Nasdaq: DVIN), a leading provider of
solutions for the extended enterprise, today announced that it has secured
equity financing totaling more than $61 million from a group led by Oak
Investment Partners, one of America's oldest and largest venture capital firms.
This investment, in combination with ongoing expense reduction efforts,
positions divine to achieve its goal of profitability by the fourth quarter with
substantial cash reserves.
"During the past year, we have aggressively executed upon our strategy of
building a critical mass of offerings to support the Extended Enterprise. The
divine management team is very proud of the progress we have made so far, and
customers are responding enthusiastically both to our vision of the extended
enterprise and our best-of-breed products and services that address this market
need," said divine Chairman and Chief Executive Officer Andrew "Flip"
Filipowski. "Oak Investment Partners shares our belief in the exceptional
potential of this market and the ongoing consolidation opportunities, and
recognizes divine's leadership position in it. This investment from Oak provides
divine with funding sufficient to carry out our strategy and is principally
intended to assure customers of our strong financial position."
Oak Investment Partners and other investors have agreed to purchase over $61
million of preferred divine stock, which is convertible into common stock at a
conversion price of $6 per share. Under the terms of the investment documents,
the investors have agreed to purchase approximately $23.0 million in convertible
preferred stock of divine immediately, and have agreed to purchase an additional
$38.0 million in convertible preferred stock after divine's stockholders approve
the second purchase. At the funding of the second purchase, the investors will
also receive warrants to purchase approximately $9.5 million in divine stock.
Assuming the conversion of the convertible preferred stock and warrants into
divine common stock and the completion of divine's one-for-twenty-five reverse
stock split, the investors will acquire approximately 3,823,000 divine common
shares in the first purchase, up to approximately 6,333,000 shares in the second
purchase, and will have the right to purchase 1,583,000 shares by exercising the
warrant. Under the terms of the financing, the convertible preferred stock held
by the investors will vote as-if-converted with divine's common stock. The
investors have agreed not to transfer divine shares for one year after the
investment. Oak also will be entitled to appoint up to two directors to divine's
Board of Directors. The second purchase is subject to approval by divine's
shareholders; divine expects to obtain shareholder approval prior to July 31,
2002.
Oak Investment Partners has sponsored more than 350 companies with aggregate
annual revenues in excess of $100 billion. The firm targets rapidly growing
companies that address large, dislocating or expanding new markets and have
experienced management teams and business models that are expected to deliver
long-term value for shareholders. Among the companies it has funded include
Compaq, Informix, Inktomi, ILOG, Parametric, Polycom, Sybase, Synopsys,
Wellfleet and Wireless Facilities, Inc.
"divine has assembled the right mix of enterprise applications and service
offerings to address a significant opportunity in the emerging extended
enterprise market," said Fredric Harman, general partner of Oak Investment
Partners. "This opportunity, combined with our confidence in the divine
management team's ability to execute, makes divine a very attractive investment
for Oak. We are impressed with the market position divine has established to
date and believe this additional financing round provides the company with a
strong capital base to achieve its financial and business goals."
divine also announced that, due to the continued success of the ongoing
integration of its acquired businesses, it expects to be able to further reduce
annual expenses by an additional $40 million in the second quarter. This is in
addition to the $45 million in previously announced consolidation savings
achieved during the first and second quarters.
"We have committed all along to reducing our cash burn by reducing overhead
associated with our acquisitions and through ongoing expense reductions. As a
result of these actions, we will have eliminated approximately $85 million in
additional annual expenses by the second quarter, representing a significant
step toward achieving profitability by the fourth quarter," said Chief Financial
Officer Michael Cullinane. "We believe that, with the cash received in this
investment combined with the cash we anticipate receiving at the close of our
acquisitions of Viant Corporation and Delano Technology, we will have in excess
of $180 million in cash in July. This level of cash reserves is well above our
operational requirements but required in this market to assure customers."
About divine, inc.
divine, inc., (Nasdaq: DVIN) is focused on extended enterprise solutions.
Through professional services, software services and managed services, divine
extends business systems beyond the edge of the enterprise throughout the entire
value chain, including suppliers, partners and customers. divine offers
single-point accountability for end-to-end solutions that enhance profitability
through increased revenue, productivity, and customer loyalty. The company
provides expertise in collaboration, interaction, and knowledge solutions that
enlighten, empower and extend enterprise systems.
Founded in 1999, divine focuses on Global 5000 and high-growth middle market
firms, government agencies, and educational institutions, and currently serves
over 20,000 customers. For more information, visit the company's Web site at
www.divine.com.
# # #
(c) 2002 divine, inc. divine is a trademark of divine, inc. All other
trademarks, trade names and service marks referenced herein are the properties
of their respective companies.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The statements contained in this news release that are forward-looking are based
on current expectations that are subject to a number of uncertainties and risks,
and actual results may differ materially. The uncertainties and risks include,
but are not limited to: divine's ability to execute its integrated Web-based
technology, professional services, and managed applications strategy; divine's
ability to successfully implement its acquisition strategy, including its
ability to integrate the operations, personnel, products, and technologies of,
and address the risks associated with, acquired companies; divine's ability to
develop enterprise Web software and services; the uncertainty of customer demand
for enterprise Web software and services; divine's ability to expand its
customer base and achieve and maintain profitability; divine's ability to retain
key personnel; divine's ability to predict revenues from project-based
engagements; divine's ability to keep pace with technological developments and
industry requirements; divine's ability to efficiently manage its growing
operations; changes in the market for Internet services and the economy in
general, including as a result of any additional terrorist attacks or responses
to terrorist attacks; increasing competition from other providers of software
solutions and professional services; the extent to which customers want to
purchase software applications under hosted subscription based models; divine's
ability to address the risks associated with international operations; divine's
ability to become cash flow positive before it depletes its cash reserves or
become insolvent; divine's ability to maintain its Nasdaq listing; and other
unanticipated events and conditions. For further information about these and
other risks, uncertainties, and contingencies, please review the disclosure
under the captions "Risk Factors" and "Special Note on Forward-Looking
Statements" in divine's most recent Forms 10-K and 10-Q filed with the SEC. You
should not place undue reliance on these forward-looking statements, which
reflect management's analysis, judgment, belief, or expectation only as of the
date hereof. Except as required by federal securities laws, divine undertakes no
obligation to publicly revise these forward-looking statements or risks,
uncertainties, or contingencies to reflect events or circumstances that arise
after the date hereof.
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Exhibit 99.1