SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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
netGuru, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] 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:
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(2) Aggregate number of securities to which transaction applies:
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(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): The
proposed transaction is valued at $3,500,000, which is the sum of the
$2,000,000 to be received by the Registrant in connection with the
sale transaction described in the preliminary materials and the
$1,500,000 to be provided to the Registrant in the reverse merger
transaction described in the preliminary materials.
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(4) Proposed maximum aggregate value of transaction:
$3,500,000
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(5) Total fee paid:
$700.00
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[X] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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NETGURU, INC.
22700 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92887
November 2, 2006
To Our Stockholders:
You are cordially invited to attend the 2006 annual meeting of
stockholders of netGuru, Inc., which will be held at 10:00 a.m. on November 28,
2006, at our executive offices located at 22700 Savi Ranch Parkway, Yorba Linda,
California 92887. All holders of our outstanding common stock as of the close of
business on September 29, 2006 are entitled to vote at the annual meeting.
At the annual meeting, stockholders will be asked to vote on the
election of directors. Stockholders will also be asked to consider and vote upon
proposals to approve a reverse merger, a sale of our Indian operations and
certain additional assets and liabilities to our affiliates, a corporate name
change, a reverse stock split and an increase in our authorized number of shares
of preferred stock.
If the proposed merger and sale transactions are consummated, then we
expect to declare and pay a cash dividend of approximately $3.5 million in the
aggregate, or approximately $0.18 cents per share of our common stock
outstanding prior to the planned reverse stock split, out of the $1.5 million in
cash anticipated to be provided to us in the merger transaction and the
approximate $2.0 million in cash anticipated to be received in the sale
transaction. The cash dividend would be paid after the closings and only to
holders of our common stock outstanding on a record date to be set prior to the
closings.
Enclosed are a copy of the notice of annual meeting of stockholders, a
proxy statement, a proxy card, our latest annual report on Form 10-KSB and our
latest quarterly report on Form 10-QSB. A current report on our business
operations will be presented at the meeting, and stockholders will have an
opportunity to ask questions.
We hope you will be able to attend the annual meeting. Whether or not
you expect to attend, it is important that you complete, sign, date and return
the proxy card in the enclosed envelope in order to make certain that your
shares will be represented at the annual meeting.
Sincerely,
/s/ Amrit K. Das
---------------------------
Amrit K. Das
Chief Executive Officer
NETGURU, INC.
22700 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92887
______________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 28, 2006
______________
NOTICE IS HEREBY GIVEN that the 2006 annual meeting of stockholders of
netGuru, Inc. will be held at 10:00 a.m. Pacific time, on November 28, 2006, at
our executive offices located at 22700 Savi Ranch Parkway, Yorba Linda,
California 92887, for the following purposes, each as described in more detail
in the attached proxy statement:
1. To elect five nominees to our board of directors, to hold office
until the next annual meeting of stockholders or until their
respective successors are elected or appointed and qualified.
2. To consider and vote upon a proposal to approve, subject to and
conditioned upon approval and consummation of proposals 3, 4, 5
and 6, the issuance of shares of our common stock pursuant to the
terms of the Agreement and Plan of Merger dated as of August 29,
2006, among privately-held BPO Management Services, Inc.
("BPOMS"), us, and BPO Acquisition Corp., as a result of which
BPOMS stockholders would hold approximately 90% of our equity
interests that would be outstanding immediately following the
consummation of the merger on a fully-diluted basis but excluding
most new equity or equity-based securities, if any, issued by us
or BPOMS after August 29, 2006.
3. To consider and vote upon a proposal to approve, subject to and
conditioned upon approval and consummation of proposals 2, 4, 5
and 6, the sale and transfer of our interest in Research
Engineers Ltd., our majority-owned India subsidiary ("REL"), and
certain additional assets and liabilities, to Das Family
Holdings, a privately-held California corporation controlled by
affiliates of our company ("DFH"), pursuant to the terms of a
Purchase Agreement dated as of August 29, 2006, between DFH and
us.
4. To consider and vote upon a proposal to amend our certificate of
incorporation in order to change our name to "BPO Management
Services, Inc.," subject to approval and consummation of
proposals 2, 3, 5 and 6.
5. To consider and vote upon a proposal to amend our certificate of
incorporation in order to consummate a reverse stock split within
a range to be determined by our board of directors from 1-for-4 to
1-for-30, with any fractional shares that would otherwise be
issuable as a result of the split being rounded up to the nearest
share.
6. To consider and vote upon a proposal to amend our certificate of
incorporation in order to increase the total number of shares of
preferred stock authorized for issuance from 5,000,000 to
5,000,000 plus the number of preferred shares needed to
accommodate the creation of the three series of preferred stock
for which the BPOMS preferred stock would be exchanged in the
merger transaction, subject to approval and anticipated
consummation of proposals 2, 3, 4 and 5.
7. To transact such other business as may properly come before the
annual meeting or any adjournments or postponements of the
meeting.
Our board of directors has fixed the close of business on September 29,
2006 as the record date for the determination of stockholders entitled to notice
of and to vote at the annual meeting. Only holders of our common stock at the
close of business on the record date are entitled to vote at the meeting. A list
of stockholders entitled to vote at the meeting will be available for inspection
at our executive offices. Stockholders attending the meeting whose shares are
held in the name of a broker or other nominee and who wish to vote in person at
the meeting should bring with them a legal proxy.
By Order of the Board of Directors
/s/ Bruce K. Nelson
Bruce K. Nelson
Secretary
Yorba Linda, California
November 2, 2006
YOUR VOTE IS IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. HOWEVER, EVEN
IF YOU DO PLAN TO ATTEND, PLEASE PROMPTLY FILL IN, DATE, SIGN AND MAIL THE
ENCLOSED PROXY IN THE RETURN ENVELOPE FURNISHED FOR THAT PURPOSE AS PROMPTLY AS
POSSIBLE. RETURNING A SIGNED PROXY CARD WILL NOT PREVENT YOU FROM VOTING IN
PERSON AT THE MEETING, IF YOU SO DESIRE, BUT WILL HELP US SECURE A QUORUM AND
REDUCE THE EXPENSE OF ADDITIONAL PROXY SOLICITATION. IF YOU LATER DESIRE TO
REVOKE YOUR PROXY FOR ANY REASON, YOU MAY DO SO IN THE MANNER DESCRIBED IN THE
ATTACHED PROXY STATEMENT.
TABLE OF CONTENTS
Page
----
Introduction...................................................................1
Date, Time, Place and Purpose.........................................1
Voting Rights and Votes Required for Approval.........................1
Solicitation of Proxies...............................................2
Recommendation of Our Board of Directors..............................3
Summary of Proposed Reverse Merger, Sale, Name Change, Reverse
Stock Split and Increase in Authorized Preferred...........................4
Overview of Proposals.................................................4
Parties to the Merger and Sale Transactions...........................4
Merger Transaction....................................................5
Sale Transaction......................................................6
Closings and Termination Fees.........................................7
Related Transactions..................................................7
Corporate Name Change.................................................8
Reverse Stock Split...................................................8
Increase in Authorized Number of Preferred Shares.....................8
Interests of Our Directors and Executive Officers.....................8
Stockholder and Board Approvals.......................................9
Reasons for the Merger and Sale Transactions.........................10
Regulatory Approvals.................................................10
Beneficial Ownership and Operations Following the Closing............10
Accounting Treatment.................................................11
Material United States Federal Income Tax Consequences...............11
Risk Factors.........................................................11
Cautionary Statement Regarding Forward-Looking Statements.....................12
Risk Factors..................................................................13
Proposal 1 - Election of Directors............................................22
Directors, Director Nominees and Executive Officers..................22
Term of Office and Family Relationships..............................24
Board of Directors and Committees....................................24
Directors' Compensation..............................................26
Security Holder Communications with Our Board of Directors...........26
Policy With Regard to Board Members' Attendance at Annual Meetings...27
Code of Business Conduct and Ethics..................................27
Section 16(a) Beneficial Ownership Reporting Compliance..............27
Board Audit Committee Report.........................................28
Change In Independent Auditors.......................................28
Principal Accountant Fees and Expenses...............................29
Pre-Approval Policy..................................................29
Executive Compensation...............................................30
Option Grants In Last Fiscal Year....................................31
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values............................................31
Long-Term Incentive Plan Awards......................................31
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Page
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Repricing of Options and SARS........................................31
Employment Agreements, Termination of Employment and
Change-in-Control Arrangements....................................31
Security Ownership of Certain Beneficial Owners and Management.......34
Changes in Control...................................................36
Certain Relationships and Related Transactions.......................36
Required Vote and Board Recommendation...............................37
Proposal 2 - Reverse Merger With BPOMS........................................38
General..............................................................38
Background of the Merger and Sale Transactions.......................38
The Merger Agreement.................................................45
Reasons for the Merger and Sale Transactions.........................56
Use of Proceeds......................................................58
Operations and Ownership Prior to and Following the Closings.........58
Pro Forma Financial Information......................................85
Historical Financial Information.....................................85
Accounting Treatment.................................................85
Material United States Federal Income Tax Consequences...............86
Attendance of Independent Registered Public Accountants
at Annual Meeting.................................................87
Regulatory Approvals.................................................87
Interests of Our Directors and Executive Officers....................87
Risk Factors.........................................................88
Required Vote and Board Recommendation...............................88
Proposal 3 - Sale of Indian Subsidiary and Certain Assets and Liabilities.....90
General..............................................................90
Background of the Sale Transaction...................................90
The Sale Agreement...................................................90
Reasons for the Sale Transaction.....................................98
Use of Proceeds......................................................98
Operations and Ownership Prior to and Following the Closings.........98
Opinion of Our Financial Advisor.....................................98
Pro Forma Financial Information......................................99
Historical Financial Information.....................................99
Accounting Treatment.................................................99
Material United States Federal Income Tax Consequences...............99
Regulatory Approvals.................................................99
Interests of Our Directors and Executive Officers...................100
Risk Factors........................................................100
Required Vote and Board Recommendation..............................100
Proposal 4 - Corporate Name Change...........................................101
The Proposal........................................................101
Interests of Our Directors and Executive Officers...................101
Risk Factors........................................................101
Required Vote and Board Recommendation..............................101
Proposal 5 - Reverse Stock Split.............................................103
The Proposal........................................................103
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Potential Anti-Takeover and Other Effects...........................104
Interests of Our Directors and Executive Officers...................107
Risk Factors........................................................107
Required Vote and Board Recommendation..............................107
Proposal 6 - Increase in Authorized Number of Preferred Shares...............108
The Proposal........................................................108
Potential Anti-Takeover and Other Effects...........................109
Interests of Our Directors and Executive Officers...................109
Risk Factors........................................................109
Required Vote and Board Recommendation..............................109
Stockholder Proposals........................................................101
Annual and Quarterly Reports.................................................112
Available Information........................................................113
Other Matters................................................................113
Appendix A - Agreement and Plan of Merger....................................A-1
Appendix B - Purchase Agreement..............................................B-1
Appendix C - Fairness Opinion................................................C-1
Appendix D - Unaudited Pro Forma Financial Information.......................D-1
Appendix E - Historical Financial Information of netGuru, Inc.
and Subsidiaries and for Research Engineers Ltd....................E-1
Appendix F - Historical Financial Information of BPO Management
Services, Inc. and Subsidiaries....................................F-1
Appendix G - Preferred Stock Description.....................................G-1
iii
NETGURU, INC.
22700 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92887
______________
PROXY STATEMENT
2006 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 28, 2006
______________
INTRODUCTION
DATE, TIME, PLACE AND PURPOSE
This proxy statement is being furnished to holders of common stock of
netGuru, Inc., a Delaware corporation, in connection with the solicitation of
proxies by our board of directors for use at the 2006 annual meeting of our
stockholders to be held at 10:00 a.m. Pacific time on November 28, 2006, at our
executive offices located at 22700 Savi Ranch Parkway, Yorba Linda, California
92887, and at any adjournments or postponements of the meeting. We anticipate
that this proxy statement and accompanying proxy card will first be mailed on or
about November 6, 2006 to all stockholders entitled to vote at the annual
meeting. At the annual meeting, stockholders will be asked to consider and vote
upon the proposals described in the accompanying notice of meeting and any other
matters that may properly come before the meeting.
VOTING RIGHTS AND VOTES REQUIRED FOR APPROVAL
We have one class of capital stock outstanding, common stock. At the
close of business on September 29, 2006, the record date for determining
stockholders entitled to notice of and to vote at the annual meeting, we had
issued and outstanding 19,235,041 shares of common stock. Each share of common
stock entitles the holder of that share to one vote on any matter coming before
the annual meeting and any adjournments or postponements of the annual meeting.
Under Delaware law and our bylaws, a majority of the shares entitled to
vote, represented in person or by proxy, will constitute a quorum at a meeting
of stockholders. Shares of our common stock represented in person or by proxy
(regardless of whether the proxy has authority to vote on all matters), as well
as abstentions and broker non-votes, will be counted for purposes of determining
whether a quorum is present at the meeting.
An "abstention" is the voluntary act of not voting by a stockholder who
is present at a meeting and entitled to vote. "Broker non-votes" are shares of
voting stock held in record name by brokers and nominees concerning which: (i)
the brokers or nominees do not have discretionary voting power under applicable
rules or the instrument under which they serve in such capacity and instructions
have not been received from the beneficial owners or persons entitled to vote;
or (ii) the record holder has indicated on the proxy or has executed a proxy and
otherwise notified us that it does not have authority to vote such shares on
that matter.
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Votes cast at the meeting will be tabulated by the person or persons
appointed by us to act as inspectors of election for the meeting. Directors will
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors, which means that the five candidates receiving the highest number of
affirmative votes of the shares entitled to be voted for them will be elected.
Proposals 2, 3, 4, 5 and 6 each require for approval the affirmative
vote of a majority of the shares entitled to vote at the meeting. In all other
matters that may properly come before the meeting, unless otherwise expressly
provided by applicable statute or by our certificate of incorporation or bylaws,
the affirmative vote of the majority of shares present in person or represented
by proxy at the meeting and entitled to vote on the proposal will constitute the
act of the stockholders.
On proposals that require for approval the affirmative vote of the
majority of shares present in person or represented by proxy at the meeting and
entitled to vote on the proposal, abstentions but not broker non-votes will be
treated as shares present and entitled to vote on the proposals. Applying that
standard, an abstention will be counted as a vote "against" the proposals, and a
broker non-vote will reduce the absolute number (although not the percentage) of
the affirmative votes needed for approval of the proposals. However, on
proposals such as proposals 2, 3, 4, 5 and 6, the effect of either an abstention
or a broker non-vote will be the same as a vote "against" the proposal, because
an absolute number of affirmative votes is required, regardless of how many
votes are cast, and abstentions and broker non-votes are not affirmative votes.
SOLICITATION OF PROXIES
The proxy card accompanying this proxy statement is solicited on behalf
of our board of directors for use at the meeting. Stockholders are requested to
complete, date and sign the accompanying proxy card and promptly return it in
the accompanying envelope or otherwise mail it to us. All proxies that are
properly executed and returned, and that are not revoked, will be voted at the
meeting in accordance with the instructions indicated on the proxies or, if no
direction is indicated, "for" each of the proposals described on the proxy card.
A stockholder who has given a proxy may revoke it at any time before it
is exercised at the meeting, by:
o delivering to our secretary (by any means, including facsimile), a
written notice, bearing a date later than the date of the proxy,
stating that the proxy is revoked;
o signing and delivering to our secretary (by any means, including
facsimile) a proxy relating to the same shares and bearing a later
date prior to the vote at the meeting; or
o attending the meeting and voting in person (although attendance at
the meeting will not, by itself, revoke a proxy).
Our board of directors does not presently intend to bring any business
before the meeting of our stockholders other than the proposals referred to in
this proxy statement and specified in the notice of meeting. So far as is known
to our board of directors, no other matters are to be brought before the
meeting. As to any business that may properly come before the meeting, however,
it is intended that shares represented by proxies held by management will be
voted in accordance with the judgment of the persons voting the shares.
2
We contemplate that the solicitation of proxies will be made primarily
by mail. We will make arrangements with brokerage houses and other custodians,
nominees and fiduciaries to send proxies and proxy material to the beneficial
owners of shares of our common stock and will reimburse them for their expenses
in so doing. We have no present plans to hire special employees or paid
solicitors to assist us in obtaining proxies, but we reserve the right to do so
if we believe it is necessary to secure a quorum.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors recommends that our stockholders vote "for" the
election of each of the director nominees named in this proxy statement and
"for" all of the other proposals described in this proxy statement and the
accompanying notice of meeting.
THE PROPOSALS TO BE VOTED UPON AT THE MEETING ARE DISCUSSED IN DETAIL
IN THIS PROXY STATEMENT. YOU ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY
THIS PROXY STATEMENT AND ITS APPENDICES IN THEIR ENTIRETY.
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SUMMARY OF PROPOSED
REVERSE MERGER, SALE, NAME CHANGE, REVERSE STOCK SPLIT
AND INCREASE IN AUTHORIZED PREFERRED
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
RELATING TO THE PROPOSED TRANSACTIONS COVERED IN PROPOSALS 2, 3, 4, 5 AND 6. IT
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU MAY CONSIDER TO BE IMPORTANT IN
DETERMINING HOW TO VOTE ON THOSE PROPOSALS. YOU SHOULD CAREFULLY READ THE ENTIRE
PROXY STATEMENT AND OTHER DOCUMENTS TO WHICH WE REFER. THESE WILL GIVE YOU A
MORE DETAILED DESCRIPTION OF THE TRANSACTIONS CONTEMPLATED. WE HAVE INCLUDED
CROSS-REFERENCES TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF THE TOPICS
PRESENTED IN THIS SUMMARY. UNLESS OTHERWISE INDICATED, CROSS-REFERENCES ARE TO
PAGES CONTAINED IN THIS PROXY STATEMENT.
OVERVIEW OF PROPOSALS
At the annual meeting, stockholders will be asked to vote on the
election of directors as discussed in proposal 1. Stockholders will also be
asked to consider and vote upon proposals to approve a reverse merger, a sale of
our Indian operations and certain additional assets and liabilities to our
affiliates, a corporate name change, a reverse stock split and an increase in
our authorized number of shares of preferred stock. These matters are covered in
the discussions of proposals 2, 3, 4, 5 and 6 and are described briefly in this
summary.
PARTIES TO THE MERGER AND SALE TRANSACTIONS
NETGURU
We are an integrated Internet technology and services company providing
collaborative software products and services and information technology ("IT")
services. We serve our clients through offices located in the United States,
Europe and India. Our principal executive offices are located at:
netGuru, Inc.
22700 Savi Ranch Parkway
Yorba Linda, California 92887
Telephone: (714) 974-2500
For more information regarding our business, see page 59 under the
heading "Operations and Ownership Prior to and Following the Closings" and also
refer to Item 1 of Part I of our annual report on Form 10-KSB for the fiscal
year ended March 31, 2006 that accompanies this proxy statement.
BPO ACQUISITION CORP.
BPO Acquisition Corp. is a wholly-owned Delaware subsidiary of ours
that shares our principal executive offices and was formed to facilitate the
merger transaction.
BPO MANAGEMENT SERVICES, INC.
BPOMS is a privately-held Delaware corporation that provides business
process outsourcing ("BPO") services to support back-office business functions
such as human resources management, IT services, document management solutions,
and finance and accounting processes. BPOMS' target is middle market enterprises
located throughout the United States and Canada. Its principal executive offices
are located at:
4
BPO Management Services, Inc.
19800 MacArthur Boulevard, Suite 820
Irvine, California 92612
Telephone: (714) 685-6473
For more information regarding BPOMS' business, see page 61 under the
heading "BPOMS' Business and Related Matters."
DAS FAMILY HOLDINGS
DFH is a privately-held California corporation that was formed for the
purpose of acquiring REL and certain additional assets and liabilities in the
proposed sale transaction. Stockholders of DFH ("DFH Holders") include Amrit K.
Das, who is our Chairman, Chief Executive Officer, President and holder of more
than 10% of our outstanding common stock, Santanu K. Das, who is the son of
Amrit K. Das and brother of Sormistha Das, is one of our directors and former
executive officers and holds more than 10% of our outstanding common stock, and
Sormistha Das, who is the daughter of Amrit K. Das and sister of Santanu K. Das,
served as our assistant controller from October 2001 to September 15, 2006, and
holds more than 10% of our outstanding common stock. The principal executive
offices of DFH are located at:
Das Family Holdings
6837 E. Horizon Drive
Orange, California 92867
Telephone: (714) 464-5352
MERGER TRANSACTION
MERGER AGREEMENT
On August 29, 2006, we entered into an Agreement and Plan of Merger
with BPOMS and BPO Acquisition Corp. ("merger agreement"). If the merger
transaction contemplated by the merger agreement is consummated, BPOMS
stockholders would exchange their shares of common and preferred stock of BPOMS
for shares of our common stock and shares of three classes of preferred stock we
would create, and we would assume BPOMS' obligations under its outstanding
options and warrants to purchase BPOMS common stock.
As a result of the merger, BPOMS would become a wholly-owned subsidiary
of ours. Also, we would experience a change in control because we anticipate
that approximately 90% of the equity interests of the combined company that
would be outstanding immediately following the merger on a fully-diluted basis
but excluding most new equity or equity-based securities issued by us or BPOMS
after August 29, 2006, would be held by the former BPOMS stockholders.
The merger agreement is the document that controls the proposed merger
transaction. We encourage you to read the entire merger agreement, which is
attached to this proxy statement as Appendix A and is described beginning on
page 45.
CONSIDERATION TO BE RECEIVED AND USE OF PROCEEDS
BPOMS has agreed to make available in connection with the closing $1.5
million in cash that we would apply toward the payment of a $3.5 million cash
dividend to our pre-merger stockholders. See "Use of Proceeds" beginning on page
59.
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NON-SOLICITATION
The merger agreement contains non-solicitation provisions restricting
our and BPOMS' rights to negotiate or enter into other acquisition or sale
transactions prior to the closing. See "Post-Signing and Post-Closing Covenants"
beginning on page 52.
SALE TRANSACTION
SALE AGREEMENT
On August 29, 2006, we entered into a Purchase Agreement ("sale
agreement") pursuant to which we would, concurrently with the consummation of
the merger transaction, sell and transfer our interest in the capital stock of
REL, our majority-owned India subsidiary that engages in engineering business
process outsourcing services, and certain additional assets and liabilities to
DFH.
The sale agreement is the document that controls the proposed sale
transaction. We encourage you to read the entire sale agreement, which is
attached to this proxy statement as Appendix B and is described beginning on
page 90.
ADDITIONAL ASSETS AND LIABILITIES
The additional assets to be sold to DFH would include certain marks and
Internet domain names, including the "netGuru" name, a copy of the source code
for our WEBWORKS(TM) software, and certain contracts, licenses and accounts
receivable primarily relating to REL's business. DFH would assume certain
obligations and liabilities, and the change in control and executive retention
agreement and the split dollar life insurance arrangement between Amrit K. Das
and us would be terminated. See "Stock, Assets and Liabilities to be Sold and
Transferred" beginning on page 91.
VOTING AGREEMENTS
On August 29, 2006, we entered into voting agreements with BPOMS and
certain of our stockholders who also are stockholders of DFH. The voting
agreements provide that those stockholders will vote their shares of our common
stock, which as of September 29, 2006 constituted 37.5% of our outstanding
common stock, in favor of the merger and sale transactions, our corporate name
change and the reverse stock split, and against any opposing or competing
transactions. See "Post-Signing and Post-Closing Covenants" beginning on pages
52 and 94.
OTHER AGREEMENTS
At the closing of the sale transaction, we would enter into an
outsourcing services agreement with REL covering services that may be provided
to us by REL after the closing, a value-added reseller agreement with REL
covering our Web4 products that may be distributed by REL after the closing, and
a transition agreement that covers the transition of the netGuru name and mark
and our hosting of the "netguru.com" website for a limited time following the
closing. See "Operations to be Sold" beginning on page 60 for additional
information.
CONSIDERATION TO BE RECEIVED AND USE OF PROCEEDS
DFH has agreed to pay us $2.0 million under the sale agreement, which
we would apply toward the payment of a $3.5 million cash dividend to our
pre-merger stockholders. See "Cash Dividend" below. We have agreed to transfer
to REL at the closing of the merger and sale transactions any cash and cash
equivalents in excess of U.S. reserved cash, as defined in Section 1.2(b)(i) of
the merger agreement. See "Post-Signing and Post-Closing Covenants" beginning on
page 94.
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NON-SOLICITATION
The sale agreement contains non-solicitation provisions restricting our
right to negotiate or enter into other acquisition or sale transactions prior to
the closing. The sale agreement also includes employee and customer
non-solicitation provisions restricting our and DFH's rights to solicit
employees and certain customers of one another for a period of 18 months
following the closing. See "Post-Signing and Post-Closing Covenants" beginning
on page 94.
CLOSINGS AND TERMINATION FEES
The merger agreement and the sale agreement each require that the
closings of the merger and sale transactions occur simultaneously. The closings
of the merger and sale transactions are subject to various conditions, including
approval of the transactions by our stockholders. If all closing conditions are
met, we anticipate that the merger and sale transactions would as soon as
practicable following the annual meeting, but not later than December 22, 2006.
See "Conditions to Closing" beginning on pages 51 and 92.
However, each party has certain rights to terminate the merger and/or
sale agreements, including the right to unilaterally terminate the agreements
with or without reason if the transactions do not close by December 22, 2006.
Depending upon the reasons a termination occurs, we might be required to pay to,
or we may receive from, BPOMS and/or DFH termination fees totaling up to
$400,000. See "Termination Fees" beginning on pages 56 and 97.
RELATED TRANSACTIONS
CASH DIVIDEND
In connection with the merger and sale transactions, we plan to declare
a cash dividend and to conduct a reverse stock split prior to the closings. The
cash dividend, if declared as anticipated, would be approximately $3.5 million
in the aggregate, or approximately $0.18 cents per share of our common stock
outstanding prior to the planned reverse stock split, and would become payable
out of the $1.5 million in cash anticipated to be provided by BPOMS in the
merger transaction and the approximate $2.0 million in cash anticipated to be
received from DFH in the sale transaction. The cash dividend would be paid after
the closings and only to holders of our common stock outstanding on a record
date to be set prior to the closings. See "Use of Proceeds" beginning on pages
59 and 98 and "Post-Signing and Post-Closing Covenants" beginning on pages 52
and 94.
CREATION OF PREFERRED STOCK
We have agreed to create three series of preferred stock containing,
among other terms, various conversion, liquidation, redemption, voting and
director election and board observation provisions. Shares of BPOMS preferred
stock would be exchanged for shares of our newly created preferred stock with
substantially the same terms at the closing of the proposed merger. See "BPOMS'
Capital Stock, Options and Warrants" beginning on page 45 and Appendix G to this
proxy statement.
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CORPORATE NAME CHANGE
The agreements relating to the merger transaction and the sale
transaction require that we change our name to BPO Management Services, Inc. at
or after the effective time of the merger. See proposal 4 beginning on page 101.
REVERSE STOCK SPLIT
After the declaration of the dividend but prior to the payment of the
dividend and the consummation of the merger, we would effect a reverse stock
split of our approximately 19.2 million outstanding shares of common stock. See
proposal 5 beginning on page 103.
INCREASE IN AUTHORIZED NUMBER OF PREFERRED SHARES
If the merger transaction is consummated, then we would first increase
the authorized number of preferred shares from 5,000,000 to 5,000,000 plus the
number of preferred shares needed to accommodate the creation of the three
series of preferred stock for which the BPOMS preferred stock would be exchanged
in the merger transaction if the merger is consummated. See proposal 6 beginning
on page 108.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Some of our directors and executive officers have interests in the
merger, sale and related transactions that are different from, or in addition
to, those of our stockholders generally. Our board of directors was aware of
these interests when it approved the merger and sale agreements.
New employment agreements with Bruce K. Nelson, who is our Chief
Financial Officer and who is proposed to serve as Chief Financial Officer of the
combined company, and Koushik Dutta, who is our Chief Operating Officer and who
is proposed to serve as Chief Technology Officer of the combined company, may be
entered into and become effective as of the closing of the merger transaction.
Mr. Dutta is not currently a party to an employment agreement with us. Mr.
Nelson's salary under the proposed new agreement would be $150,000, as compared
to his current salary of $127,000. Mr. Dutta's salary under the proposed new
agreement would be $140,000, as compared to his current salary of $115,000. In
addition, under the proposed new employment agreements, Messrs. Nelson and Dutta
would each become eligible for a monthly car allowance of $600 and annual bonus
equal to up to 50% of their base salary based on the achievement of company and
individual performance goals as may be established by the board.
Also, upon execution of the employment agreements at the closing, Mr.
Nelson would be granted an option to purchase up to 100,000 shares of common
stock, vesting 25% after one month, an additional 25% six months after the
closing, and the remaining 50% twelve months after the closing. In addition, Mr.
Dutta would be granted an option to purchase up to 75,000 shares of common
stock, vesting 25% for every six months Mr. Dutta is employed full-time
following the closing. In the event of a change in control, or if Mr. Nelson's
or Mr. Dutta's employment is terminated without cause or for good reason, the
options would become 100% vested immediately. See "Post-Closing Beneficial
Ownership and Operations"" beginning on page 69 for additional information
regarding the proposed terms of the employment agreements.
Mr. Nelson has received and anticipates receiving under his existing
employment agreement bonus compensation tied to milestones that relate in part
to our progress in connection with the merger and sale transactions. To date,
Mr. Nelson has received approximately $95,250 under the milestone bonus
payments. The final payment will be $51,000 and is due to Mr. Nelson on November
18, 2006 regardless of the status of the merger and sale transactions. See
"Employment Agreements, Termination of Employment and Change-in-Control
Arrangements" beginning on page 31 for additional information regarding his
existing employment agreement.
As indicated above, Mr. Dutta does not currently have an employment
agreement with us. However, Mr. Dutta is entitled to a cash bonus of $50,000
payable at the time of the closing. See "Certain Relationships and Related
Transactions" beginning on page 36 for additional information regarding that
bonus.
Each of our non-employee directors has received $67,000 for serving on
a special committee of our board of directors that was charged with the task of
assisting in establishing a specific course of action for us to take after the
consummation of asset sale last year. See "Directors' Compensation" beginning on
page 26 for more specific information regarding director compensation.
Mr. Amrit K. Das and Mr. Santanu K. Das, two of our directors, are also
shareholders and officers of DFH, the entity to which we propose to sell our
interest in the capital stock of REL and certain additional assets and
liabilities in exchange for $2.0 million cash in the sale transaction.
Accordingly, each of these two directors has a direct financial interest in the
sale transaction and therefore abstained from voting on the proposed merger and
sale transactions. See "The Sale Agreement - General" beginning on page 91 for
further information regarding the sale transaction.
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Also, at the closing of the sale transaction, we plan to enter into an
outsourcing services agreement with REL covering services that may be provided
to us by REL after the closing. The outsourcing services agreement has an
initial term of twelve months and will automatically renew for successive twelve
month periods unless terminated by either party. The agreement provides that
approximately ten persons who are employed by REL and who currently engage in
ongoing product development, testing and support work for our Web4 and netGuru
Systems divisions will continue to do those tasks, with us paying to REL their
gross pay, which totals approximately $4,500 per month, plus $500 per month
each. Other services to be provided under the agreement will be pursuant to
statements of work that would provide for fees commensurate with the type of
services and level of skill required. Offshore BPO services would be paid at
$7.00 per hour. Fees for software development services would range from $12.00
to $15.00 per hour. Onsite work fees would range from $20.00 to $70.00 per hour.
Telephone and Internet usage and other special services or software would be
billed at actual cost plus a 10% processing fee. See "Operations and Ownership
Prior to and Following the Closings - Operations to be Sold" beginning on page
60 for further Information.
STOCKHOLDER AND BOARD APPROVALS
The merger transaction, sale transaction, corporate name change,
reverse stock split and increase in the authorized number of preferred shares
are the subject of proposals 2, 3, 4, 5 and 6, respectively. Approval of each of
these matters requires the affirmative vote of a majority of the shares entitled
to vote at the annual meeting. We anticipate that the shares covered by the
voting agreements will be voted in favor of proposals 2, 3, 4, 5 and 6. The
independent members of our board of directors recommend that our stockholders
approve each of these proposals.
At the close of business on September 29, 2006, our directors, director
nominees and executive officers collectively owned approximately 27.4% of the
outstanding shares of our common stock entitled to vote at the annual meeting, a
substantial portion of which are subject to the voting agreements. See "Security
Ownership of Certain Beneficial Owners and Management" beginning on page 34.
The boards of directors and stockholders of BPOMS, BPO Acquisition
Corp. and DFH have approved the merger and sale transactions, as applicable.
We intend that the name change, cash dividend and increase in the
authorized number of preferred shares will not occur unless the merger and the
sale transactions are consummated. However, we intend that if approved by our
stockholders, the reverse stock split likely would occur regardless of whether
the merger and sale transactions are consummated. The cash dividend is discussed
in conjunction with proposals 2 and 3 and does not require separate stockholder
approval.
REASONS FOR THE MERGER AND SALE TRANSACTIONS
POTENTIAL BENEFITS AND NEGATIVE FACTORS
In reaching its decision to approve the merger and sale transactions,
our board of directors considered numerous potential benefits and material
factors pertaining to the merger and sale transactions, including the belief
that the concurrent merger and sale transactions represent the most favorable
alternative currently available to us to maximize stockholder value. Our board
of directors also considered a number of potentially negative factors in
reaching its decision to approve the merger and sale transactions, including the
anticipated dilution and the termination fee provisions of the merger and sale
agreements. See "Reasons for the Merger and Sale Transactions" beginning on page
57.
OPINION OF OUR FINANCIAL ADVISOR
In deciding to approve the merger and sale transactions, our board of
directors considered an opinion from its financial advisor, B. Riley & Co., Inc.
("B. Riley"), that as of August 29, 2006, the aggregate consideration proposed
to be received by us in connection with the merger and sale transactions was
fair to our stockholders from a financial point of view. See "Opinion of Our
Financial Advisor" beginning on page 79 and APPENDIX C.
We did not request, and B. Riley did not provide, separate fairness
determinations for the merger transaction and the sale transaction. The terms of
the merger agreement and the sale agreement explicitly provide that both of
those transactions must occur concurrently. Accordingly, we believe that
obtaining separate fairness determinations would not have been useful or an
appropriate use of our resources given the required concurrence of the two
transactions.
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REGULATORY APPROVALS
There are no material United States federal or state regulatory
approvals required for completion of the merger and sale transactions, the
corporate name change and the reverse stock split, other than the approval of
those proposals by our stockholders under the corporate law of the State of
Delaware. However, in order to remain listed on The Nasdaq Capital Market, we
will need to obtain Nasdaq approval. See "Regulatory Approvals" beginning on
pages 87 and 99.
BENEFICIAL OWNERSHIP AND OPERATIONS FOLLOWING THE CLOSING
BENEFICIAL OWNERSHIP
As a result of the merger, BPOMS would become a wholly-owned subsidiary
of ours. Also, we would experience a change in control because we anticipate
that approximately 90% of the equity interests of the combined company that
would be outstanding immediately following the merger on a fully-diluted basis
but excluding most new equity or equity-based securities issued by us or BPOMS
after August 29, 2006, would be held by the former BPOMS stockholders. See
"Post-Closing Beneficial Ownership and Operations" beginning on page 69.
BUSINESS
At the effective time of the merger, BPOMS will become a wholly-owned
subsidiary of ours. We anticipate that our Web4 and IT services businesses will
be integrated with BPOMS' businesses after the closing. See "Post-Closing
Beneficial Ownership and Operations" beginning on page 69.
MANAGEMENT
Concurrently with the closing, we anticipate that BPOMS' management
team and directors and officers selected by BPOMS would assume various
management positions with us and most positions on our board, including
chairman. Also, BPOMS' management intends that Messrs. Nelson and Dutta will
enter into employment agreements to take effect at the effective time of the
merger. See "Post-Closing Beneficial Ownership and Operations" beginning on page
69.
ACCOUNTING TREATMENT
MERGER TRANSACTION
BPOMS will be the accounting acquirer, with the merger transaction
reflected as a reverse acquisition. See "Accounting Treatment" beginning on page
85 and Appendix D.
SALE TRANSACTION
We anticipate reporting a gain on sale of approximately $80,000
relating to the sale transaction. See "Accounting Treatment" beginning on page
99.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
We and BPOMS intend that the merger transaction will qualify as a tax
deferred reorganization as defined in the Internal Revenue Code of 1986, as
amended. If the merger qualifies as a tax deferred reorganization, BPOMS
stockholders will generally not recognize gain or loss for United States federal
income tax purposes upon receipt of our stock in the merger, except in
connection with cash received instead of a fractional share of our common stock.
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Our stockholders will not exchange their common stock in the merger and,
accordingly, will not recognize any taxable gain or loss as a result of the
merger. However, stockholders who participate in the cash distribution we intend
to pay following the merger transaction may be taxed as a dividend on their
receipt of the distribution. See "Material United States Federal Income Tax
Consequences" beginning on pages 86_ and 99.
RISK FACTORS
Various risk factors relating to our consummation of, or failure to
consummate, the proposals described in the proxy statement, together with risk
factors relating to our current and proposed operations, are included under the
heading "Risk Factors" beginning on page 13.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement and the documents accompanying or incorporated by
reference into this proxy statement contain forward-looking statements about the
merger and sale transactions and our company within the meaning of Section 27A
of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended ("Exchange Act"). These
forward-looking statements generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance, and can generally be identified by the use of the
words "believe," "intend," "plan," "expect," "forecast," "project," "may,"
"should," "could," "seek," "pro forma," "goal," "estimates," "continues,"
"anticipate" and similar words. Other forward-looking statements include those
concerning the value of the assets to be transferred to DFH in the sale
transaction, the aggregate net consideration to be received by us in the merger
and sale transactions, the likelihood of stockholder value resulting from the
merger transaction or the merger and sale transactions, and the business
operations of our company following the closing of, or in the event the merger
and sale transactions are not completed, in lieu of, the merger and sale
transactions.
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements.
We intend the forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for
purposes of invoking these safe harbor provisions. Such statements are based
upon current expectations and beliefs and are subject to risks, uncertainties
and changes in condition, significance, value and effect, including those
discussed in the sections entitled "Risk Factors" beginning on page 13_ and
contained in Item 6 of Part II of our annual report on Form 10-KSB for the
fiscal year ended March 31, 2006. Such risks, uncertainties and changes in
condition, significance, value and effect could cause our actual results to
differ materially from those anticipated events. Except as may be required under
federal law, we undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur.
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RISK FACTORS
Please refer to the "Cautionary Statement Regarding Forward-Looking
Statements" at page 12. The discussion below highlights some important risks we
have identified in connection with the proposed merger and sale transactions and
related matters, but these should not be assumed to be the only factors that
could affect our future performance and condition, financial and otherwise. We
do not have a policy of updating or revising forward-looking statements, and
silence by management over time should not be assumed to mean that actual events
are bearing out as estimated in such forward-looking statements.
WE AND BPOMS EACH HAVE HISTORIES OF LOSSES AND ACCUMULATED DEFICITS THAT
MAY CONTINUE IN THE FUTURE AND, ALONG WITH "GOING CONCERN" REPORTS MAY
ADVERSELY AFFECT OUR AND THE POST-MERGER COMBINED COMPANY'S BUSINESS,
PROSPECTS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS AND STOCK
PRICE BY, AMONG OTHER THINGS, MAKING IT MORE DIFFICULT TO RAISE ADDITIONAL
DEBT OR EQUITY FINANCING.
We have incurred net losses each fiscal year since our public offering
in 1996, with the exception of the fiscal year ended March 31, 2006, in which we
realized net income of $14.7 million due to a $21.5 million gain on the asset
sale to Bentley Systems Incorporated ("Bentley") in November 2005. We do not
expect to realize similar gains in future periods. For the three months ended
June 30, 2006, we recorded a net loss of approximately $452,000, as compared to
a net loss of approximately $334,000 for the three months ended June 30, 2005.
Our accumulated deficit through June 30, 2006 was approximately $17.0 million,
and as of that date we had a total shareholders' equity of approximately $3.2
million.
Our recurring losses from operations, excluding gains on the sale of
significant portions of our operating assets, our limited cash resources and
continued negative cash flow from operations, our accumulated deficit and the
potential sale of additional operating assets, among other factors, raised
substantial doubt about our ability to continue as a going concern and led our
independent registered public accounting firm to include an explanatory
paragraph related to our ability to continue as a going concern in their report
for the year ended March 31, 2006.
BPOMS had a net loss of $792,227 from inception to December 31, 2005,
and a net loss of $1,067,584 for the six months ended June 30, 2006. BPOMS
believes that a substantial part of the loss in each period relates to the costs
associated with forming its business, developing its business plan, acquiring
companies and integrating the operations that it acquired. Nonetheless, BPOMS'
losses from operations since inception and lack of sufficient capital resources
led BPOMS' auditors to include an explanatory paragraph related to BPOMS'
ability to continue as a going concern in their report accompanying BPOMS'
financial statements for the fiscal year ended December 31, 2005.
Reports of independent auditors questioning a company's ability to
continue as a going concern generally are viewed unfavorably by analysts and
investors. This may make it difficult for us and/or BPOMS to raise additional
debt or equity financing needed for our or the combined company's continued
operations or for planned expansion, particularly if we are unable to attain and
maintain profitable operations in the future. Consequently, future losses may
adversely affect our or the combined company's business, prospects, financial
condition, results of operations and cash flows. You should review the reports
of our and BPOMS' independent registered public accounting firms and our
respective consolidated financial statements and unaudited pro forma financial
information contained in the appendices to this proxy statement before making a
decision as to whether to vote in favor of or against the proposed transactions.
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WE MAY INCUR ADDITIONAL COSTS AND EXPERIENCE IMPAIRED OPERATING RESULTS IF
WE ARE UNABLE TO RETAIN AN EXPERIENCED MANAGEMENT TEAM, REGARDLESS OF
WHETHER THE MERGER AND SALE TRANSACTIONS ARE CONSUMMATED.
Our founder, Chairman and Chief Executive Officer, Amrit K. Das, and
our Chief Financial Officer, Bruce K. Nelson, have been with us for
approximately 25 years and 4 years, respectively. Mr. Das' employment agreement
has expired, and he plans to resign concurrently with the consummation of the
merger and sale transactions. Mr. Nelson's existing employment agreement may be
terminated by us or him at any time and for any reason, and he has not entered
into a new post-merger employment agreement, although BPOMS anticipates that he
will do so. We rely heavily on the experience, expertise, industry knowledge and
historical company knowledge of Mr. Das and Mr. Nelson. Accordingly, it would be
extremely difficult to replace them if we were to lose the services of either of
them. Also, we do not have key person insurance on the lives of either of them.
BPOMS depends on the efforts of its executive officers and other key
personnel, including its founders Patrick Dolan, who serves as its Chief
Executive Officer, and James Cortens, who serves as its President, Chief
Financial Officer and Chief Operating Officer. The loss of these officers could
adversely affect our post-merger business, financial condition and results of
operations. BPOMS has employment agreements with each of its executive officers,
but does not have key person insurance on the lives of either of them.
The precise impact of the loss of services of Mr. Das or Mr. Nelson if
the merger and sale transactions are not consummated, or the loss of Messrs.
Dolan or Cortens if the merger and sale transactions are consummated, is
difficult to predict, but would likely result in, at a minimum, additional costs
to recruit, hire and retain a successor and could impair operating results while
the successor was being recruited and transitioning into the position.
WE MAY BE DELISTED FROM THE NASDAQ CAPITAL MARKET EITHER VOLUNTARILY OR
INVOLUNTARILY, AND WE MAY SEEK TO TERMINATE OUR SECURITIES AND EXCHANGE
COMMISSION ("COMMISSION") REPORTING OBLIGATIONS UNDER SECTIONS 12 AND 15 OF
THE EXCHANGE ACT IF WE ARE OR BECOME ELIGIBLE TO DO SO, WHICH COULD REDUCE
THE LIQUIDITY OF OUR COMMON STOCK AND INHIBIT OR PRECLUDE OUR ABILITY TO
RAISE ANY NEEDED WORKING CAPITAL FROM EQUITY INVESTORS.
Nasdaq's quantitative listing standards require, among other things,
that listed companies maintain a minimum closing bid price of $1.00. On
September 12, 2006, we received a Nasdaq staff determination notice indicating
that our grace period to regain compliance with this provision has expired and
that our shares are subject to delisting from The Nasdaq Capital Market unless
we successfully appeal the determination. On October 19, 2006, we attended an
appeal hearing to present our plan for regaining compliance with all applicable
Nasdaq rules. Elements of the plan include the proposed merger transaction and
proposed reverse stock split to be voted upon by our stockholders. The hearing
panel has granted our request for continued listing until December 4, 2006.
However, we cannot assure you that the proposed merger transaction and proposed
reverse stock split will be approved by our stockholders and ultimately
consummated before or after that date.
In addition, Nasdaq rules require that a listed company that
experiences a change in control and desires to remain listed on Nasdaq must
re-apply for a new listing and meet all initial listing criteria. We currently
do not meet the initial listing criteria relating to minimum bid price, market
value of publicly held shares and stockholders' equity/market value of listed
securities/net income from continuing operations. Also, we will need to confirm
whether the terms of the preferred stock to be created in connection with the
merger transaction comply with Nasdaq corporate governance rules. Accordingly,
even if we are able to maintain our listing until the reverse merger occurs, we
may be delisted and unable to relist on Nasdaq if we are unable to meet the
initial listing criteria at the effective time of the reverse merger.
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Alternatively, particularly if the merger transaction is not
consummated, we may determine that it is not cost-effective for us to remain
listed on Nasdaq and maintain full-reporting status relative to our operations.
In that event, we would seek to conserve resources by voluntarily delisting our
common stock from trading on Nasdaq and terminating our reporting obligations
under Sections 12 and 15 of the Exchange Act. Considering our rate of cash usage
and our current cash position, if the merger and sale transactions are not
consummated within the next few months, we may proceed with steps to delist from
Nasdaq and terminate our Commission reporting obligations if we are then
eligible to do so.
If we are delisted from The Nasdaq Capital Market and/or if we
terminate our Commission reporting obligations, our stock price could decline
and the ability of our stockholders and of any potential or future investors to
achieve liquidity from our common stock could be severely limited. This could
inhibit, if not preclude, our ability to raise any needed additional working
capital through equity offerings on acceptable terms.
THE SALE AGREEMENT CONTAINS INDEMNIFICATION OBLIGATIONS THAT WE OR THE
COMBINED COMPANY MAY BE REQUIRED TO FULFILL.
We have agreed to indemnify, defend and hold harmless DFH and each of
its officers, directors, stockholders, employees, agents, representatives,
affiliates, successors and assigns from and against and pay on behalf of or
reimburse such persons in respect of any loss they incur as a result of or
relating to our breach of any representation or warranty in the sale agreement
or in any related closing certificate and our breach of any covenant or
agreement in the sale agreement. As described under the heading
"Indemnification" beginning at page 95, the indemnification obligation may be in
an amount up to the entire $2.0 million purchase price under the sale agreement.
ADDITIONAL RISKS IF THE PROPOSED TRANSACTIONS ARE CONSUMMATED
THE MERGER TRANSACTION WILL BE HIGHLY DILUTIVE TO OUR EXISTING STOCKHOLDERS
AND WILL SUBJECT OUR STOCKHOLDERS TO THE PRIOR RIGHTS AND PREFERENCES OF
PREFERRED STOCKHOLDERS.
As a result of the merger transaction, we will experience a change in
control because we anticipate that approximately 90% of the equity interests of
the combined company that would be outstanding immediately following the merger
on a fully-diluted basis but excluding most new equity or equity-based
securities issued by us or BPOMS after August 29, 2006, would be held by the
former BPOMS stockholders. In addition, our common stockholders will become
subordinated to the rights, preferences and privileges of the classes of
preferred stock to be created in connection with the merger transaction. These
rights, preferences and privileges will include various conversion, liquidation,
redemption, voting, director election and board observation provisions,
consistent with those described under the heading "BPOMS' Capital Stock, Options
and Warrants" beginning on page 45.
WE AND BPOMS WILL NEED FINANCING TO CONDUCT OUR COMBINED POST-MERGER
OPERATIONS AND MAKE DESIRED ACQUISITIONS, WHICH FINANCING MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS OR AT ALL AND, IF AVAILABLE, MAY RESULT IN
SIGNIFICANT ADDITIONAL DILUTION TO OUR CURRENT STOCKHOLDERS.
The combined company will need financing to conduct operations and make
desired acquisitions following the consummation of the merger and sale
transactions. As described under the heading "BPOMS Potential Financing"
beginning on page 77, BPOMS is currently seeking to raise up to $15 million in
one or more private financing transactions that would close immediately
following the consummation of the merger. However, financing may not be
available on terms favorable to the combined company, or at all. If adequate
funds are not available when required or on acceptable terms, the combined
company may be unable to continue its operations as planned or at all. In
15
addition, financing transactions, if successful, are likely to result in
significant additional dilution to the voting and economic rights of our
existing stockholders. Financings may also result in the issuance of securities
with rights, preferences and other characteristics superior to those of the
common stock and, in the case of debt or preferred stock financings, may subject
the combined company to covenants that restrict its ability to freely operate
its business.
TWO OF THE COMBINED COMPANY'S EXECUTIVE OFFICERS WILL COLLECTIVELY
BENEFICIALLY OWN APPROXIMATELY 68.9% OF THE OUTSTANDING COMMON STOCK OF THE
COMBINED COMPANY FOLLOWING THE MERGER ON A FULLY-DILUTED BASIS BUT
EXCLUDING MOST NEW EQUITY OR EQUITY-BASED SECURITIES ISSUED BY US OR BPOMS
AFTER AUGUST 29, 2006, AND WILL BE ABLE TO CONTROL OR EXERCISE SIGNIFICANT
INFLUENCE OVER THE OUTCOME OF MATTERS TO BE VOTED ON BY THE COMBINED
COMPANY'S STOCKHOLDERS.
Immediately following the merger, Messrs. Dolan and Cortens will
collectively beneficially own approximately 68.9% of the outstanding common
stock of the combined company following the merger on a fully-diluted basis but
excluding most new equity or equity-based securities issued by us or BPOMS after
August 29, 2006. In addition, it is anticipated that as the sole holders of the
combined company's Series A Preferred stock following the merger, voting as a
separate class, they will be entitled to elect two members of our board of
directors to the extent permitted by applicable Nasdaq rules. We anticipate that
immediately following the merger, Mr. Dolan will be the combined company's
Chairman of the Board and Chief Executive Officer and Mr. Cortens will be the
combined company's President, Secretary and a director. Accordingly, Messrs.
Dolan and Cortens will be able to control or exercise significant influence with
respect to the election of directors, offers to acquire the combined company and
other matters submitted to a vote of the combined company's stockholders.
BECAUSE BPOMS HAS A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO PREDICT
ITS FUTURE PERFORMANCE.
BPOMS was organized in July 2005 and acquired its ADAPSYS and Digica
subsidiaries in August 2005 and January 2006, respectively. BPOMS therefore has
limited operating and financial history available to help stockholders evaluate
its past performance or to make a decision regarding the merger transaction.
Moreover, BPOMS' limited historical financial results may not accurately predict
its future performance. Companies in their initial stages of development present
substantial business and financial risks and may suffer significant losses. As a
result of the risks specific to BPOMS' business and those associated with new
companies in general, it is possible that BPOMS or the combined company may not
be successful in implementing BPOMS' business strategy and that our stockholders
could lose the total value of their investment in the combined company.
THE COMBINED COMPANY'S GROWTH MAY DEPEND ON ITS SUCCESSFUL ACQUISITION OF
OTHER BUSINESSES IN THE BUSINESS PROCESS OUTSOURCING INDUSTRY.
Following the merger, BPOMS' management intends that the combined
company would pursue acquisitions of businesses in the business processing
outsourcing industry that can be acquired on acceptable terms. The combined
company's future growth may depend, in part, upon the successful implementation
of this strategy. We cannot assure you, however, that the combined company will
be successful in identifying suitable acquisitions. If any potential acquisition
opportunities are identified, there can be no assurance that the combined
company will consummate the acquisitions, or that any acquisitions that are
consummated will enhance the combined company's business or results of
operations. Acquisitions may also result in further dilution to existing
stockholders and require the combined company, on a regular basis, to examine
goodwill for impairment and, if appropriate, to write off significant amounts of
impaired goodwill and other identifiable intangible assets.
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IF BPOMS IS UNABLE TO INTEGRATE OR ACHIEVE THE OBJECTIVES OF ITS RECENT OR
FUTURE ACQUISITIONS, THE COMBINED COMPANY'S OVERALL BUSINESS MAY SUFFER.
The combined company's business strategy will depend on successfully
integrating BPOMS' recent and future acquisitions. Acquiring businesses involves
integration risks, including:
o the diversion of management's time and attention away from
operating the business to acquisition and integration challenges;
o the need to integrate each business' accounting, information
management, human resources, contract and other administrative
systems to permit effective management;
o an acquired company, product or technology may not perform as well
as expected; and
o its entry into new markets or geographic areas.
BPOMS and the combined company may be unable to effectively integrate
businesses they may acquire without encountering these and other difficulties.
Failure to integrate these businesses effectively could adversely affect the
combined company's business, results of operations and financial condition. In
addition to this integration risk, the combined company's business, results of
operations and financial condition could be adversely affected if it is unable
to achieve the planned objectives of an acquisition resulting from, for example,
the financial underperformance of these acquisitions, the loss of key clients of
the acquired business, or the occurrence of unanticipated liabilities or
contingencies.
THE MARKETS BPOMS SERVES ARE HIGHLY COMPETITIVE, AND ITS COMPETITORS MAY
HAVE GREATER RESOURCES TO COMMIT TO GROWTH, NEW TECHNOLOGY AND MARKETING,
WHICH COULD IMPAIR THE COMBINED COMPANY'S RESULTS OF OPERATIONS.
BPOMS' current and potential competitors include in-house, back-office
departments of corporations, as well as other third parties that provide
discrete or combined business process functions, including very large BPO firms
that have evolved out of former "Big Five" accounting firms and other
industry-leading technology and consulting services companies. In addition,
BPOMS expects that the predicted growth of the outsourcing market will attract
other consulting firms and outsourcers and motivate competitors to assume
responsibility for broad integration of human resources and other back-office
processes. Many of BPOMS' competitors have substantially greater financial,
technical and marketing resources, larger customer bases, greater name
recognition and more established relationships with their customers and key
product and service suppliers than BPOMS does. Those competitors may be able to:
o develop and expand their delivery infrastructure and service
offerings more quickly;
o adapt better to new or emerging technologies and changing client
needs;
o take advantage of acquisitions and other opportunities more
readily;
o devote greater resources to the marketing and sale of their
services; and
o adopt more aggressive pricing policies.
Some of BPOMS' competitors may also be able or willing to provide clients with
additional benefits at lower overall costs. In addition, BPOMS believes there
will be future consolidation in its market, which could increase competition in
ways that may be adverse to the combined company.
17
THE COMBINED COMPANY MAY BE UNABLE TO ATTRACT AND RETAIN, OR HAVE ACCESS
TO, QUALIFIED PERSONNEL IN THE MARKETS THE COMBINED COMPANY WOULD SERVE,
WHICH COULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS BY IMPAIRING ITS
ABILITY TO GROW AND PROVIDE COMPETITIVE SERVICES.
BPOMS' ability to provide its customers with competitive services and
grow partially depends on its ability to attract and retain highly motivated
people with the skills to serve its customers in a cost-effective way. If the
combined company is unable to hire or otherwise obtain cost-effective access to
skilled personnel in its markets, its operations may suffer. In addition, the
combined company will be subject to the risk of management and employee
disruption associated with the merger and sale transactions, including the risk
that key technical, marketing and management personnel might not remain employed
by the combined company through the consummation of the merger and sale
transactions.
THE COMBINED COMPANY WOULD BE SUBJECT TO RISKS ASSOCIATED WITH BPOMS'
CANADIAN OPERATIONS, WHICH COULD RESULT IN INCREASED COSTS, OPERATIONAL
DIFFICULTIES AND REDUCED REVENUE.
Canadian operations represented over 63% of BPOMS' revenue in the first
six months of 2006. There are risks inherent in doing business internationally,
including changing regulatory requirements, legal uncertainty regarding foreign
laws, tariffs and other trade barriers, political instability, potentially
adverse tax consequences, foreign currency fluctuations and cultural
differences. In addition, BPOMS' Canadian operations are localized, which makes
its business dependent on regional economic conditions. Any one or more of these
factors could adversely affect the combined company's business in a number of
ways, such as increased costs, operational difficulties and reductions in
revenue.
THE MARKET PRICE FOR THE COMBINED COMPANY'S COMMON STOCK MAY BE HIGHLY
VOLATILE AFTER THE MERGER AND SALE TRANSACTIONS, WHICH COULD IMPAIR THE
VALUE OF THE COMBINED COMPANY'S COMMON STOCK AND RESULT IN LITIGATION
AGAINST THE COMBINED COMPANY.
The cash expenditures related to the merger and sale transactions, as
described under the heading "Expenses" beginning on pages 57 and 98, and our
anticipated declaration of a cash dividend to our pre-merger stockholders, may
add to the anticipated volatility of the combined company's stock price. The
price of the combined company's common stock could further decline due to the
impact of any of the following factors:
o failure to meet its sales goals or operating budget;
o decline in demand for its common stock;
o revenues and operating results failing to meet expectations of
securities analysts or investors in any quarter;
o downward revisions in operating performance estimates or changes
in general market conditions;
o technological innovations by competitors or in competing
technologies;
o investor perception of its industry or prospects; or
o general economic trends.
18
Market fluctuations are often unrelated to operating performance and
therefore are beyond our control. In the past, securities class action
litigation has often been brought against a company following periods of
volatility in the market price of its securities. The combined company may
become the target of similar litigation, which could result in substantial costs
and divert management's attention and resources.
RESALES BY EXISTING BPOMS STOCKHOLDERS OF SHARES ISSUED TO THEM IN THE
MERGER OR BY STOCKHOLDERS WHO PURCHASE SECURITIES IN THE PROPOSED
FINANCINGS MAY DEPRESS THE MARKET PRICE OF THE COMBINED COMPANY'S COMMON
STOCK.
Our issuance of shares to existing BPOMS stockholders will result in
the relative number of shares of our common stock outstanding after the merger
being at least ten times the number it would have been absent the merger. The
combined company will be required to register for public resale the shares of
common stock issued in the merger transaction or underlying newly created
preferred stock and the shares underlying options and warrants assumed by the
combined company. Also, it is likely that any shares of common stock issued or
issuable under derivative securities issued in the proposed financings being
structured by BPOMS would subsequently be registered for resale by the
purchasers. Future resales of these shares of common stock, or the perception
that such sales could occur, could adversely affect the market price of the
combined company's common stock. We cannot assure you as to when, and how many
of, those shares will be resold and the effect those sales may have on the
market price of the combined company's common stock.
CHANGES IN TECHNOLOGY IN THE OUTSOURCING INDUSTRY COULD CAUSE BPOMS' OR THE
COMBINED COMPANY'S BUSINESS TO LOSE MONEY OR COULD REQUIRE THE COMBINED
COMPANY TO INVEST ADDITIONAL CAPITAL IN NEW TECHNOLOGY.
The markets for BPOMS' services change rapidly because of technological
innovation, new product and service introductions, and changes in customer
requirements, among other things. New products and services and new technology
often render existing information services or technology infrastructure
obsolete, costly, or otherwise unmarketable. As a result, the combined company's
success will depend on its ability to timely innovate and integrate new
technologies into its service offerings. We cannot assure you that the combined
company will be successful at adopting and integrating new technologies into its
service offerings in a timely manner or at all.
BPOMS' SYSTEMS AND PROCESSES ARE NOT PROTECTED BY PATENTS OR BY REGISTERED
COPYRIGHTS, TRADEMARKS, TRADE NAMES OR SERVICES MARKS AND, AS A RESULT, THE
COMBINED COMPANY'S COMPETITORS MAY BE ABLE TO USE ITS SYSTEMS AND PROCESSES
TO COMPETE AGAINST IT.
BPOMS believes that, because of the rapid pace of technological change
in the computer industry, copyright and other forms of intellectual property
protection are of less significance than factors such as the knowledge and
experience of management and other personnel, and the ability to develop,
enhance, market and acquire new systems and services. As a result, BPOMS'
systems and processes are not protected by patents or by registered copyrights,
trademarks, trade names, or service marks. To protect its proprietary services
and software from illegal reproduction, BPOMS relies on certain mechanical
techniques in addition to trade secret laws, restrictions in certain of its
customer agreements with respect to use of its services and disclosure to third
parties, and internal non-disclosure safeguards, including confidentiality
restrictions with certain employees. Despite these efforts, it may be possible
for BPOMS' competitors or clients to copy aspects of its trade secrets. This
could adversely affect the combined company's business, financial condition and
results of operations.
19
IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, THE COMBINED COMPANY'S
BUSINESS WILL BE ADVERSELY AFFECTED.
The combined company's business could be adversely affected if the
trend toward outsourcing declines or reverses, or if companies bring previously
outsourced functions back in-house. The continued threat of terrorism within the
United States and abroad and the potential for sustained military action may
cause disruption to commerce and economic conditions, both domestic and foreign,
which could adversely affect the combined company's business and new client
prospects.
BPOMS OPERATES IN A COMPLEX REGULATORY ENVIRONMENT, AND FAILURE TO COMPLY
WITH APPLICABLE LAWS AND REGULATIONS COULD ADVERSELY AFFECT THE COMBINED
COMPANY'S BUSINESS.
BPOMS' human resource processes and other operations are subject to a
number of laws and regulations, including those applicable to payroll practices,
benefits administration, employment practices and data privacy. Because BPOMS'
clients operate in the United States and in Canada, BPOMS must perform its
services in compliance with the legal and regulatory requirements of multiple
jurisdictions. Some of these laws and regulations may be difficult to ascertain
or interpret, may change and may be inconsistent with BPOMS' business practices.
Violations of laws and regulations could subject BPOMS or the combined company
to fines and penalties, damage their reputation, constitute breach of their
client contracts and impair their ability to do business in various
jurisdictions or according to their established processes.
THE COSTS AND EFFECTS OF LITIGATION, INVESTIGATIONS OR SIMILAR MATTERS
COULD ADVERSELY AFFECT THE COMBINED COMPANY'S FINANCIAL POSITION AND
RESULTS OF OPERATIONS.
The combined company may be involved from time to time in a variety of
litigation, investigations or similar matters arising out of its business. For
example, BPOMS is currently a defendant in two lawsuits filed by 28 former
employees who allege their employment was terminated without either reasonable
notice or compensation in lieu of reasonable notice and who seek unspecified
damages. Further, although BPOMS' standard customer contracts limit liability to
a specified percentage of revenue from the contract, asserted claims may still
exceed those amounts. BPOMS' or the combined company's insurance may not cover
all claims that may be asserted against them, and any claims asserted against
them, regardless of merit or eventual outcome, may harm BPOMS' or the combined
company's reputation. If the ultimate judgments or settlements in any litigation
or investigation significantly exceed insurance coverage, they could adversely
affect the combined company's financial position and results of operations. In
addition, the combined company may be unable to obtain appropriate types or
levels of insurance in the future.
BPOMS' SYSTEMS MAY BE SUBJECT TO DISRUPTIONS THAT COULD ADVERSELY AFFECT
THE COMBINED COMPANY'S BUSINESS AND REPUTATION.
BPOMS' business depends on its ability to process, on a daily basis, a
large number of complicated transactions. BPOMS relies heavily on its human
resources, financial, accounting and other data processing systems. If any of
these systems fails to operate properly or becomes disabled even for a brief
period of time, the combined company could suffer financial loss, a disruption
of its business, liability to clients, regulatory intervention or damage to its
reputation. BPOMS has disaster recovery plans in place to protect its businesses
against natural disasters, security breaches, military or terrorist actions,
power or communication failures or similar events. Despite these preparations,
in the event of a catastrophic occurrence, BPOMS' disaster recovery plans may
not be successful in preventing the loss of customer data, service
interruptions, disruptions to the combined company's operations, or damage to
its important facilities.
20
ADDITIONAL RISKS IF THE PROPOSED TRANSACTIONS ARE NOT CONSUMMATED
EVEN IF APPROVED BY OUR STOCKHOLDERS, THE MERGER AND SALE TRANSACTIONS MAY
NOT BE COMPLETED, WHICH WOULD MEAN WE EXPENDED SUBSTANTIAL RESOURCES AND
INCURRED SIGNIFICANT LEGAL AND ACCOUNTING COSTS WITHOUT REALIZING ANY
BENEFIT AND WE COULD BE REQUIRED TO PAY SUBSTANTIAL TERMINATION FEES.
As discussed in proposals 2 and 3, the completion of the merger and
sale transactions is subject to certain conditions, including stockholder
approval. However, even if our stockholders approve the transactions, we cannot
assure you that the other conditions to closing will be met and that the
transactions will be completed. If the transactions are not completed, we will
have spent a substantial amount of time and financial resources in connection
with the transactions without realizing any benefit. In addition, as described
under the heading "Termination Fees" beginning at pages 56 and 97, we may have
to pay termination fees totaling up to $400,000.
WE HAVE LIMITED CASH RESOURCES AVAILABLE TO CONTINUE OUR OPERATIONS AND OUR
EFFORTS TO CONSUMMATE THE PROPOSED MERGER AND SALE TRANSACTIONS.
ACCORDINGLY, IF WE ARE UNABLE TO TIMELY CONSUMMATE THE PROPOSED
TRANSACTIONS OR RAISE NEEDED CAPITAL IN THE FUTURE, WE MAY BE UNABLE TO
FUND OPERATING CASH SHORTFALLS.
We have limited cash resources, and these resources may diminish in the
future. Our future capital requirements will depend upon many factors, including
our consummation of the merger and sale transactions, sales and marketing
efforts, the development of new products and services, future strategic mergers
and/or divestitures/acquisitions, the progress of our research and development
efforts, and the status of competitive products and services. As of June 30,
2006, we had working capital of $3.6 million, including $1.5 million of net
assets and liabilities held for sale, and an accumulated deficit of $17.0
million. As of that date, we had $2.2 million of cash and cash equivalents and
$368,000 of accounts receivable, net of allowance for doubtful accounts. Our
total cash "burn" rate is estimated to be approximately $300,000 per month.
We recorded net operating losses of $6.1 million and $370,000 from
continuing operations and used $2.2 million and $346,000 of cash in continuing
operating activities during the fiscal year ended March 31, 2006 and the three
months ended June 30, 2006, respectively. There is no assurance that we will be
able to generate sufficient operating cash in future quarters. We believe that
our cash resources may not be sufficient to fund our operations beyond December
31, 2006. We have incurred and expect to continue to incur significant costs in
connection with the consummation of the merger and sale transactions, much of
which we will expend in preparation for the closings and regardless of whether
the proposed transactions ultimately are consummated.
We do not have any debt instruments in place that we could use for
future borrowings. Thus, if the merger and sale transactions are not consummated
or are not consummated on a timely basis, we may be forced to seek additional
capital in order to continue our operations. Our inability to obtain any needed
financing on terms acceptable to us, or at all, could result in a significant
loss of ownership and/or control of our proprietary technology and other
important assets and could also hinder our ability to fund our continued
operations and our product development efforts that historically have
contributed significantly to our competitiveness. We could also find it
necessary to pursue a plan of complete liquidation and dissolution. In that
event, we would incur additional costs related to the disposal of our remaining
assets and businesses, which would reduce or eliminate the cash available for
distribution to our stockholders.
21
PROPOSAL 1
ELECTION OF DIRECTORS
Our bylaws provide that our board of directors shall consist of not
less than five nor more than eight directors, with the exact number of directors
that constitutes our board of directors to be set by our board of directors
subject to the provisions of our certificate of incorporation. The number of
directors on our board of directors is set at five, and there are no vacancies
on our board of directors.
Directors are elected annually and hold office until the next annual
meeting of stockholders or until their respective successors are elected and
qualified. However, if the merger and sale transactions described in this proxy
statement are consummated, then our board of directors would be reconstituted at
the effective time of the merger in accordance with the terms of the merger
agreement, as described under the heading "Post-Closing Beneficial Ownership and
Operations - Management" beginning on page 73.
It is intended that the proxies solicited by the board of directors
will be voted "for" election of the five nominees listed in this proxy statement
unless a contrary instruction is made on the proxy. If, for any reason, one or
more of these nominees is unavailable as a candidate for director, an event that
we do not anticipate, the proxies held by management may be voted for a
substitute nominee or nominees, if any, as recommended by management. In no
event, however, shall the proxies be voted for a greater number of persons than
the number of nominees named. All of the nominees for director are currently
directors of netGuru.
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
Set forth below is certain information as of September 29, 2006
regarding our directors, who are all nominees for re-election, and our executive
officers.
Name Age Position
---- --- --------
Amrit K. Das 61 Chairman of the Board, Chief
Executive Officer, President and
Director
Koushik Dutta 42 Chief Operating Officer
Bruce K. Nelson 52 Chief Financial Officer and Secretary
Santanu K. Das 33 Director
D. Dean McCormick III (1)(2)(3)(4) 53 Director
Stanley W. Corbett (1)(2)(4) 73 Director
Benedict A. Eazzetta (1)(2)(3)(4) 43 Director
____________________________
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating and Governance Committee.
(4) Member of Special Committee.
AMRIT K. DAS is the founder of our company. He has served as our Chief
Executive Officer and Chairman of our board of directors since our inception in
1981 and as our President since November 2003. Mr. Das also served as our
President from our inception until March 1999. Mr. Das holds a B.S. in
Civil/Structural Engineering from Calcutta University, India, and an M.S. in
Structural Engineering from the University of South Carolina. Mr. Das is the
father of Santanu K. Das.
22
KOUSHIK DUTTA has served as our Chief Operating Officer since November
2005. He has served as Chief Technology Officer of our Web4 division since April
2000. Prior to that, Mr. Dutta co-founded Allegria Software, Inc. and served as
President and Chief Technology Officer of that company from February 1999 to
March 2000. Additionally, Mr. Dutta served as Vice President of Research and
Development for Advanced Technology Corporation from 1995 to June 1997 and as
Senior Manager for Research Engineers International from 1992 to 1995. Mr. Dutta
also co-founded and launched two business ventures, MicroWare and StanSoft. Mr.
Dutta is the inventor of eReview, WebWorks, ForReview and Autoproject. Further
Mr. Dutta is the winner of CSI's (Computer Society of India) prestigious NSTPC
award for programming. Mr. Dutta holds a Bachelors of Technology degree from
Indian Institute of Technology and an M.B.A. from Indian Institute of
Management.
BRUCE K. NELSON has served as our Chief Financial Officer since April
2002 and as our Secretary since November 2005. Prior to joining us, Mr. Nelson
served as Chief Financial Officer of Millennium Information Technologies, Inc.
from 1997 to April 2002. From 1992 to 1997, he was co-founder and President of
Comprehensive Weight Management, a healthcare marketing company. From 1985 to
1992, Mr. Nelson served as Treasurer of Comprehensive Care Corporation, a
NYSE-traded national service company. Mr. Nelson holds a B.S. in Finance from
University of Southern California and an M.B.A. from Bryant College in
Smithfield, Rhode Island.
SANTANU K. DAS has served as a director since November 2003. He also
served as our Executive Vice President and Chief Operating Officer from November
2003 until he resigned to join Bentley in connection with our sale of assets on
November 18, 2005. Prior to that, he served as Corporate Vice President and
President of Engineering and Collaborative Software from April 2002 to November
2003, as our Vice President of New Technology from July 1999 to November 2003
and as a director from September 1996 to July 2003. Prior to that, Mr. Das
served as our Corporate Vice President and President of Engineering and
Animation Software and ASP from January 2001 to March 2002. Prior to that, Mr.
Das served as our Manager of New Technology from May 1997 until June 1999, and
as a Senior Engineering Analyst for our company from 1991 to April 1997. Mr. Das
holds a B.S. in Structural Engineering from the University of Southern
California and an M.S. in Structural Engineering from the Massachusetts
Institute of Technology. Santanu Das is the son of Amrit K. Das.
D. DEAN MCCORMICK III is a certified public accountant and has been
president of the accounting firm of McCormick Consulting, Inc. since July 1993.
He has also been a member of Insight Consulting Partners, LLC, a strategic
consulting firm, since October 2004. He joined the Board of Directors of
Composite Technology Corporation in January 2006. He has been a member of the
Audit and Budget Committee for the Catholic Diocese of Orange since February
2004. Mr. McCormick has been a member of the Forum for Corporate Directors since
June 2003. He served as president of the Orange County Chapter of the
Association for Corporate Growth from 1995 to 1996. Mr. McCormick holds a B.A.
in Economics from the University of Redlands and an M.B.A. from the University
of Southern California.
STANLEY W. CORBETT has served as one of our directors since July 2002.
Mr. Corbett is a manufacturing executive in the aerospace industry. Since 1989,
Mr. Corbett has been providing consulting services for software system
implementations to first and second tier defense contractors as well as
commercial manufacturers. As a consultant, he also has provided solutions to a
large variety of manufacturing problems. Mr. Corbett holds a B.S. in Mechanical
Engineering from Lehigh University and an M.S. in Industrial Engineering from
Stanford University and has completed the University of California at Los
Angeles Executive Program.
23
BENEDICT A. EAZZETTA has served as the president of Intergraph Public
Safety, Inc., a division of Intergraph Corporation (NasdaqGS:INGR), since August
2004. Prior to that, he served as the chief operating officer of Intergraph
Process Power & Offshore, an engineering software and services business segment
of Intergraph Corporation, and executive vice president of Intergraph
Corporation, since May 2001. He co-founded and then served from January 2000 to
April 2001 as vice president of product management for Industria Solutions, a
privately held software and services company. Mr. Eazzetta served as an
engineering executive at ExxonMobil from January 1996 to January 2000. Prior to
that, he served in several engineering, staff and management positions,
including downstream planning and development, economics and planning, and
various operational supervisory roles. Mr. Eazzetta earned a B.S. in Nuclear
Engineering and an M.S. in Mechanical Engineering from Georgia Tech.
TERM OF OFFICE AND FAMILY RELATIONSHIPS
Our directors hold office until the next annual stockholders' meeting,
until their respective successors are elected or until their earlier death,
resignation or removal. Our officers are appointed by, and serve at the
discretion of, our board of directors. However, the merger agreement described
in proposal 2 requires that we receive written resignations dated and effective
as of the closing of the merger, executed by our directors and officers who are
not to continue as directors and officers after the merger, and that we will
appoint officers selected by BPOMS in accordance with the merger agreement. See
"Post-Closing Beneficial Ownership and Operations - Management" beginning on
page 73.
Mr. Santanu K. Das, a director and director nominee, is the son of our
Chairman, director and director nominee, Mr. Amrit K. Das.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors held six meetings during the fiscal year ended
March 31, 2006. Our board of directors currently has an audit committee, a
compensation committee, a nominating and corporate governance committee and a
special committee. During the fiscal year ended March 31, 2006, no incumbent
director attended fewer than 75% of the aggregate of the total number of
meetings of the board of directors held during the period for which he was a
director and the total number of meetings held by all committees of the board on
which he served during the periods that he served.
AUDIT COMMITTEE
Our audit committee is responsible for the appointment of our
independent auditors, reviews the results and scope of the audit and other
services provided by our independent auditors, reviews our consolidated
financial statements for each interim period, and reviews and evaluates our
internal control functions. Our audit committee is governed by a written
charter, which was amended and restated on October 7, 2004. A copy of the
amended and restated audit committee charter was attached as Appendix A to our
definitive proxy statement for our 2004 annual meeting of stockholders and is
available on our Internet site at the following address:
http://www.netguru.com/netGuruPolicies.asp.
Since July 25, 2003, our audit committee has consisted of Messrs.
Corbett, Eazzetta and McCormick, with Mr. McCormick holding the position of
chairman of that committee. Our board of directors has determined that Mr.
McCormick is an "audit committee financial expert" and meets the NASD's
professional experience requirements, and that each of the members of our audit
committee is "independent" within the meaning of NASD Marketplace Rule
4200(a)(15). Our audit committee held five meetings during the fiscal year ended
March 31, 2006.
COMPENSATION COMMITTEE
Our compensation committee makes recommendations to our board of
directors concerning salaries and incentive compensation for our employees and
consultants and also selects the persons to receive options under our stock
option plans and establishes the number of shares, exercise price, vesting
period and other terms of the options granted under these plans. Since July 25,
2003, our compensation committee has consisted of Messrs. McCormick, Eazzetta
and Corbett, with Mr. Eazzetta holding the position of chairman of that
committee.
24
Our board of directors has determined that each member of the
compensation committee meets NASD independence requirements. The compensation
committee held one meeting during the fiscal year ended March 31, 2006. No
executive officer of netGuru has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director of netGuru.
Our compensation committee's amended and restated charter was attached
as Appendix B to our definitive proxy statement for our 2004 annual meeting of
stockholders and is available on our Internet site at
http://www.netguru.com/netGuruPolicies.asp.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Nasdaq rules require that board of director nominees must be either
selected, or recommended for the board's selection, by either a nominating
committee comprised solely of independent directors or by a majority of our
independent directors. Effective as of April 30, 2004, we formed the nominating
and corporate governance committee to be composed entirely of non-employee
directors who meet Nasdaq independence standards. The committee currently
comprises Messrs. Eazzetta and McCormick, with Mr. Eazzetta serving as committee
chairman. The nominating and corporate governance committee assists our board of
directors with its nominating function and with reviewing and evaluating our
compliance with corporate governance requirements as described in the
committee's charter referenced below.
The committee utilizes a variety of methods for identifying and
evaluating nominees for director, including candidates that may be referred by
our stockholders. Stockholders who desire to recommend candidates for the board
for evaluation may do so by contacting us in writing, identifying the potential
candidate and providing background information. See "Security Holder
Communications with Our Board of Directors." Candidates may also come to the
attention of the committee through current board members, professional search
firms and other persons. In evaluating potential candidates, the committee will
take into account a number of factors, including among others, the following:
o independence from management;
o whether the candidate has relevant business experience;
o judgment, skill, integrity and reputation;
o existing commitments to other businesses;
o corporate governance background;
o financial and accounting background, to enable the nominating and
corporate governance committee to determine whether the candidate
would be suitable for audit committee membership; and
o the size and composition of the board.
The committee operates pursuant to an amended and restated charter approved by
our board of directors and the committee. A copy of the charter was attached as
Appendix C to our definitive proxy statement for our 2004 annual meeting of
stockholders and is available on our Internet site at
http://www.netGuru.com/netGuruPolicies.asp. Our nominating and corporate
governance committee held no meetings during the fiscal year ended March 31,
2006 and took action by written consent on one occasion.
25
SPECIAL COMMITTEE
On August 31, 2005, our board of directors appointed Messrs. McCormick,
Eazzetta and Corbett to a special committee charged with the task of assisting
the board of directors in establishing a specific course of action for us to
take after the consummation of the asset sale that we completed in November
2005. For more information regarding the activities of the special committee,
see "Background of the Merger and Sale Transactions" beginning on page 38.
DIRECTORS' COMPENSATION
From January 2004 to March 2005, Messrs. McCormick, Eazzetta and
Corbett, our non-employee directors, were eligible to receive $1,500 per month,
each, in consideration for their services on our board of directors. This amount
was increased to $2,000 per month in April 2005. In addition, since June 1,
2005, the chairman of the Audit Committee has received an additional $500 per
month in consideration for his services as Audit Committee chairman.
Non-employee directors are reimbursed for certain expenses in connection with
attendance at board of directors and committee meetings.
We also periodically award options to our directors under our existing
stock option plans and otherwise. During fiscal 2006, we established an
automatic annual option grant program for our non-employee directors. However,
the program subsequently was cancelled in connection with the cash distribution
we made to our stockholders in January 2006. Prior to cancellation of the
program, fully vested non-qualified stock options to purchase 15,000 shares of
common stock each were issued to Dean McCormick III, Benedict A. Eazzetta and
Stanley W. Corbett. The options had an exercise price of $1.02 per share (which
price was the fair market value of a share of our common stock on the date of
the grant), vested immediately on the date of the grant, which was June 7, 2005,
and were to expire June 7, 2015. In addition, the vesting of outstanding options
granted to non-employee directors was to be accelerated under the circumstances
described in the program with regard to a change in control. However, all
options granted to our non-employee directors terminated in connection with the
January 2006 cash distribution, and no further grants have been made.
Effective August 31, 2005, our board of directors approved payment of
$42,000 cash compensation to each of our then three non-employee directors,
Messrs. McCormick, Eazzetta and Corbett, in consideration of their agreement to
serve as members of a special committee of the board of directors. The charge of
the committee was to establish a specific course of action for us to take after
we consummated the sale of assets to Bentley. Each non-employee director
received five equal monthly installments of $8,400, commencing August 31, 2005.
Subsequent to March 31, 2006, in recognition of the additional efforts
expended by members of the special committee during calendar 2006, our board and
compensation committee approved an additional cash payment in the amount of
$25,000 made to each member of the special committee on May 31, 2006.
Accordingly, through the date of this proxy statement, each special committee
member has received cash compensation totaling $67,000 in consideration for
their services on the special committee. No further compensation to the special
committee has been granted or is under consideration.
26
SECURITY HOLDER COMMUNICATIONS WITH OUR BOARD OF DIRECTORS
Our board of directors has established a process to receive
communications from security holders. Security holders and other interested
parties may contact any member (or all members) of our board of directors, or
the independent directors as a group, any committee of our board of directors or
any chair of any such committee, by mail or electronically. To communicate with
our board of directors, any individual directors or any group or committee of
directors, correspondence should be addressed to our board of directors or any
such individual directors or group or committee of directors by either name or
title. All such correspondence should be sent "c/o Secretary" at 22700 Savi
Ranch Parkway, Yorba Linda, California 92887. To communicate with any of our
directors electronically, security holders should send an e-mail "c/o
Secretary," at info@netguru.com.
All communications received as set forth in the preceding paragraph
will be opened by our Secretary for the sole purpose of determining whether the
contents represent a message to our directors. Any contents that are not in the
nature of advertising, promotions of a product or service, patently offensive
material or matters deemed inappropriate for our board of directors will be
forwarded promptly to the addressee. In the case of communications to our board
of directors or any group or committee of directors, our Secretary will make
sufficient copies (or forward such information in the case of e-mail) of the
contents to send to each director who is a member of the group or committee to
which the envelope or e-mail is addressed.
POLICY WITH REGARD TO BOARD MEMBERS' ATTENDANCE AT ANNUAL MEETINGS
It is our policy that our directors are invited and encouraged to
attend all of our annual meetings. At the time of our 2005 annual meeting of
stockholders, we had five directors, four of whom were in attendance at our 2005
annual meeting of stockholders.
CODE OF BUSINESS CONDUCT AND ETHICS
Our code of business conduct and ethics, as approved by our board of
directors, can be obtained from our Internet site at
http://www.netGuru.com/netGuruPolicies.asp.
We intend to satisfy the disclosure requirement under Item 5.05 of Form
8-K relating to amendments to or waivers from provisions of the code that relate
to one of more of the items set forth in Item 406(b) of Regulation S-B, by
describing on our Internet site, within five business days following the date of
a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.
Information on our Internet site is not, and shall not be deemed to be,
a part of this proxy statement or incorporated into any other filings we make
with the Commission.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who beneficially own more than 10% of a registered class
of our common stock, to file initial reports of ownership and reports of changes
in ownership with the Commission. These officers, directors and stockholders are
required by Commission regulations to furnish us with copies of all such reports
that they file.
Based solely upon a review of copies of such reports furnished to us
during the fiscal year ended March 31, 2006 and thereafter, or any written
representations received by us from reporting persons that no other reports were
required, we believe that, during our fiscal 2006, all Section 16(a) filing
requirements applicable to our reporting persons were met.
27
BOARD AUDIT COMMITTEE REPORT
The audit committee of netGuru's board of directors reviewed and
discussed with the independent auditors all matters required by generally
accepted auditing standards, including those described in Statement on Auditing
Standards No. 61, as amended, "Communication with Audit Committees," and
reviewed and discussed the audited consolidated financial statements of netGuru,
both with and without management present. In addition, the audit committee
obtained from the independent auditors a formal written statement describing all
relationships between the auditors and netGuru that might bear on the auditors'
independence consistent with Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees," and discussed with the
auditors any relationships that may impact their objectivity and independence
and satisfied itself as to the auditors' independence. Based upon the audit
committee's review and discussions with management, the audit committee
recommended to the board of directors that the audited consolidated financial
statements of netGuru be included in netGuru's annual report on Form 10-KSB for
the fiscal year ended March 31, 2006, for filing with the Commission. The audit
committee also recommended appointment of new independent auditors, and the
board of directors concurred with such selection.
AUDIT COMMITTEE:
D. Dean McCormick III, Chairman
Stanley W. Corbett
Benedict A. Eazzetta
CHANGE IN INDEPENDENT AUDITORS
On July 20, 2004, we notified KPMG LLP ("KPMG"), our then independent
accountants, that we had engaged new certifying accountants, and terminated our
relationship with KPMG.
Also on July 20, 2004, we engaged Haskell & White LLP ("H&W") as our
new certifying accountants. We had not consulted with H&W during the two most
recent fiscal years and through July 20, 2004 regarding the application of
accounting principles to a proposed or completed specified transaction or the
type of audit opinion that might be rendered on our consolidated financial
statements, where either a written report was provided or oral advice was
provided that H&W concluded was an important factor considered by us in reaching
a decision as to the accounting, auditing or financial reporting issue or as to
any disagreement or reportable event as described in Item 304(a)(1)(iv) and Item
304(a)(1)(v) of Regulation S-K under the Securities Act.
The audit reports of KPMG on our consolidated financial statements as
of and for the years ended March 31, 2004 and 2003, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles, except that KPMG's audit
reports on the fiscal 2004 and 2003 consolidated financial statements made
reference to the fact that we changed our method of accounting for goodwill and
other intangible assets as required by Statement of Financial Accounting
standards No. 142, "Goodwill and Other Intangible Assets" on April 1, 2002.
Our decision to change accountants was approved by our audit committee
and board of directors. In connection with the audits of the two fiscal years
ended March 31, 2004, and during the subsequent interim period through July 20,
2004, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures which disagreements, if not resolved to KPMG's satisfaction, would
have caused KPMG to make reference to the subject matter of the disagreement in
28
their report on the consolidated financial statements for such years. In
addition, there were no reportable events as described in Item 304(a)(1)(v) of
Regulation S-K under the Securities Act. We provided KPMG with a copy of the
disclosures we made in the required Form 8-K for July 20, 2004 and filed with
that Form 8-K KPMG's letter to the Commission dated July 27, 2004 regarding
those disclosures.
PRINCIPAL ACCOUNTANT FEES AND EXPENSES
Our audit committee and board of directors have appointed the
independent registered public accounting firm of H&W to audit our consolidated
financial statements for the fiscal year ending March 31, 2007, and to conduct
whatever audit functions are deemed necessary pursuant thereto. H&W audited our
fiscal 2006 consolidated financial statements included in our 2006 annual
report. A representative of H&W is expected to be present at the annual meeting
and will be given the opportunity to make a statement if he or she so desires
and to respond to appropriate questions.
The following table presents fees for professional services rendered by
H&W for the years ended March 31, 2006 and 2005:
2006 2005
-------- --------
Audit Fees (1) $190,000 $119,000
Audit-Related Fees (2) -- --
Tax Fees (3) -- --
All Other Fees (4) -- --
-------- --------
Total $190,000 $119,000
======== ========
- ---------------
(1) Audit Fees: Includes fees for professional services performed by H&W in
fiscal 2006, for the audit of our annual financial statements and review
of financial statements included in our Form 10-QSB filings, and services
that are normally provided in connection with statutory and regulatory
filings or engagement, such as the filing of Form S-3 or Form S-8.
(2) Audit-Related Fees: H&W did not provide any audit-related services.
(3) Tax Fees: H&W did not provide any professional services with respect to
tax compliance, such as preparation and filing of original and amended
returns for us and our consolidated subsidiaries, refund claims, payment
planning, tax audit assistance and tax work stemming from "Audit-Related"
items.
(4) All Other Fees: H&W did not provide other permissible work for us that
does not meet the above category descriptions.
PRE-APPROVAL POLICY
Our audit committee is responsible for approving all Audit,
Audit-Related, Tax and Other Services. The audit committee pre-approves all
auditing services and permitted non-audit services, including all fees and terms
to be performed for us by our independent auditor at the beginning of the fiscal
year. Non-audit services are reviewed and pre-approved by project at the
beginning of the fiscal year. Any additional non-audit services contemplated by
our company after the beginning of the fiscal year are submitted to the audit
committee chairman for pre-approval prior to engaging the independent auditor
for such services. Such interim pre-approvals are reviewed with the full audit
committee at its next meeting for ratification.
29
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services rendered during the last three fiscal years
to our company in all capacities as an employee by our Chief Executive Officer
and our other executive officers whose aggregate cash compensation exceeded
$100,000 (collectively, the "named executive officers") during fiscal 2006 shown
below. Koushik Dutta accepted the position of Chief Operating Officer effective
November 18, 2005 when Santanu K. Das resigned from this position due to his
employment with Bentley. In addition, due to his employment with Bentley on
November 18, 2005, Stephen Owen resigned from his positions as our Corporate
Vice President and President of European Operations.
LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- ---------- ------------
FISCAL
YEAR OTHER ANNUAL SECURITIES
ENDED COMPENSATION UNDERLYING ALL OTHER
NAME AND MARCH SALARY BONUS (1) OPTIONS COMPENSATION
PRINCIPAL POSITION 31, ($) ($) ($) (#) ($)
- -------------------------------- ------ ------- ------ ------------ ---------- ------------
Amrit K. Das 2006 220,154 --- --- --- 11,827(2)
Chairman, Chief Executive 2005 217,000 --- --- --- 11,749(3)
Office, President 2004 330,462 --- --- --- 12,324(4)
Koushik Dutta 2006 114,231 --- --- --- 3,427(5)
Chief Operating Officer 2005 110,000 --- --- --- 3,315(5)
2004 106,277 --- --- --- 3,173(5)
Bruce K. Nelson 2006 127,500 25,000 --- --- 3,825(5)
Chief Financial Officer
and Secretary 2005 102,423 --- --- 20,000* 3,073(5)
2004 93,923 --- --- --- 2,301(5)
Santanu K. Das 2006 109,638 25,000 --- --- 6,723(6)
Former Corporate Vice
President, Former Chief
Operating Officer 2005 120,000 --- --- --- 8,750(7)
2004 121,615 --- --- --- 8,750(7)
Stephen W. Owen 2006 108,152 9,652 --- --- 2,100(8)
Former Corporate Vice
President, Former President,
European Operations 2005 159,904 9,243 --- --- 3,376(8)
2004 157,477 --- --- --- 767(8)
(*) These options were cancelled in connection with the January 2006 cash
distribution to stockholders.
(1) The costs of certain benefits are not included because they did not
exceed, in the case of each named executive officer, the lesser of
$50,000 or 10% of the total annual salary and bonus as reported above.
(2) Includes $6,324 in premiums paid by us pursuant to a split-dollar life
insurance policy established for the benefit of Amrit Das and $5,504 in
company contributions to the 401(k) plan.
(3) Includes $6,324 in premiums paid by us pursuant to a split-dollar life
insurance policy established for the benefit of Amrit Das and $5,425 in
company contributions to the 401(k) plan.
(4) Includes $6,324 in premiums paid by us pursuant to a split-dollar life
insurance policy established for the benefit of Amrit Das and $6,000 in
company contributions to the 401(k) plan
30
(5) Represents company contributions to the 401(k) plan.
(6) Includes $3,433 in premiums paid by us pursuant to a life insurance
policy established for the benefit of Santanu Das and $3,289 in company
contributions to the 401(k) plan.
(7) Includes $5,150 in premiums paid by us pursuant to a life insurance
policy established for the benefit of Santanu Das and $3,600 in company
contributions to the 401(k) plan.
(8) Represents premiums paid by us pursuant to a life insurance policy for
the benefit of Stephen Owen.
OPTION GRANTS IN LAST FISCAL YEAR
In fiscal 2006, no options were granted to the named executive
officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
On December 29, 2005, we announced that our board of directors approved
a cash distribution in the amount of $0.85 per share payable on January 27, 2006
to stockholders of record as of January 17, 2006. In connection with the
distribution, all holders of options issued under our stock option plans were
notified that, in accordance with the terms of the plans, plan-related options
would cease further vesting and then would terminate if not exercised prior to
the ex-distribution date of January 30, 2006. Accordingly, all options held by
the named executive officers were cancelled prior to fiscal year-end.
LONG-TERM INCENTIVE PLAN AWARDS
In fiscal 2006, no awards were made to the named executive officers
under long-term incentive plans.
REPRICING OF OPTIONS AND SARS
No adjustments to or repricing of stock options previously awarded to
the named executive officers occurred in fiscal 2006. However, outstanding
options were terminated as described above under the heading "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values."
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In June 2001, we entered into a five-year employment agreement with
Amrit Das, our Chairman, Chief Executive Officer and President. The agreement
provided that Mr. Das would receive a minimum base annual salary of $312,000.
However, in December 2003, Mr. Das voluntarily agreed to reduce his annual
salary by $100,000, effective April 2004. The $100,000 was to be used toward the
expansion of our engineering business process outsourcing services, which Mr.
Das has been managing from India.
The agreement expired on May 31, 2006. All terms and conditions have
been extended to Mr. Das that were in effect on May 31, 2006 on a month-to-month
basis. The agreement contains provisions for confidentiality and assignments of
intellectual property rights. In addition, the agreement prohibits Mr. Das from
competing with us and from recruiting our employees, suppliers or independent
contractors within one year after termination of the agreement.
Since June 2005, we have been a party to a Change in Control and
Executive Retention Agreement ("retention agreement") with Mr. Amrit K. Das. The
initial term of the agreement ran through March 31, 2006. Commencing on April 1,
2006 and each April 1 thereafter, the term of the retention agreement shall
automatically be extended for one additional year unless, not later than
December 31 of the preceding year, we give notice to Mr. Das of our intention
not to continue the retention agreement. However, if a Change in Control (as
defined in the retention agreement) occurs during the term of the agreement,
then the agreement will continue in effect for 24 months beyond the Change in
Control.
31
The sale agreement relating to proposal 3 provides that the retention
agreement will terminate immediately prior to the consummation of the sale
transaction, at which time DFH will assume all of our obligations and
liabilities under the retention agreement.
The retention agreement generally provides for payment of severance
benefits if Mr. Das is terminated following a Change in Control during the term
of the retention agreement, unless the termination is due to his death or
disability, is made by us for cause, or is made by him other than for good
reason. The retention agreement also contains certain provisions regarding a
"Change in Control" as defined Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act, whether or not we are then subject to such
reporting requirement. A Change in Control will be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than a trustee or other fiduciary
holding securities under our employee benefit plan is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of our securities
representing 35% or more of the combined voting power of our
then outstanding voting securities;
(ii) there is a merger or consolidation of our company in which our
company does not survive as an independent public company;
(iii) the business or businesses of our company for which the services
principally performed by the executive are disposed of by us
pursuant to a partial or complete liquidation of our company, a
sale of assets (including stock of a subsidiary) of our company,
or otherwise; or
(iv) during any period of two consecutive years during the term of
the agreement, individuals who, at the beginning of such period
constitute the board of directors, cease for any reason to
constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such
period has been approved in advance by directors representing at
least two-thirds of the directors then in office who were
directors at the beginning of the period. However, no
transaction that effects a mere reincorporation of our company
or reorganizes our company will be considered a "Change in
Control" for purposes of these agreements.
Following a Change in Control during the term of the retention
agreement, Mr. Das will be entitled to:
(a) during a period of disability, receive base salary at the rate
in effect at the commencement of the disability period until we
terminate the retention agreement in accordance with its terms;
(b) if termination is by us for cause, by Mr. Das other than for
good reason, or due to death, disability or retirement, receive
full base salary plus other amounts otherwise due through the
date of termination;
(c) if termination is by us other than for cause, retirement or
disability, or by Mr. Das for good reason, receive:
o full base salary plus other amounts otherwise due through the
date of termination;
32
o vesting of all unvested benefits Mr. Das has accrued under
any stock option, retirement or deferred compensation plan,
program or agreement of our company in which Mr. Das
participates, payable subject to the same actuarial and
interest factors applicable and in accordance with the
options available and selected by Mr. Das under such plans or
programs;
o a lump sum severance payment equal to the sum of Mr. Das'
annual base salary in effect immediately prior to the
occurrence of the circumstance that gives rise to the
termination ("Circumstance") plus the bonus paid to Mr. Das
during the twelve calendar months preceding the Circumstance;
o for twelve months after termination, receive for Mr. Das and
his dependents life, disability, accident and health
insurance benefits substantially similar to those received
immediately prior to the notice of termination, provided that
Mr. Das must continue to make the required employee
contribution payments; and
o payment of legal fees and expenses incurred by Mr. Das as a
result of the termination.
The retention agreement provides that the severance payment to Mr. Das
will be reduced if and to the extent that any payment or benefit received or to
be received by Mr. Das in connection with a change in control or the termination
of his employment following a change in control would constitute an excess
parachute payment as defined in Section 280G(b) of the Internal Revenue Code.
On March 24, 2006, we entered into an employment agreement with Mr.
Bruce Nelson, our Chief Financial Officer and Secretary. The employment
agreement superseded and made void a retention agreement that we had entered
into with Mr. Nelson in June 2005 on the same terms as the retention agreement
described above. The employment agreement provides for an annual base salary of
$127,000 per year, or such greater amount as may be established by our
compensation committee, plus additional incentive cash compensation as follows:
(a) A bonus payment equal to three months' salary, payable on the
date of execution of the agreement, March 24, 2006;
(b) A bonus payment equal to three months' salary, payable at the
earlier of five days after we close the sale of any of our
then three remaining business units or April 21, 2006;
(c) A bonus payment equal to three months' salary at the earlier
of five days after we enter into a definitive agreement
providing for a change in control transaction, which is
defined as the merger of our company (or a subsidiary of ours)
with any other company in which our stockholders immediately
prior to the merger will (by virtue of the ownership of our
stock) own less than 50% of the outstanding voting securities
of the surviving entity (or parent thereof) immediately after
the merger, five days after we deregister our securities under
the Exchange Act, or July 31, 2006; and
(d) A bonus payment equal to three months' salary plus an
additional $20,000 at the earlier of the completion of the
sale of all three remaining business units, the closing of a
change of control transaction, resignation of two or more
members of our board of directors, including at least one of
the independent members, or November 18, 2006.
33
The agreement will continue until terminated by either party at any
time and for any reason. The foregoing notwithstanding, if Mr. Nelson's
employment is terminated for "good cause" or if he resigns without "good
reason," Mr. Nelson shall not be entitled to receive any bonus payable after the
effective date of such termination. If we terminate Mr. Nelson's employment
without "good cause" or if Mr. Nelson dies or resigns for "good reason," then
any unpaid bonus amounts will become immediately due and payable. The third and
fourth bonus payments described above are to be placed into escrow and released
to Mr. Nelson or his estate upon satisfaction of the conditions described above,
or released back to us if Mr. Nelson's employment is terminated for "good cause"
or without "good reason" prior to the relevant payment date.
"Good cause" for us to terminate the agreement includes Mr. Nelson's
material breach of the agreement, conviction of a crime involving moral
turpitude or imprisonment, failure to cure within ten days after receiving a
written notice regarding his continuing repeated failure or refusal to perform
his material and lawful duties required by the agreement or regarding his gross
negligence, insubordination, disloyalty or other material misconduct.
"Good reason" for Mr. Nelson to terminate the agreement includes a
reduction from Mr. Nelson's title as Chief Financial Officer, or our material
breach of the agreement or failure to provide Mr. Nelson with adequate staff or
continued benefits.
The agreement also provides that Mr. Nelson is entitled to three weeks
of paid vacation each year and standard employee health insurance. If Mr.
Nelson's employment terminates other than for "good cause" or with "good
reason," then Mr. Nelson or his estate will be entitled to receive $500 per
month until the earlier of six months from the date of termination or November
18, 2006.
The agreement contains restrictions on Mr. Nelson's disclosure and use
of confidential company information and property and an assignment to us of
intellectual property rights relating to Mr. Nelson's activities at our company.
Mr. Koushik Dutta, our Chief Operating Officer, does not currently have
an employment agreement with us. His current annual base salary is $115,000. As
described under the heading "Certain Relationships and Related Transactions"
beginning on page 36, Mr. Dutta is eligible for a bonus upon completion of the
merger transaction.
In connection with the merger transaction described in proposal 2,
BPOMS' management is negotiating new employment agreements with Messrs. Nelson
and Dutta, to take effect at the closing of the merger transaction. See
"Post-Closing Beneficial Ownership and Operations - Management" beginning at
page 73.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
As of September 29, 2006, a total of 19,235,041 shares of our common
stock were outstanding. The following table sets forth information as of that
date regarding the beneficial ownership of our common stock by:
o each of our directors;
o each of our current named executive officers listed in the summary
compensation table;
o all of our directors and executive officers as a group; and
34
o each person known by us to beneficially own 5% or more of the
outstanding shares of our common stock as of the date of the
table.
Except as indicated below, the address for each named beneficial owner
is the same as ours. The information with respect to each person is as supplied
or confirmed by such person or based upon statements filed with the Commission.
The inclusion of shares in this table as beneficially owned is not an admission
of beneficial ownership. Percentages shown as an asterisk represent less than
1.0%.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Commission, and generally includes voting or investment power
with respect to securities. Except as indicated below, we believe each holder
possesses sole voting and investment power with respect to all of the shares of
common stock shown below as owned by that holder, subject to community property
laws where applicable. In computing the number of shares beneficially owned by a
holder and the percentage ownership of that holder, shares of common stock
subject to options held by that holder that are currently exercisable or
convertible or are exercisable or convertible within 60 days after the date of
the table are deemed outstanding. Those shares, however, are not deemed
outstanding for computing the percentage ownership of any other person or group.
NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL PERCENT OF CLASS
OF BENEFICIAL OWNER OWNERSHIP OF COMMON STOCK OF COMMON STOCK
------------------- ------------------------- ---------------
Amrit K. Das 2,724,468(1) 14.2%
Koushik Dutta - -
Bruce K. Nelson - -
D. Dean McCormick III - -
Benedict A. Eazzetta - -
Stanley W. Corbett - -
Santanu K. Das 2,554,900 13.3%
Sormistha Das 1,933,744 10.1%
Peter Kellogg 3,835,800(2) 19.9%
Diker GP, LLC, Diker
Management LLC, Charles
M. Diker and Mark M. Diker 967,424(3) 5.0%
All directors and executive
officers as a group (7 persons) 5,279,368(4) 27.4%
_______________
(1) Includes 1,170,659 shares of common stock held by the A. and P. Das
Living Trust and 1,170,659 shares of common stock held by the Purabi Das
Marital Trust, of which trusts Amrit Das is the trustee. Also includes
157,700 shares of common stock held by the Purabi Das Foundation, Inc.,
of which foundation Amrit Das is the trustee. Mr. Das disclaims
beneficial ownership of the shares held by the foundation.
(2) The address for Mr. Kellogg is 120 Broadway, New York, New York, 10271.
(3) Based on a Schedule 13G filed February 17, 2006, power to vote or dispose
of the shares is shared by: Diker GP, LLC, as the general partner ("Diker
GP") to Diker Value-Tech Fund, LP, the Diker Value Tech QP Fund, LP, the
Diker Micro-Value Fund, LP, the Diker Micro-Value QP Fund, LP, the Diker
Micro and Small Cap Fund, LP, and the Diker M&S Cap Master, Ltd.
(collectively, the "Diker Funds"); Diker Management, LLC, as the
investment manager of the Diker Funds with respect to the shares of
35
common stock held by the Diker Funds ("Diker Management"); and Charles M.
Diker and Mark N. Diker, as managing members of each of Diker GP and
Diker Management, with respect to the shares of common stock subject to
the control of Diker GP and Diker Management. Each of these persons
disclaims all beneficial ownership, however, as affiliates of a
registered investment advisor and, in any case, disclaims beneficial
ownership except to the extent of their pecuniary interest in the shares.
The address of each of these persons is 745 Fifth Avenue, Suite 1409, New
York, New York 10151.
(4) Includes 157,700 shares of common stock that are held indirectly by Amrit
Das and as to which Mr. Das disclaims beneficial ownership.
CHANGES IN CONTROL
The merger transaction described in proposal 2 is anticipated to result
in the former BPOMS stockholders holding approximately 90% of our equity
interests that would be outstanding immediately following the consummation of
the merger on a fully-diluted basis but excluding most new equity or
equity-based securities, if any, issued by us or BPOMS after August 29, 2006.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 2003, we borrowed $100,000 from Mr. Amrit Das, our Chief
Executive Officer, and issued to him a 7.25% interest bearing unsecured
promissory note. The proceeds were used for working capital. The principal along
with the accrued interest was paid in full in August 2005.
In June 2001, we entered into a five-year employment agreement with
Santanu Das, our then Chief Operating Officer and Executive Vice President. The
agreement provided for a minimum base annual salary of $120,000 and contained
terms similar to the employment agreement for Mr. Amrit Das discussed above. In
June 2005, the annual salary of Mr. Santanu Das was increased to $165,000. Mr.
Santanu Das resigned from his position with us effective November 18, 2006 due
to his employment with Bentley. In March 2006, Mr. Santanu Das received a cash
bonus of $25,000 in consideration for services he rendered in his capacity as an
executive officer in connection with the asset sale to Bentley.
Each of Mr. Amrit Das, Mr. Santanu Das and Mr. Nelson (collectively,
the "Executives"), were eligible to receive annual bonuses at the discretion of
the compensation committee based upon achievement of certain operating income
targets and contribution of the recipient to profitability during fiscal 2006.
The annual discretionary bonuses were to be up to 50% of Mr. Santanu Das' base
salary or up to 30% of the annual base salaries of the other two Executives.
However, none of the Executives received any annual bonus under this
arrangement.
In June 2005, we entered into Change in Control and Executive Retention
Agreements with each of Mr. Amrit Das, Mr. Santanu Das and Mr. Nelson, on the
terms described under the heading "Employment Agreements, Termination of
Employment and Change-in-Control Arrangements" above with regard to Mr. Amrit
Das's retention agreement. In connection with the asset sale to Bentley in
November 2005, Mr. Santanu Das terminated his employment agreement with us, was
immediately employed by Bentley and waived his rights to any claim under the
retention agreement. Mr. Nelson's retention agreement was terminated in
connection with the execution of his employment agreement in March 2006.
In November 2005, Mr. Nelson received a cash bonus of $25,000, which
had been contingent upon the closing of the asset sale to Bentley.
Mr. Dutta is eligible for a bonus of approximately $50,000, payable
upon the successful completion of the merger contemplated by the merger
agreement described in proposal 2. The payment of a bonus was authorized prior
to his becoming an executive officer, to be payable upon a change in control of
our Web4 division.
36
In December 2004, Mr. Amrit Das personally guaranteed a term loan from
a bank in India. The term loan is secured by substantially all of our assets
located in India. The loan bears an annual interest of 9.5% payable monthly. The
principal is payable in quarterly installments beginning January 2005 and ending
December 2009. As of March 31, 2006, this loan had been paid OFF. In addition to
this, we had obtained overdraft facilities for meeting our working capital
requirement in India. These overdraft facilities are also secured by
substantially all our assets located in India. The loan bore an annual interest
of 11% payable monthly. As of March 31, 2006, this loan had been paid off.
We are a party to director and executive officer compensation
arrangements, employment, change in control and separation agreements with
related parties, as more particularly described elsewhere in this proxy
statement. In addition, Sormistha Das, who beneficially owned more than 10% of
our outstanding shares of common stock as of September 29, 2006 and is the
daughter of Mr. Amrit Das and sister of Santanu K. Das, served as our assistant
controller from October 2001 to September 15, 2006.
In connection with the merger and sale transactions described in
proposals 2 and 3, we entered into various agreements and arrangements with
related parties, as more particularly described in the discussions of those
proposals.
REQUIRED VOTE AND BOARD RECOMMENDATION
Directors will be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors, which means that the five candidates receiving the
highest number of affirmative votes of the shares entitled to be voted for them
will be elected, to serve until the next annual meeting or until their
successors are elected and qualified.
However, if the merger and sale transactions described in this proxy
statement are consummated, then our board of directors would be reconstituted at
the effective time of the merger in accordance with the terms of the merger
agreement, as described under the heading "Post-Closing Beneficial Ownership and
Operations - Management" beginning on page 73.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE
FIVE DIRECTOR NOMINEES NAMED IN THIS PROPOSAL.
37
PROPOSAL 2
REVERSE MERGER WITH BPOMS
GENERAL
The following is a description of material aspects of the proposed
reverse merger with BPOMS and certain related agreements and transactions. The
proposed sale transaction and related agreements are discussed in further detail
in proposal 3.
While we believe the following description covers the material terms of
the merger agreement and related transactions, the description may not contain
all of the information that is important to you. You should carefully read this
document and the other documents to which we refer for a more complete
understanding of the merger transaction. In particular, the following summaries
of the merger and other agreements are not complete and are qualified by
reference to the copies of those agreements attached as appendices to this proxy
statement and incorporated herein by reference.
You should be aware, however, that the terms and information in the
attached agreements should not be relied upon as disclosures about us or BPOMS
without consideration of all of the public disclosures made by us in our public
reports filed with the Commission and as set forth elsewhere in this proxy
statement. The terms of those agreements, including without limitation, the
representations and warranties contained in those agreements, were made by the
parties to those agreements solely for the benefit of one another and are
intended to govern the contractual rights and relationships, and allocate risks,
between the parties in relation to the merger and related transactions.
Accordingly, you should not rely on the representations and warranties as
characterizations of the actual state of facts, since they were only made as of
the date of those agreements and are modified in important part by the
underlying disclosure materials. We have provided additional specific
disclosures in our public filings to the extent we are aware of the existence of
any material facts that are required to be disclosed under federal securities
law and might otherwise contradict the representations and warranties contained
in the agreements.
BACKGROUND OF THE MERGER AND SALE TRANSACTIONS
During the second half of calendar 2004, we began an initial review of
strategic alternatives, including the sale of some or all of our business
operations, acquisitions of other companies, reverse merger candidates, and
going private. During this time, our management and board of directors met with
various consultants and advisors, including three investment banking firms
specializing in providing strategic services to public companies in the
technology sector. In August 2005, we entered into an asset sale agreement
pursuant to which we agreed to sell to Bentley for approximately $23.5 million
our Research Engineers International ("REI") division and STAAD product lines,
which at that time constituted a substantial portion of our assets.
On August 31, 2005, our board of directors appointed Messrs. McCormick,
Eazzetta and Corbett to a special committee charged with the task of assisting
the board of directors in establishing a specific course of action for us to
take after the consummation of the asset sale to Bentley in November 2005. The
asset sale to Bentley was approved by our stockholders at our last annual
meeting in November 2005. We did not have a previous relationship with Bentley.
Mr. Ben Eazzetta, who is and was then one of our directors, was also then an
executive officer and shareholder of Intergraph Corporation, a publicly-held
company that owned approximately 29% of the outstanding shares of common stock
of Bentley as of the date of the agreement with Bentley. However, to our
knowledge Mr. Eazzetta was not a party to any arrangement pursuant to which he
benefited directly or materially from the sale to Bentley.
38
On November 18, 2005, we completed the sale of our REI business and
STAAD product lines to Bentley. The asset sale included the worldwide operations
associated with REI, including the STAAD structural analysis and design product
line, software and product development, customer support and relationships, and
offices associated with the worldwide business. In addition to the $23.5 million
cash purchase price, we received $250,000 for reimbursement of expenses relating
to legal and financial services in connection with the asset sale.
In accordance with the Bentley asset sale agreement, in November 2005
we had set aside a cash reserve of $1.07 million. As of May 17, 2006, the sum of
the prepaid assets assigned to Bentley at closing and assigned accounts
receivable for which payments had been received by Bentley was less than the
aggregate amount of the assumed current liabilities, which resulted in a
shortfall of approximately $760,000. Per the asset sale agreement, we were
obligated to pay, and did pay, the amount of the shortfall to Bentley from the
cash reserve.
On December 29, 2005, we announced that our board of directors had
approved a cash distribution in the amount of $0.85 per share payable on January
27, 2006 to stockholders of record as of January 17, 2006. The total amount that
was distributed on January 27, 2006 was approximately $16.25 million, which
constituted substantially all of the net proceeds of the asset sale after
repaying debt and setting aside reserves for taxes, continuing operations, and
other contingencies. In connection with the distribution, options issued under
our stock option plans ceased further vesting and then terminated if not
exercised prior to the ex-distribution date of January 30, 2006. Non-plan
options and warrants that remained outstanding on the ex-distribution date had
an $0.85 per share reduction in their exercise prices on the ex-distribution
date.
In November 2005, we retained ISI Capital Partners, LLC ("ISI") as an
advisor to the special committee in connection with the special committee's
evaluation of the possible divestiture of some or all of our remaining assets
and operations, as well as possible mergers and/or strategic acquisitions for
our company and our information technology, collaborative software, and
engineering business process outsourcing businesses. ISI's role was to identify
and initiate contact with potential parties interested in a transaction and to
assist us in negotiations and was not to provide any formal reports, opinions or
appraisals to the special committee and/or board relating to the merger and sale
transactions.
The compensation agreement between us and ISI involves a monthly
retainer of $5,000 per month and a contingent fee of $75,000 payable upon the
consummation of a transaction. If the merger and sale transactions are completed
as anticipated in December 2006, ISI will have received fees totaling $135,000
under the compensation agreement.
ISI's relationship with us dates back to late 2004, when we began
reviewing the possible divestiture of our REI division. We retained ISI in June
2005 to assist in the sale of that division to a select group of buyers,
including Bentley. We paid ISI total fees of $405,000 in connection with the
sale to Bentley in November 2005. Upon completion of the proposed merger and
sale transactions that are the subject of proposals in this proxy statement, ISI
will have no obligation or arrangement to provide any services to or receive any
further compensation from the combined company.
39
Between November 2005 and July 2006, ISI and our management, under the
supervision of our special committee, engaged in discussions with various public
and private entities involving potential asset purchases, common stock
purchases, and reverse mergers with unrelated third parties. However, those
discussions did not lead to any indications of bona fide offers that were
superior to the proposal involving the concurrent sale of our United States
operations to BPOMS and our Indian operations to Mr. Das and his affiliates.
On April 4, 2006, we engaged the services of an investment banking
firm, B. Riley, to render a "fairness opinion" to our board of directors in
connection with a merger or the sale of our remaining assets. B.Riley was hired
as a third party advisor to avoid any conflicts of interest with ISI, as ISI
would have a direct financial benefit should a transaction be completed. We had
previously paid to B. Riley $90,000 plus reimbursement of certain expenses
totaling approximately $9,200 for issuing a fairness opinion in connection with
our sale of assets to Bentley in November 2005. In connection with the fairness
opinion relating to the proposed merger and sale transactions, we paid B. Riley
total fees and expenses of $62,500. No part of B. Riley's services or fees are
contingent upon the merger and sale transactions occurring.
On April 17, 2006, we received an inquiry from George Logan of Global
Capital Markets, Inc., BPOMS' financial advisor ("GCM"), regarding BPOMS'
potential interest in a merger transaction with us. We did not have any prior
relationship with BPOMS. However, during 1999 to 2000, Mr. Logan had acted as an
investor relations consultant for us. Mr. Logan had learned about our interest
in exploring strategic alternatives via our public disclosures and contacted Mr.
Nelson via e-mail on behalf of BPOMS regarding exploring a potential merger
transaction between BPOMS and us. Mr. Nelson forwarded the inquiry to Brian
Mulvaney of ISI. Mr. Mulvaney then notified the special committee regarding Mr.
Logan's inquiry.
On April 18, 2006, our special committee requested that Mr. Mulvaney
examine the potential merger transaction with BPOMS.
On April 19, 2006, we and BPOMS executed a mutual confidentiality and
non-disclosure agreement. Also, BPOMS executed a finders' fee agreement with
GCM. Under the finders' fee agreement, BPOMS has agreed to pay to GCM a $250,000
cash finders' fee and to issue a seven-year fully-vested warrant to purchase a
number of shares of common stock of the combined company calculated by dividing
2% of the $1.5 million to be provided to us by BPOMS in the merger transaction
(that is, $30,000) by the fair market value of a share of the combined company's
common stock on the closing date. The warrant would have an exercise price equal
to 100% of the fair market value of the combined company's common stock on the
closing date.
On April 21, 2006, our management, including Bruce Nelson and Amrit
Das, met with Mr. Logan of GCM, Mr. Mulvaney of ISI and James Cortens and
Patrick Dolan of BPOMS to discuss potential strategic integration issues and
possible deal structures. At the meeting, BPOMS initially indicated that it
would consider paying $4.0 million for all of our operations based on estimates
of our total revenues and certain assumptions regarding cash levels and
liabilities, and that this price was contingent upon the completion of a due
diligence review of our company. As the discussions continued about the
activities in our various operations, BPOMS realized that the business conducted
by our Indian operations was not conducive to BPOMS' overall business plan.
Accordingly, BPOMS indicated that it was now interested in acquiring only our
United States operations and not our Indian operations. Accordingly, Mr. Das
then proposed the concept of selling our Indian operations to him and his
affiliates for $2.5 million in cash plus the assumption of our Indian
liabilities, including outstanding litigation and other contingent liabilities,
and concurrently selling our United States operations, including control of our
company, to BPOMS. BPOMS then suggested a price of $2.0 million in cash for our
United States operations based on estimates of revenues of our United States
operations and certain assumptions regarding cash levels and liabilities, and
indicated that this price was contingent upon the completion of a due diligence
review of our company. The purchase price proposed by Mr. Das for our Indian
operations was based on his own personal assessment of the assets and
liabilities that he proposed to acquire.
This structure would have provided us with approximately $4.5 million
for distribution to our stockholders, which was superior to the $4.0 million
offer for our entire company initially proposed by BPOMS. However, it became
apparent that the assumptions for these pricing levels included a closing date
that could not be accomplished. Additional months would be needed to obtain
stockholder approval, and the losses and expenses for those additional months
needed to be taken into account. The discussions further progressed regarding
how the acquisition could be structured in order to maintain our public
reporting status. The concept of a reverse merger was considered, and the
parties agreed that if a reverse merger were to be pursued, it would be
appropriate for our stockholders to retain an approximate 10% ownership in the
combined company, further enhancing the value of the proposal. Management
immediately informed the special committee of the details of these discussions
by telephone.
40
On April 26, 2006, the special committee conducted a meeting to discuss
the proposal outlined above. Mr. Nelson and Mr. Mulvaney informed the special
committee regarding the status of our management's review of possible strategic
alternatives, including the proposal outlined above. Following substantial
discussion, the special committee directed our management to investigate the
sale of our Indian operations to Mr. Das and his affiliates and the concurrent
merger of our remaining United States operations with BPOMS, as well as to
continue to identify and investigate any other possible strategic transactions
with other parties.
On May 3, 2006, the special committee met with Mr. Nelson, Mr. Mulvaney
and Mr. Scott Santagata of Dorsey & Whitney LLP, counsel to the special
committee. Mr. Mulvaney provided an update on efforts to sell our remaining
businesses. Mr. Mulvaney reported that a third party had discussed with him a
verbal proposal to acquire our entire company for cash. However, BPOMS also had
verbally communicated its proposal of a cash purchase price, a continuing equity
interest for our stockholders, and a requirement that DFH purchase the India
subsidiary. The special committee then discussed the merits of these proposals.
Mr. Mulvaney noted that the third party had been informed that it would need to
improve its offer in order to be considered because we were in discussion
regarding a superior proposal. The special committee instructed Mr. Mulvaney to
continue to communicate with the third party and BPOMS in an effort to negotiate
the best terms possible. Mr. Mulvaney then periodically communicated with the
third party to express interest in continuing discussions and offered to provide
any additional diligence information required. On May 11, 2006, our special
committee met with BPOMS and their investment banker at the time, to discuss the
potential sale to BPOMS of our United States operations and concurrent sale to
Mr. Das and his affiliates of our Indian operations, as well as to discuss a
capital raise strategy. Our special committee authorized ISI and our management
to continue negotiations with BPOMS and Mr. Das, as well as to continue to
identify and investigate any other possible transactions with other parties.
On May 18, 2006, we and BPOMS began the due diligence process and
exchange of data, including conference calls with management groups of our
respective entities.
On or about May 22, 2006, BPOMS and an entity formed by Mr. Das for
purposes of the proposed acquisition of our Indian operations, DFH, requested
that their respective attorneys begin drafting the merger agreement and the sale
agreement.
On May 26, 2006, we received from BPOMS' counsel an initial draft of
the merger agreement. The initial terms were based on the terms discussed at the
April 21, 2006 meeting and assumed that no material changes would occur in our
operations, assets and liabilities.
On June 1, 2006, June 6, 2006 and June 21, 2006, the special committee
met with Mr. Nelson, Mr. Mulvaney and Mr. Santagata. Mr. Mulvaney provided
updates on the progress of negotiations with BPOMS. At the June 1, 2006 meeting,
Mr. Mulvaney reported that Mr. Amrit Das and Mr. Santanu Das would be meeting
with their affiliates on June 2, 2006 to discuss their proposed purchase of our
Indian operations. The special committee discussed outstanding issues relating
to proceeding with the proposed BPOMS transaction, including risks, timing,
benefits, our financial condition and prospects for other proposals, and
concluded it was in the best interests of our company and our stockholders to
continue to proceed with negotiations regarding the BPOMS transaction and, at
the same time, continue to consider alternative proposals that may be available
in order to ensure the timely completion of a transaction.
On June 8, 2006, we received from DFH's counsel an initial draft of the
sale agreement. The initial purchase price proposed by DFH was $2.5 million plus
the assumption of various contingent liabilities. The proposed terms were based
on the expectation that at the closing, Indian working capital would be at least
$200,000 and cash would be reserved to offset any assumed liabilities.
41
On June 15, 2006, BPOMS provided revised terms involving a purchase
price of $2.5 million in cash, with our stockholders still retaining an
approximate 10% ownership in the combined company, and the concept of a purchase
price adjustment that would be based upon our projected cash balances at the
time of closing of the proposed merger and sale transactions. Our management
continued negotiations with BPOMS and DFH regarding the terms of the proposed
merger and sale transactions, keeping the special committee apprised and
obtaining input from the special committee throughout the negotiation process.
On July 7, 2006, the special committee met with Mr. Mulvaney and Mr.
Nelson for an update on the progress of negotiations with BPOMS and DFH,
including the status of and outstanding issues relating to the transactions, due
diligence matters and the merger and sale agreements. Mr. Nelson noted that
BPOMS had indicated that its audited financial statement would not be available
until the end of July. The special committee discussed these matters, as well as
issues relating to the contingent dividend, the financing structure and the
impact on the timing and content of the proxy statement. The special committee
provided direction to ISI and our management regarding efforts to resolve the
outstanding issues as expeditiously as possible. Mr. Mulvaney noted that we were
not foreclosing offers or proposals from other interested parties, but that no
such parties were actively engaged in discussions with us at that time.
On July 13, 2006, the special committee met with Mr. Nelson, Mr.
Mulvaney, Ms. Cristy Parker of Rutan & Tucker, LLP, counsel to our company, and
Mr. Santagata. Mr. Mulvaney and Mr. Nelson provided an update on the progress of
negotiations with BPOMS and DFH. The special committee discussed the status of
the transactions and outstanding issues, including a proposed purchase price
adjustment depending upon cash balances and the terms of the sale of the India
operations. The special committee discussed appropriate parameters for such
adjustments and approved the negotiation of adjustments within those parameters.
On July 18, 2006, the special committee met with Mr. Nelson, Mr.
Mulvaney, Mr.Santagata and Mr. Michael Lowell of B. Riley. Mr. Lowell reported
on the status of his firm's evaluation of the proposed combined BPOMS/and DFH
transactions and preparation of a single fairness opinion covering both
transactions. Mr. Lowell indicated that the evaluation was complete based on the
current terms and provided a brief overview of the process and certain key
issues. Mr. Lowell also confirmed that his firm had concluded that, based on the
current terms, the aggregate consideration proposed to be received by us in
connection with the merger and sale transactions is fair to our stockholders
from a financial point of view. Mr. Lowell confirmed that he would be prepared
to provide a detailed presentation to our board as well as to deliver the
fairness opinion (subject to material changes to the terms of the transactions)
when the terms of the transactions had been finalized. Mr. Mulvaney and Mr.
Nelson provided an update on the proposed BPOMS transaction, including
outstanding issues, negotiations of the merger agreement, due diligence matters
and financial statement information. Mr. Nelson and special committee member Mr.
Dean McCormick were directed to follow up with BPOMS to discuss the outstanding
issues.
Mr. Mulvaney then provided an update on the status of the negotiation
of the agreement to sell the India operations to DFH. The special committee then
discussed the timing of the transaction with BPOMS, the reasons for delays and
the issues facing us in light of the revised schedule. The special committee
also discussed other options we might pursue. Mr. Mulvaney reported that no
additional bona fide bidders were in discussions with us and there were no other
indications of interest to acquire us at that time. The special committee
discussed the prospect of selling the Indian operations separate from the rest
of our company and also considered the likelihood of completing a transaction
with other parties for the sale of the Indian operations on more favorable terms
than the proposed DFH transaction. The special committee expressed willingness
to consider any other credible offer. At the conclusion of the discussion, the
special committee directed Mr. Mulvaney to continue discussions with all
possible credible parties to assess their level of interest and determine
whether they would be willing to make a proposal. The special committee further
instructed Mr. Nelson and Mr. Mulvaney to continue to work as diligently as
possible to resolve outstanding issues with BPOMS in order to further our
progress with that transaction.
42
On July 20, 2006, the third party delivered to Mr. Mulvaney a brief
one-page letter stating its general interest in making a tender offer of up to
$0.25 per share, subject to a 45-day due diligence period. The special committee
instructed Mr. Mulvaney to deliver a letter to the third party on July 22, 2006
indicating our willingness to provide any additional information required and
requesting that the third party provide a detailed proposal outlining the terms
and conditions of the offer by July 27, 2006, as the special committee intended
to meet on or about that date regarding the BPOMS proposal. On July 26, 2006,
the third party requested some additional information, which was promptly
provided to them on July 27, 2006. We reminded the third party that because it
was proposing a tender offer for the outstanding shares, it was not necessary
for the third party to obtain the consent or approval of the special committee
or board of directors. However, the third party did not subsequently request any
other additional information nor did it ever deliver a detailed proposal to the
special committee or tender an offer to our stockholders.
At the July 28, 2006 meeting of our board of directors, Mr. Mulvaney of
ISI (by telephone conference), and Mr. Mike Lowell and Mr. Bret Zorich of B.
Riley (by telephone conference), were in attendance at our management's request.
Mr. Amrit Das was also present at that meeting. However, no negotiations were
conducted during that meeting. B. Riley's staff, Mr. Lowell and Mr. Zorich,
presented to our board of directors a preliminary report in support of their
fairness opinion proposed to be rendered for the merger and sale transactions
and answered questions posed by our board of directors and management. After the
presentation at the board meeting, the board again discussed the pros and cons
of the proposed merger and sale transactions. Potential risks and liabilities to
us in connection with the transactions were also discussed. Based on the report
prepared by B. Riley and all other information received and deliberations made
to date, including the fact that no third party had delivered a superior offer,
all of the members of the board present expressed general support for the
potential merger and sale transactions with BPOMS and DFH. However, because we
were still awaiting final audited financial statements from BPOMS and final
transaction documentation, the board postponed any final decision until a later
board meeting and directed B. Riley to perform additional analyses upon receipt
of final information.
While awaiting BPOMS' final audited financial statements and final
transaction documentation, our actual and projected working capital and cash
balances declined further than previously anticipated. Changes in those
conditions resulted from higher than forecasted audit and legal expenses for
our Commission filings and the negotiation of the merger and sale agreements,
lower than forecasted revenue for our Web4 and IT services divisions, and
unanticipated expenses in India related to uncollectible receivables and
litigation. Therefore, the proposed purchase price adjustments were removed from
the draft merger and sale agreements and the purchase prices instead were
adjusted downward. DFH reduced its purchase price offer for our Indian
operations by $500,000 to $2.0 million in exchange for accepting that Indian
working capital would be at least $0 and cash in REL could be less than
$100,000. BPOMS reduced its purchase price offer for our United States
operations by $500,000 to $1.5 million, with our stockholders still retaining an
approximate 10% ownership in the combined company, in exchange for accepting
that projected working capital and cash balances would be lower than previously
anticipated.
At the August 29, 2006 meeting of the special committee, the special
committee met with B. Riley by telephone conference to obtain an update on the
proposed fairness opinion that B. Riley had discussed with the special committee
on July 28, 2006. A meeting of our board of directors then followed, at which
Mr. Mulvaney of ISI was present by telephone conference at the request of our
board of directors. The board members discussed the final terms of the proposed
merger and sale, the presentations previously provided by B. Riley, and
supplemental information provided by B. Riley to the special committee and the
board members prior to the meeting. Consideration was given to the selected
precedent transaction analysis, comparable public company analysis and
discounted cash flow analysis conducted by B. Riley, which appeared to indicate
that the aggregate consideration proposed to be received by us in the merger and
sale transactions is favorable to our stockholders. Consideration was also given
to the facts that the fairness opinion would provide that the aggregate
consideration proposed to be received by us in the concurrent merger and sale
transactions is fair to our stockholders from a financial point of view, that no
other credible transaction alternatives were available to us after an extensive
search by ISI, that we were continuing to experience monthly losses that were
continuing to exhaust our cash reserves, and that it was doubtful we would find
another party that would provide a credible offer quickly. After further
deliberation, our board of directors concluded, following a recommendation by
the special committee, that the proposed concurrent merger and sale transactions
with BPOMS and DFH would secure the best value reasonably available for our
stockholders in the short-term and therefore were in the best interests of our
company and our stockholders and consistent with the board's fiduciary
obligations. Accordingly, our board approved the proposed merger and sale
transactions by unanimous approval of our independent directors, with Mr. Amrit
Das and Mr. Santanu Das abstaining from the vote due to their affiliation with
DFH.
Our board then directed our management to finalize and execute the
merger agreement, the sale agreement and related documentation and to submit the
merger and sale transactions to our stockholders for approval. Although under
applicable laws and regulations we would be submitting the merger transaction
and the sale transaction to our stockholders as separate numbered proposals in
our proxy statement, and despite the fact that the sale transaction would
involve a sale of REL to affiliates of ours, each of the two proposals would
explicitly state that each of the two transactions would be subject to and
conditoned upon the approval and simultaneous consummation of the other
transaction, and that we have obtained a single fairness determination
indicating that the aggregate consideration proposed to be received by us in the
two concurrent transactions is fair to our stockholders from a financial point
of view. Accordingly, our board believed that it was appropriate to recommend
that our stockholders approve both of the proposals together and that it was
also appropriate for our board in making that recommendation to rely upon a
single fairness determination covering the simultaneous consummation of the two
transactions.
43
After the close of business on August 29, 2006, the parties exchanged
signatures on the merger agreement, sale agreement and voting agreements. On
August 30, 2006, we issued a press release announcing the proposed transactions.
THE MERGER AGREEMENT
The following section summarizes the material terms of the merger
agreement. The merger agreement is attached as APPENDIX A to this proxy
statement. Stockholders are urged to, and should, read the merger agreement
carefully and in its entirety for a description of the terms of the proposed
merger.
GENERAL
Under the terms of the merger agreement, BPOMS stockholders would
exchange their shares of common and preferred stock of BPOMS for shares of our
common stock and shares of three classes of preferred stock we would create, and
we would assume BPOMS' obligations under its outstanding options and warrants to
purchase BPOMS common stock. As a result of the merger, BPOMS would become a
wholly-owned subsidiary of ours. Also, approximately 90% of the equity interests
of NGRU that would be outstanding immediately following the merger on a
fully-diluted basis but excluding most new equity or equity-based securities
issued by NGRU or BPOMS after August 29, 2006, would be held by the former BPOMS
stockholders.
Exemption from the registration provisions of the Securities Act for
the transaction described above will be claimed under Section 4(2) of, and
Regulation S under, the Securities Act, among other exemptions, on the basis
that such transaction does not involve any public offering and the recipients
are either accredited or are not U.S. persons and not acquiring the securities
for the account or benefit of any U.S. person. Appropriate investment
representations will be obtained, and the securities will be issued with
restricted securities legends.
BPOMS' CAPITAL STOCK, OPTIONS AND WARRANTS
Authorized and Outstanding
--------------------------
BPOMS' authorized capital stock currently consists of 15,000,000 shares
of common stock and 34,220,000 shares of preferred stock, par value $0.001 per
share, of which 2,220,000 shares are designated as Series A Preferred ("Series
A"), 2,000,000 shares are designated as Series B Preferred ("Series B"), and
30,000,000 shares are designated as Series C Preferred ("Series C"). BPOMS plans
to increase its authorized number of shares of common stock to 17,900,000 prior
to the closing of the merger transaction. As of September 29, 2006, BPOMS had
9,925,000 shares of common stock issued and outstanding, 2,088,036 shares of
Series A issued and outstanding, 2,000,000 shares of Series B issued and
outstanding, no shares of Series C issued and outstanding and 2,762,999 shares
of common stock reserved for issuance under outstanding options and warrants
with exercise prices of $0.025 per share.
Market Price and Dividends
--------------------------
There is no established public trading market for securities of
BPOMS. At September 29, 2006, BPOMS had 13 holders of common stock, two holders
of Series A, six holders of Series B and no holders of Series C.
BPOMS has not paid any cash dividends on its common stock since
its inception on July 26, 2005 and has indicated to us that it has no present
plans to do so. Holders of BPOMS preferred stock have priority over holders of
BPOMS common stock with regard to dividend payments.
44
Preferred Stock
---------------
The material terms of BPOMS' preferred stock are described below.
The terms of BPOMS' preferred stock, options and warrants are subject to
appropriate adjustments in connection with the proposed reverse stock split and
other capitalization or similar changes that may occur prior to the closing of
the merger transaction.
o Series A
--------
o DIVIDENDS - Shares of Series A are entitled to an 8.0%
per year cumulative dividend, payable at the end of each
calendar quarter in shares of Series A, junior to shares
of Series C and senior to all other classes and series
of stock.
Series A holders are entitled to a tax gross-up payment
in cash to cover United States federal income and
withholding taxes to the extent those taxes exceed 10%
of the fair market value of a dividend on the dividend
distribution date.
o VOTING - Shares of Series A vote together with shares of
common stock on an as-converted basis, with any
fractional votes rounded to the nearest share, on
matters submitted to a vote of stockholders generally.
Series A holders, voting as a separate class, are
entitled to elect two members of BPOMS' board of
directors at each meeting or pursuant to each written
consent.
The affirmative vote of a majority of the outstanding
shares of Series A is required prior to:
o the sale, lease or other transfer of all or
substantially all of BPOMS' assets;
o the merger or consolidation of BPOMS into or
with any other corporation that results in the
transfer of more than 50% of the voting power
of BPOMS; or
o the acquisition in any manner or form,
including through the issuance of debt and/or
stock and/or payment of cash, of all or
substantially all of the assets or business or
capital stock or ownership interest of another
entity or business.
o LIQUIDATION PREFERENCE - Series A shares rank junior to
shares of Series C and senior to shares of Series B and
common stock in the distribution of BPOMS' assets in
connection with a liquidation, dissolution or winding up
event, which events include:
o a voluntary or involuntary liquidation,
dissolution or winding up;
o a merger or consolidation with or into any
other corporation or corporations as a result
of which BPOMS' stockholders immediately prior
to the consummation of the merger or
consolidation hold less than 50% of the voting
securities of the surviving entity; and
45
o the sale, transfer or lease of all or
substantially all of BPOMS' assets.
The Series A liquidation preference is $1.00 per share,
subject to adjustments for stock splits, stock
dividends, recapitalizations and the like, plus an
amount equal to all accrued and unpaid dividends.
Any remaining assets and funds available for
distribution to stockholders after payment of the
liquidation preferences on the Series C, Series A and
then Series B are to be distributed ratably among the
holders of common stock.
o REDEMPTION - Shares of Series A are not subject to
redemption.
o CONVERSION - Each share of Series A is convertible at
the option of the holder into one share of common stock,
subject to adjustments for stock splits, stock
dividends, recapitalizations and the like, with any
fractional shares of common stock rounded up to the next
whole number.
Shares of Series A are automatically convertible into
common stock immediately prior to the closing of a firm
commitment underwritten public offering with gross
proceeds of at least $10 million and a public offering
price of at least $5.00 per share, subject to
adjustments for stock splits, stock dividends,
recapitalizations and the like.
o Series B
--------
o DIVIDENDS - Shares of Series B are not entitled to
dividends.
o VOTING - Shares of Series B vote together with shares of
common stock on an as-converted basis, with any
fractional votes rounded to the nearest share, on
matters submitted to a vote of stockholders generally.
o LIQUIDATION PREFERENCE - Series B shares rank junior to
shares of Series C and Series A and senior to shares
common stock in the distribution of BPOMS' assets in
connection with a liquidation, dissolution or winding up
event;
The Series B liquidation preference is $1.00 per share,
subject to adjustments for stock splits, stock
dividends, recapitalizations and the like.
o REDEMPTION - Shares of Series B are not subject to
redemption.
o CONVERSION - Each share of Series B is convertible at
the option of the holder into one share of common stock,
subject to adjustments for stock splits, stock
dividends, recapitalizations and the like, with any
fractional shares of common stock rounded up to the next
whole number.
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Shares of Series B are automatically convertible into
common stock immediately prior to the closing of a firm
commitment underwritten public offering with gross
proceeds of at least $10 million and a public offering
price of at least $5.00 per share, subject to
adjustments for stock splits, stock dividends,
recapitalizations and the like.
o BOARD OBSERVATION - Holders of a majority of outstanding
shares of Series B have the right to appoint an observer
to attend all meetings of BPOMS' board of directors in a
nonvoting capacity, except during any period in which
any holder of Series B serves as a director of BPOMS.
o Series C
--------
o ORIGINAL ISSUE PRICE - Shares of Series C, if any, are
to be issued pursuant to the bridge loan agreement
described under the heading "Bridge Loan Agreement"
beginning at page 78. The aggregate purchase price for
the shares of Series C would equal the amount of
additional equity required to meet BPOMS' $1.5 million
capital surplus requirement. The number of shares of
Series C issued for the purchase price is equal to the
purchase price divided by 50% of the value of the BPOMS
common stock (or, if the merger has occurred when the
Series C is issued, the market value of the combined
company's common stock).
o DIVIDENDS - Shares of Series C are entitled to a
cumulative monthly dividend out of retained earnings,
senior to dividends on all other classes and series of
stock, in an amount calculated as follows:
o for the first twelve months following their
issuance date, an amount equal to $0.00750
multiplied by the Series C original issue
price per share (as adjusted for stock splits,
stock dividends, recapitalizations and the
like) and then divided by $1.00;
o for the next succeeding 36 months, an amount
equal to $0.03180 multiplied by the Series C
original issue price per share (as adjusted
for stock splits, stock dividends,
recapitalizations and the like) and then
divided by $1.00; and
o from and after the 48th month, the Series C
shares will not bear a dividend.
o VOTING - Shares of Series C have one vote per share and
vote together with shares of common stock on matters
submitted to a vote of stockholders generally.
In addition, the affirmative vote of a majority of the
outstanding shares of Series C is required prior to any
of the events listed under the heading "Liquidation
Preference" below.
Also, the affirmative vote of holders of not less than
two-thirds of the outstanding shares of Series C is
required for:
47
o the creation of a new class or series of stock
that is entitled to dividends or shares in the
distribution of assets on a parity with or in
priority to the Series C or that provides for
mandatory redemption;
o the redemption of shares of capital stock
other than Series C; and
o the amendment of the terms of the Series C in
a manner that would materially alter or change
their powers, preferences or special rights.
o LIQUIDATION PREFERENCE - Series C shares rank senior to
all other classes and series of stock in the
distribution of BPOMS' assets in connection with a
liquidation, dissolution or winding up event, which
events include:
o a voluntary or involuntary liquidation,
dissolution or winding up;
o a merger or consolidation with or into any
other corporation or corporations as a result
of which BPOMS' stockholders immediately prior
to the consummation of the merger or
consolidation hold less than 50% of the voting
securities of the surviving entity; and
o the sale, transfer or lease of all or
substantially all of BPOMS' assets.
The Series C liquidation preference is equal to the
Series C redemption price plus an amount equal to all
accrued and unpaid dividends, plus interest on all
accrued and unpaid dividends at a rate of 10% per year.
Any remaining assets and funds available for
distribution to stockholders after payment of the
liquidation preferences on the Series C, Series A and
then Series B preferred stock are to be distributed
ratably among the holders of common stock.
o REDEMPTION - Shares of Series C may be redeemed at
BPOMS' election for an amount per share equal to 125% of
the Series C original issue price plus any declared by
unpaid dividends.
o CONVERSION - Shares of Series C are not convertible into
shares of common stock.
Additional Potential Capital Stock
----------------------------------
The terms of the merger agreement permit BPOMS to issue or
authorize for issuance BPOMS capital stock or other securities convertible into
or exercisable for BPOMS capital stock as follows without our prior written
consent:
o issuance of shares of BPOMS common stock upon exercise of
options or warrants that were outstanding as of August 29,
2006 or are specifically permitted to be issued;
48
o issuance or authorization for issuance of up to 200,000
shares of BPOMS common stock upon the closing of BPOMS'
acquisition of Novus Imaging Solutions, Inc. ("Novus"), which
occurred in October 2006;
o issuance of warrants to purchase up to a maximum of 1,000,000
shares of BPOMS common stock as permitted under the terms of
a bridge loan agreement described under the heading "BPOMS
Bridge Loan Agreement" beginning on page 78;
o entry into an agreement to authorize the issuance of
securities in a financing transaction described under the
heading "BPOMS Potential Financing" beginning on page 77;
o issuance of shares of BPOMS Series C in accordance with the
BPOMS bridge loan agreement;
o grant to BPOMS employees who were not officers, directors or
stockholders of BPOMS as of August 29, 2006 of stock options
to purchase up to an aggregate of 400,000 shares of BPOMS
common stock under BPOMS' existing stock option plan on terms
consistent with past practice (including initial vesting no
earlier than six months after the date of grant); and
o grant to Bruce Nelson and/or Koushik Dutta of options in
connection with employment agreements they may enter into as
of the closing.
To the extent BPOMS issues securities as permitted under the
merger agreement or with our prior written consent, our stockholders will become
subject to additional dilution upon or following consummation of the merger
transaction.
NETGURU PREFERRED STOCK
As outlined in proposal 5 beginning on page 103, we had no shares of
preferred stock outstanding as of September 29, 2006. However, we plan to create
three series of preferred stock for which shares of BPOMS preferred stock
outstanding at the effective time of the merger would be exchanged. The terms of
the three new series would conform to the terms of the BPOMS preferred stock
described above, subject to appropriate adjustments in connection with the
proposed reverse stock split or similar changes that occur prior to the closing
of the merger transaction. APPENDIX G to this proxy statement contains further
details regarding the proposed terms of the preferred stock we would create.
If we issue shares of preferred stock in connection with the closing of
the merger, the rights and privileges of holders of our common stock will become
subordinate to the conversion, liquidation, redemption, voting, director
election, board observation and other rights of the preferred stockholders.
CLOSING
The merger is subject to various closing conditions, including approval
by our stockholders and compliance with regulatory requirements. If stockholder
approval and other closing conditions are met, the merger is expected to close
as soon as practicable following the annual meeting but no later than December
22, 2006.
49
PRIOR, CONCURRENT AND SUBSEQUENT TRANSACTIONS
The merger would close concurrently with the closing of the sale
transaction described in proposal 3. Prior to the closings, we would conduct the
reverse stock split that is the subject of proposal 5 and declare a dividend to
our pre-merger stockholders of record as described under the heading "Use of
Proceeds" below. After the closings, we would change our name to BPO Management
Services, Inc. as described in proposal 4.
REPRESENTATIONS AND WARRANTIES
We and BPOMS have made a number of representations and warranties,
subject in some cases to qualifications, to one another in the merger agreement
regarding aspects of our respective businesses, financial conditions,
structures, customer contracts, intellectual properties, and other facts
pertinent to the merger transaction. The representations and warranties made by
both BPOMS and us will not survive the consummation of the merger transaction.
CONDITIONS TO CLOSING
Our and BPOMS' obligations to complete the merger transaction are
subject to the satisfaction or waiver, at or prior to the closing, of each of
the following:
o the merger agreement and the transactions contemplated by the
merger agreement must have been approved by the requisite
vote of our stockholders;
o the sale transaction must be effective at the effective time
of the merger; and
o the reverse stock split must have been consummated.
BPOMS' obligations to complete the merger transaction are subject to
the satisfaction or waiver, at or prior to the closing, of each of the
following:
o each of our representations and warranties must have been
accurate as of August 29, 2006 and as of the closing date as
if made on such date, except where the failure to be accurate
would not, individually or in the aggregate, have a material
adverse effect on the business, assets (including intangible
assets), financial condition or results of operations of us
and our subsidiaries, taken as a whole ("NGRU Material
Adverse Effect"), without regard to any materiality
qualification contained in our representations and
warranties;
o we must have performed, or complied in all material respects
with all of the covenants and obligations required to be
performed or complied with by us prior to the closing under
the terms of the merger agreement, without regard to any
materiality qualification contained in our representations
and warranties;
o after the date of the merger agreement, there must not have
occurred any change, circumstance or event concerning us and
our subsidiaries, taken as a whole, that has had or could be
reasonably likely to have a NGRU Material Adverse Effect;
o immediately prior to the effective time of the merger, the
total combined cash and cash equivalents of us and our
subsidiaries must be at least equal to our U.S. reserved
cash, as defined in Section 1.2(b)(i) of the merger
agreement;
50
o we must have received written resignations dated and
effective as of the closing date, executed by our directors
and officers who are not to continue as directors and
officers of the combined company and we must have appointed
officers selected by BPOMS; and
o after the date of the merger agreement, neither our principal
executive officer nor our principal financial officer will
have failed to provide any necessary certification for filing
with the Commission relating to our controls and procedures.
Our obligations to complete the asset sale are subject to the
satisfaction or waiver, at or prior to the closing, of each of the following
conditions:
o each of BPOMS' representations and warranties must have been
accurate as of August 29, 2006 and as of the closing date as
if made on such date, except where the failure to be accurate
would not, individually or in the aggregate, have a material
adverse effect on the business, assets (including intangible
assets), financial condition or results of operations of
BPOMS and its subsidiaries taken as a whole ("BPOMS Material
Adverse Effect"), without regard to any materiality
qualification contained in BPOMS' representations and
warranties;
o BPOMS must have performed, or complied in all material
respects with all of the covenants and obligations required
to be performed or complied with by it prior to the closing
under the terms of the merger agreement, without regard to
any materiality qualification contained in BPOMS'
representations and warranties;
o after the date of the merger agreement, there must not have
occurred any change, circumstance or event concerning BPOMS
and its subsidiaries that has had or could be reasonably
likely to have a BPOMS Material Adverse Effect;
o we must have received from each holder of shares of BPOMS
capital stock or securities convertible or exchangeable or
exercisable for BPOMS common stock, an investor suitability
questionnaire containing required representations and
certifications;
o immediately prior to the effective time of the merger, BPOMS
must have at least $1.5 million in cash available for payment
of a cash dividend to our pre-merger stockholders and capital
surplus of at least $1.5 million;
o no holders of BPOMS capital stock will have failed to approve
the merger transaction or exercised their right to demand
payment for their shares as dissenting stockholders; and
o BPOMS stockholders holding a majority of the disinterested
shares of each class or series of BPOMS capital stock, voting
as separate classes, must have approved any amendment to the
terms of any certificate of designation of BPOMS and all
other required approvals by BPOMS stockholders must have been
obtained.
POST-SIGNING AND POST-CLOSING COVENANTS
We and BPOMS have also agreed to perform various obligations from and
after the signing of the merger agreement or the closing of the merger
transaction, including the following:
51
o we and BPOMS have agreed to continue to operate our
respective businesses in the ordinary course and in the same
manner as our respective operations have previously been
conducted until the close of the merger transaction and to
report to one another on material operational matters;
o prior to the closing of the merger transaction, we and BPOMS
will not authorize or issue additional shares of capital
stock or securities convertible into or exercisable for
shares of our capital stock, other than as expressly
permitted in the merger agreement or the sale agreement;
o we have agreed to seek stockholder approval of the merger
transaction, the sale transaction, the reverse stock split
and the corporate name change;
o we have agreed to use reasonable best efforts to maintain our
listing on The Nasdaq Capital Market and to cause the shares
of our common stock that are to be issued in the merger
transaction to be listed, upon official notice of issuance,
on The Nasdaq Capital Market prior to the effective time of
the merger;
o until the merger transaction is completed or the merger
agreement is terminated, we and BPOMS each have agreed not
to, and not to authorize any of our or our affiliates'
respective officers, directors, employees, representatives or
agents to, and not to permit any such person or any of its
subsidiaries to, directly or indirectly encourage, solicit,
or initiate discussions or negotiations with, or provide any
information to, or approve, endorse, recommend or execute a
letter of intent with any corporation, partnership, person or
other entity or group concerning merger, sale of assets, sale
of equity interests or similar transactions, except that:
o we may engage in a superior proposal as described in
Section 6.9 of the merger agreement, provided that we
may be required to pay a termination fee to BPOMS;
o we may consummate the sale transaction;
o BPOMS may negotiate and enter into definitive agreements
relating to a private placement of shares of our common
stock or securities convertible into or exercisable for
shares of our common stock, which private placement
would be for the purpose of raising up to $15 million of
working capital for us, would close after the effective
time of the merger on terms consistent with those
described under the heading "BPOMS Potential Financing"
beginning on page 77 and would not require a stockholder
vote; and
o BPOMS may negotiate, enter into definitive agreements
and close the Novus acquisition described under the
heading "BPOMS' Business and Related Matters" beginning
on page 62;
o if we or BPOMS learn of any breach or potential breach of the
merger agreement, that party must immediately notify the
other party;
o BPOMS must take all necessary and appropriate actions,
including if necessary the issuance of shares of BPOMS Series
C or the causing to be purchased shares of NGRU Series C in
accordance with the terms of a bridge loan agreement dated
August 18, 2006 between BPOMS, James Cortens and Patrick
Dolan, to ensure that as of the second business day
52
immediately preceding the dividend payable date and through
the dividend payable date, the capital surplus carried from
BPOMS to us as a result of the merger transaction is at least
$1.5 million and BPOMS' unrestricted cash that shall remain
unrestricted and available for payment of the cash dividend
to our pre-merger stockholders is at least $1.5 million;
o as of the effective time of the merger, we must have obtained
the resignation of each of our directors and of Amrit K. Das,
Chairman and Chief Executive Officer, and caused the persons
designated by BPOMS (see "Post-Closing Beneficial Ownership
and Operations - Management" at page 73) to be appointed to
our board of directors and as officers of our company;
o we and BPO Acquisition Corp. will maintain director and
officer indemnification provisions in our charter documents
and directors' and officers' liability insurance tail
coverage for six years after the effective time of the
merger;
o we and BPOMS have entered into voting agreements with each of
the DFH Holders and certain of their affiliates, and each of
the DFH Holders and those affiliates has granted irrevocable
proxies to certain of our executive officers that provide
that the holders' shares of our common stock will be voted in
favor of the merger transaction, the sale transaction and
related matters;
o we have agreed to consummate the sale transaction at the
effective time of the merger for aggregate net proceeds of at
least $2.0 million;
o we have agreed to effect a reverse stock split prior to the
closing of the merger transaction;
o we have agreed to declare a $3.5 million special cash
dividend to our stockholders of record immediately prior to
the closing of the merger transaction, with the dividend to
be paid on or before the tenth business day after the
closing, and must take all necessary and appropriate actions
to ensure that the proceeds from the sale transaction are
reserved for payment of the cash dividend;
o we have agreed to transfer to REL at the closing of the
merger and sale transactions any cash and cash equivalents in
excess of U.S. reserved cash, as defined in Section 1.2(b)(i)
of the merger agreement;
o we have agreed to file promptly after the effective time of
the merger a registration statement on Form S-8 with respect
to the shares of our common stock underlying BPOMS options
and warrants we assume in the merger transaction that are
eligible for inclusion on Form S-8 under applicable
securities laws, and to use our reasonable best efforts to
maintain the current status of the prospectus contained
therein, as well as to comply with any applicable state
securities laws, for one year after the effective time of the
merger; and
o we have agreed to file within 120 days following the
consummation of the merger transaction a registration
statement covering the resale of the shares of our common
stock to be issued in the merger transaction, to be issued
upon conversion of our preferred stock issued in the merger
transaction, or to be issued upon exercise of options or
warrants we assume from BPOMS in the merger transaction that
are not eligible for inclusion on Form S-8, and to use
commercially reasonable efforts to cause the registration
statement to be declared effective within 180 days, and to
remain effective for up to two years, following the
consummation of the merger transaction.
53
TERMINATION
The merger agreement may be terminated in accordance with its terms at
any time prior to the closing of the merger transaction, whether before or after
the approval of the merger transaction by our stockholders at our annual meeting
of stockholders:
o by mutual written consent of us and BPOMS;
o by us or BPOMS if a court of competent jurisdiction or other
governmental body has issued a final and non-appealable
order, decree or ruling or have taken any other action,
having the effect of permanently restraining, enjoining or
otherwise prohibiting the merger transaction, provided that
the party seeking to terminate has used its commercially
reasonable efforts to appeal the order, decree, ruling or
other action;
o by us if BPOMS breaches any representation, warranty,
covenant or agreement and, as a result, certain conditions to
the closing would not be satisfied, provided that if the
breach is capable of being cured by December 22, 2006 and
BPOMS diligently proceeds to cure the breach, then we may not
terminate under this provision unless BPOMS does not cure the
breach by that date;
o by BPOMS if we breach any representation, warranty, covenant
or agreement and, as a result, certain conditions to the
closing would not be satisfied, provided that if the breach
is capable of being cured by December 22, 2006 and we
diligently proceed to cure the breach, then BPOMS may not
right terminate under this provision unless we do not cure
the breach by that date;
o by BPOMS or us if our board of directors withdraws or
modifies adversely to BPOMS its approval or recommendation of
the merger agreement or we enter into a definitive agreement
providing for the implementation of another acquisition
proposal in accordance with the provisions of Section 6.9 of
the merger agreement;
o by us if BPOMS' board of directors withdraws or modifies
adversely to us its approval or recommendation of the merger
agreement or BPOMS enters into or engages in negotiations
regarding an acquisition proposal or otherwise violates the
non-solicitation provisions of the merger agreement;
o by either us or BPOMS, if the merger transaction has not been
consummated on or before December 22, 2006, other than due to
a failure or breach by the party seeking to terminate the
merger agreement;
o by us or BPOMS if we fail to obtain stockholder approval of
the merger transaction;
o by us if BPOMS suffers a BPOMS Material Adverse Effect, or by
BPOMS if we suffer a NGRU Material Adverse Effect;
54
o by us if immediately prior to the effective time of the
merger, BPOMS's capital surplus is less than $1.5 million or
BPOMS's unrestricted cash that remains unrestricted and
available for payment of a cash dividend to our pre-merger
stockholders is less than $1.5 million; or
o by us or BPOMS, if the other party becomes unable to pay its
liabilities as they come due or seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement,
composition or comparable proceeding, or if any such
proceeding is instituted against the other Party and not
dismissed within 60 days.
Upon termination of the merger agreement, all further obligations of
the parties under the agreement will terminate, except that the expenses and
termination fee provisions will apply, no party will be relieved of any
obligations or other liabilities arising from any breach by that party of any
provisions of the merger agreement and the parties shall remain bound by and
continue to be subject to any obligations regarding confidentiality and
non-disclosure of information that may continue pursuant to their terms.
TERMINATION FEES
We have agreed to pay BPOMS a termination fee of $200,000 upon the
termination of the merger agreement by us or BPOMS if the sale agreement is
terminated and DFH pays us a termination fee in connection with the termination
of the sale agreement. However, if DFH pays us less than $400,000 upon
termination of the sale agreement (other than upon mutual agreement of us and
DFH), then we will pay BPOMS 50% of the lesser amount. If we have not paid BPOMS
a termination fee as described in the preceding sentences, then we will be
required to pay BPOMS a termination fee of $200,000 upon the termination of the
merger agreement:
o by BPOMS if we breach and fail to timely cure a
representation, warranty or covenant such that certain
conditions to closing could not be satisfied;
o by BPOMS or us if our board of directors withdraws or
modifies adversely to BPOMS its approval or recommendation of
the merger agreement or we enter into a definitive agreement
providing for the implementation of another acquisition
proposal in accordance with the non-solicitation provisions
of the merger agreement; or
o by us other than as expressly permitted by the termination
provisions.
BPOMS has agreed to pay us a termination fee of $400,000 upon the
termination of the merger agreement:
o by us if BPOMS breaches and fails to timely cure a
representation, warranty or covenant such that certain
conditions to closing could not be satisfied;
o by us if BPOMS' board of directors withdraws or modifies
adversely to us its approval or recommendation of the merger
agreement or BPOMS enters into or engages in negotiations
regarding an acquisition proposal or otherwise violates the
non-solicitation provisions of the merger agreement;
o by us if immediately prior to the effective time of the
merger, BPOMS's capital surplus is less than $1.5 million or
BPOMS's unrestricted cash that remains unrestricted and
available for payment of a cash dividend to our pre-merger
stockholders is less than $1.5 million; or
55
o by BPOMS other than as expressly permitted by the termination
provisions.
EXPENSES
Except as specifically set forth in the merger agreement, all fees and
expenses incurred in connection with the merger agreement and merger transaction
are to be paid by the party incurring the expenses, whether or not the merger
transaction is consummated and irrespective of the failure of any closing
condition to be met. BPOMS has agreed to pay as and when requested all fees and
expenses incurred by us in connection with listing on The Nasdaq Capital Market
the shares of our common stock to be issued to BPOMS stockholders in the merger
transaction and in connection with a substitute listing for the reverse stock
split.
ASSIGNMENTS
We may assign the merger agreement or our related rights or obligations
in whole or in part to any of our affiliates so long as we remain obligated
under the merger agreement and the assignment does not alter BPOMS' rights or
obligations under the merger agreement. BPOMS may not assign the merger
agreement or any rights or obligations under the merger agreement.
AMENDMENTS AND WAIVERS
The parties may amend or modify the merger agreement in any respect in
writing. However, after we obtain stockholder approval, no amendment may be made
that would require further stockholder approval unless we obtain further
stockholder approval. The failure to enforce any provision of the merger
agreement will not operate as a waiver of the provision or any other provisions
within the merger agreement.
REASONS FOR THE MERGER AND SALE TRANSACTIONS
In reaching its decision to approve the merger agreement and the sale
agreement and the merger and sale transactions contemplated by those agreements,
our board of directors considered numerous potential benefits and material
factors pertaining to the merger and sale transactions, including the following:
o the belief that, after reviewing our ongoing financial
condition, results of operations and business and earning
prospects, and notwithstanding the concerted efforts of
management and our board of directors to scale our business
and increase revenues and profitability, remaining an
independent operating company focusing on our remaining
businesses was not reasonably likely to create greater value
for our stockholders than the prospects presented by the
merger and sale transactions;
o the belief that the concurrent merger and sale transactions
with BPOMS and DFH represent the most favorable alternative
reasonably available for our stockholders in the short-term;
o the opinion of B. Riley, financial advisor to our board of
directors, to the effect that as of August 29, 2006, the
aggregate consideration proposed to be received by us in
connection with the merger and sale transactions was fair to
our stockholders from a financial point of view;
56
o the belief that the concurrent merger and sale transactions
will likely be approved by our stockholders based upon the
potential benefits of those transactions to us and our
stockholders and the voting agreements;
o the belief that the benefits to us contemplated in connection
with the concurrent merger and sale transactions, including
the receipt of the purchase price from DFH and the funds to
be made available from BPOMS at closing, are likely to be
achieved within a reasonable time frame;
o the amount and form of the consideration to be paid in the
sale transaction and the amount of cash required to be
provided by BPOMS for our use in paying the cash dividend to
our pre-merger stockholders;
o the due diligence and negotiation process undertaken by us
and BPOMS in connection with the negotiation of the merger
agreement;
o the terms of the merger and sale agreements, including our
ability to terminate those agreements under certain
circumstances, including in connection with certain
unsolicited third party superior offers, and the limitation
on our potential indemnification, compensation and
reimbursement obligations for breaches of our representations
and warranties to DFH under the terms of the sale agreement;
o the potential cost savings through the transfer to DFH of
customer contracts and assets and reduction of workforce in
connection with the sale agreement; and
o the positive treatment of many of our employees through
possible employment by DFH following the sale transaction, as
well as continued employment for many retained employees
following the sale and merger transactions.
Our board of directors also considered a number of potentially negative
factors in reaching its decision to approve the concurrent merger and sale
transactions, including the following:
o the risk that the potential benefits of the merger and sale
transactions may not be realized, in part or at all,
including the risk that we could have to satisfy
indemnification and/or termination fee obligations under the
merger and sale agreements under certain circumstances;
o the risk that the merger and sale transactions may not be
consummated, including the risks associated with obtaining
the necessary approval of our stockholders required to
complete the merger and sale transactions, notwithstanding
the voting agreements obtained from holders of a substantial
amount of our outstanding common stock as of the record date;
o the risk of management and employee disruption associated
with the merger and sale transactions, including the risk
that key technical, marketing and management personnel might
not remain employed by us through the consummation of the
merger and sale transactions;
o the merger and sale agreements may be terminated by us or the
other parties to those agreements if, among other things, our
board of directors withdraws its recommendation in favor of
the merger and sale transactions or recommends another
acquisition proposal;
57
o the merger and sale agreements require us to pay termination
fees to BPOMS and DFH if those agreements are terminated
under certain circumstances;
o the interests of our directors and officers that are
different from, or in addition to, those of our stockholders
generally, including those described under the heading
"Interests of Our Directors and Executive Officers" beginning
on page 87;
o the potential impact of the merger and sale transactions on
our employees who are not retained by us after the closing or
offered employment by DFH or its affiliates;
o our obligations to provide services to DFH for a period of
time following the closing pursuant to the terms of the
transition agreement;
o the significant costs involved in consummating the merger and
sale transactions; and
o the potential negative effect on our stock price as a result
of the public announcement of or consummation of the sale or
merger transaction or related matters.
USE OF PROCEEDS
Within ten business days following the consummation of the merger and
sale transactions, we plan to use the approximate $2.0 million cash proceeds
from the sale transaction and the $1.5 million cash to be supplied by BPOMS to
pay a $3.5 million cash dividend to our pre-merger stockholders of record.
OPERATIONS AND OWNERSHIP PRIOR TO AND FOLLOWING THE CLOSINGS
PRE-CLOSING OWNERSHIP AND OPERATIONS
Information regarding our pre-closing beneficial ownership is contained
under the heading "Security Ownership of Certain Beneficial Owners and
Management" beginning on page 34. Information regarding BPOMS' pre-closing
beneficial ownership is contained under the heading "Principal BPOMS
Stockholders" beginning on page 67.
Our operations currently consist of:
o our Web4 division, consisting primarily of our eReview
software;
o our IT services division, operating primarily our of our
Boston office; and
o our engineering business process outsourcing operations,
located in our Kolkata, India office.
Sales in our Web4 division consist almost entirely of sales of our
eReview software. Once installed at a host location, our eReview collaborative
software enables a host and other participants to view, markup and/or engage in
real-time Web-based conferencing and document sharing anywhere and anytime in
over 150 widely used document formats. eReview allows our customers to bridge
physical distances in their global business environments by enabling decision
makers to communicate without costly and time consuming travel to geographically
dispersed locations. Complementing eReview, our WebWorks software provides
comprehensive project-based document and team management functions. Our
collaborative products can be implemented as stand-alone enterprise solutions or
as an integrated system working in concert with other products. For example, BfA
and LVA, two Federal Pension Fund Agencies of Germany, are using eReview as the
58
viewer, which is tightly integrated with IBM content manager (for BfA) and
FileNet P8 (for LVA). We have secured eReview contracts with Deusche Post. Due
to our engineering experience, our collaborative software is ideally suited for
multi-faceted architecture/engineering/construction projects. Architectural
Resource Consultants based in the United States is using eReview to allow their
architects to collaborate with clients and contractors across the country. We
have also developed integrations to most major document and content management
software, such as FileNet's ECM, TCM, MatrixOne, EMC's Documentum suite and
Oracle's Collaboration Suite. Web4 also delivers custom content management
solutions as professional services. We recently executed such a project with
Post-Industrial Technology and Nissan USA.
Our IT services division has provided contracted IT services and
software solutions to a wide variety of vertical industry markets (that is, a
particular industry or group of enterprises to whom similar goods and services
can be sold), with an emphasis on engineering, aerospace, e-commerce,
semiconductors, finance, education, insurance, manufacturing, distribution,
retail, government, pharmaceuticals and healthcare. As a total service provider,
we provide our business-to-business clients with services that involve
integration of multiple existing third party software. We also offer value-added
IT services by incorporating and customizing our proprietary collaborative
software technology and/or our engineering software into enterprise solutions
designed to accomplish our clients' current objectives and grow with our
clients' enterprises. We specialize in providing IT services that involve
mission critical applications that deliver round-the-clock performance.
OPERATIONS TO BE SOLD
We have agreed to sell our engineering business process outsourcing
operations to DFH pursuant to the terms of the sale agreement. At the closing of
the sale transaction, we plan to enter into an outsourcing services agreement
with REL covering services that may be provided to us by REL after the closing,
a value-added reseller agreement with REL covering our Web4 products that may be
distributed by REL after the closing, and a transition agreement that covers the
transition of our corporate name and mark and our hosting of the "netguru.com"
website for a limited time following the closing. The sale agreement contains
18-month mutual post-closing employee and customer non-solicitation provisions
between us and DFH and our respective subsidiaries.
The outsourcing services agreement has an initial term of twelve months
and will automatically renew for successive twelve month periods unless
terminated by either party. The agreement provides that approximately ten
persons who are employed by REL and who currently engage in ongoing product
development, testing and support work for our Web4 and netGuru Systems divisions
will continue to do those tasks, with us paying to REL their gross pay, which
totals approximately $4,500 per month, plus $500 per month each. Other services
to be provided under the agreement will be pursuant to statements of work that
would provide for fees commensurate with the type of services and level of skill
required. Offshore BPO services would be paid at $7.00 per hour. Fees for
software development services would range from $12.00 to $15.00 per hour. Onsite
work fees would range from $20.00 to $70.00 per hour. Telephone and Internet
usage and other special services or software would be billed at actual cost plus
a 10% processing fee.
Historically, our engineering business process outsourcing operations
contributed approximately $370,000 of our $3.9 million total net revenues for
the fiscal year ended March 31, 2006, and approximately $84,000 of our $1.1
million total net revenues for the three months ended June 30, 2006. See
APPENDIX D for financial information regarding REL. We and BPOMS believe that
the immediate effect of the concurrent merger and sale transactions will be a
temporary improvement in the combined company's cash position and a temporary
reduction in revenues while BPOMS' business is being integrated with ours and
expanded. The approximately $2.0 million in net proceeds from the sale
transaction and the $1.5 million to be provided by BPOMS, as described above,
will be included in the combined company's cash balances at the time of closing.
However, we anticipate that the combined company will pay a $3.5 million
dividend on or before the tenth business day after the closing.
59
We and BPOMS anticipate that the combined company will operate at a
cash deficit during the integration process and that the combined company will
not achieve profitability in the immediate future due primarily to the
administrative costs of operating as a public company relative to its size. We
and BPOMS believe that completion of a successful integration of BPOMS' and our
businesses would provide efficiencies and cross-marketing opportunities that
would lead to growth in the combined company's revenues and gross margins as
early as the latter half of the combined company's first full year of
operations.
We and BPOMS believe that the combined company's access to capital
markets may improve after the merger due to the anticipated increase in
operating margins and revenues. We and BPOMS anticipate that if BPOMS does not
raise additional capital for the combined company as described under the heading
"BPOMS Potential Financing" below, the combined company likely will be required
to do so after the merger transaction. Any additional equity offering would
result in additional dilution to our and the combined company's stockholders.
BPOMS' BUSINESS AND RELATED MATTERS
Overview
--------
BPOMS provides business process outsourcing (BPO) services to
enterprises in the United States and Canada. "BPO" refers to the outsourcing of
entire business processes, typically to reduce cost and/or to improve the
performance of that process. BPOMS' objective is to provide a comprehensive
suite of BPO functions to support the back-office business requirements of
middle-market enterprises throughout North America on an outsourced or recurring
revenue basis.
BPOMS was incorporated in the state of Delaware on July 26, 2005. Since
its inception, BPOMS has grown principally through acquisitions. In August 2005,
BPOMS acquired ADAPSYS Transaction Processing, Inc. and ADAPSYS Document
Management, Inc. (collectively, the "ADAPSYS entities"), providers of document
management solutions located in Winnipeg, Canada. In November 2005, BPOMS
purchased the assets of BPO Management Services CA, a provider of human
resources outsourcing services based in San Francisco, California. In December
2005, BPOMS purchased the Regina and Winnipeg, Canada- based assets of Deines
Imaging, a provider of document imaging, microfilming and records management
solutions from Critical Control, and consolidated this business within ADAPSYS
Document Management.
In January 2006, BPOMS acquired Digica, Inc., a provider of information
technology outsourcing services based in Branchburg, New Jersey ("Digica"). In
February 2006, as previously planned, the sole legacy customer contract of
ADAPSYS Transaction Processing ended and, as a result, the ADAPSYS Transaction
Processing entity has had no ongoing operations since that time. All new
document management business for BPOMS is being provided through ADAPSYS
Document Management.
In October 2006, BPOMS purchased Novus, a provider of
document imaging, microfilming and records management solutions located in
Winnipeg, Canada, whose business operations are in the process of being
consolidated with the former Deines imaging business operations of ADAPSYS
Document Management.
60
The stock purchase agreement pursuant to which BPOMS acquired Novus
provides for the cash portion of the purchase price to be paid in two
installments. The first installment is due upon the earlier of January 1, 2007
and the closing of a $1 million investment in BPOMS or the combined company by
persons other than current BPOMS' stockholders. The second installment is due
upon the earlier of three months after the closing of the Novus acquisition or
the date upon which the Novus business integration plan is completed, as
determined by BPOMS. If either of the installments are not paid when due, then
the sellers of Novus will have the right to rescind their sale of Novus to BPOMS
and to purchase for $1.00 from BPOMS all of the assets and liabilities of
ADAPSYS' Deines business.
BPOMS' principal subsidiaries are the two ADAPSYS entities, Digica and
Novus. BPOMS is headquartered in Irvine, California, and has offices in San
Francisco, California, Branchburg, New Jersey and the Canadian cities of
Winnipeg, Regina and Toronto. Its principal business address is 19800 MacArthur
Boulevard, Suite 820, Irvine, California 92612 and its telephone number is (714)
685-6473. BPOMS maintains a website at www.bpoms.com, and its subsidiaries
maintain websites at www.adapsys.ca, www.digicainc.com and
www.novusimaging.mb.ca. Information on these websites is not intended to be part
of this proxy statement.
Market Opportunity
------------------
BPOMS believes the market for BPO services has grown rapidly in recent
years and will continue to grow substantially in the near future. In today's
rapidly changing and globally competitive business environment, executives are
being asked to manage their companies more closely and to meet their growth and
profitability commitments predictably by doing more with less. They require
greater efficiencies from their resources and improved worker productivity.
Combine this with a dramatic increase in regulatory requirements, such as under
the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and
Accountability Act, and BPOMS believes executives are turning increasingly to
outsourcing a wide variety of important, non-core back-office business functions
traditionally provided by in-house staff.
Although the BPO market generally is dominated by large "Tier 1"
providers who focus on the largest enterprises and governmental agencies, BPOMS
believes those companies are not addressing the back-office needs of
middle-market businesses. The middle market is defined by BPOMS as businesses
with revenues between $100 million and $3 billion and between 100 and 7,000 on
staff, which BPOMS estimates includes approximately 50,000 businesses in the
United States. BPOMS believes middle market companies spend more, on a per
employee basis, on back-office services (such as healthcare, IT services, staff
benefits and payroll) than their larger counterparts and receive fewer benefits
and less service in return. By outsourcing back-office functions, these
companies can obtain better functionality and breadth of service at a lower
total cost.
BPOMS believes this middle market is underserved - the dominant Tier 1
BPO providers are focused on the largest companies and government agencies,
whereas other large BPO providers generally provide a single, narrowly focused
BPO solution, and the smaller BPO providers offer only a few BPO services.
BPOMS' current intention is to acquire more of these small BPO providers in
order to increase the breadth of its BPO service offering, increase geographic
coverage and build critical mass in this market.
BPO Services
------------
BPOMS provides a variety of back-office support services to middle
market companies on an outsourced basis. BPOMS currently provides four principal
BPO services:
61
o human resources outsourcing;
o document and data management solutions, which is referred to
in the industry as "enterprise content management";
o information technology outsourcing; and
o finance and accounting services.
Substantially all of BPOMS' revenue during 2005 was derived from
document and data management solutions. For the six months ended June 30, 2006,
document and data management solutions and information technology outsourcing
accounted for approximately 62% and 30%, respectively, of consolidated revenue.
HUMAN RESOURCES OUTSOURCING
BPOMS offers 22 human resources services to its customers,
either as a complete human resources outsource or through the selective
implementation of specific human resources services. BPOMS' human resources
services include those relating to:
o personnel administration / human resources information
system;
o recruiting;
o education and training;
o consulting;
o benefits administration; and
o payroll.
DATA AND DOCUMENT MANAGEMENT SOLUTIONS
The ADAPSYS entities and Novus, subsidiaries of BPOMS, have
been providing data and document management services to Canadian customers for
over 30 years. BPOMS currently offers the following services: image and data
capture; documents/records management; workflow and electronic forms;
collaboration; consulting and implementation.
BPOMS' imaging and data capture solutions allow customers to
transform paper documents into digital information deposited into a document
repository with application specific indexing, which is readily accessible
throughout a customer's computer network. BPOMS' documents/records management
solutions provide out-sourced or in-sourced scanning services, as well as data
entry and data capture services to extract desired information from scanned
documents. Workflow and electronic forms solutions eliminate paper forms and
capture indexing, routing and tracking information electronically. BPOMS'
collaboration solutions create for customers virtual workgroups - comprising
both internal colleagues and external customers and business partners - within a
secure desktop workspace that is always available. BPOMS provides a full range
of services to address customer records management business challenges, from
initial consultation through project completion and ongoing operations
management and support. Consultants and certified technical professionals
recommend, design, implement and support solutions for middle market enterprises
in a wide variety of industries.
62
INFORMATION TECHNOLOGY OUTSOURCING
BPOMS can support, host and manage all related information
technology infrastructure components, networks and applications on a 24 hours-7
days-52 weeks per year basis from a secure data center facility located in
Branchburg, New Jersey, with high-speed, redundant fiber based connectivity to a
MCI mega-center providing instantaneous backup and recovery capability. This
capability provides BPOMS with the ability to standardize, support and integrate
with other customer enterprise applications all of its customer information
systems required to support the customer's back-office business functions.
BPOMS also offers remote managed services to support other
business application servers, networks and related desktop environment,
specializing in IBM iSeries and Intel-based servers which are predominant in
middle market enterprises.
Hosting and managed application support services offered by
BPOMS provide a secure, rapidly implemented and cost-effective method of
application delivery and management. Through this service customers are able to
access scanned images, human resources records, accounting information or other
documents from any computer or office location via a secure web or private
network connection. These services are offered on an on-demand basis.
FINANCE AND ACCOUNTING SERVICES
BPOMS currently offers a select few finance and accounting
outsourcing solutions. BPOMS plans to build out and enhance its solution set in
this area through strategic acquisitions. The services currently offered by
BPOMS in this area are accounts payable invoice processing solutions and
financial member services.
The BPOMS accounts payable invoice processing solution enables
customers to scan incoming invoices and capture information from the image (for
example, invoice date, invoice number, purchase order number and invoice total).
This information can be automatically delivered directly into customers'
accounts payable, document management or other back-end system. The solution
also provides the ability to automatically match purchase orders with invoices,
eliminating labor intensive manual matching. BPOMS' solution allows customers to
process all invoices the day they are received, no matter how many batches are
handled each day. The solution enables recording the batch number and date
received, identifying the vendor and capturing data from key invoice fields --
not manually, but automatically with a high-powered document scanner.
BPOMS' process management/workflow solution is delivered to
financial services providers and works in concert with customers' existing
computing systems to improve the time it takes to process a loan application.
Marketing and Sales
-------------------
BPOMS seeks multi-year, recurring revenue BPO service contracts with
middle market enterprises in North America. BPOMS believes that the middle
market offers shorter sales cycles, quicker implementation of services, and
greater opportunity for continued growth and margin than the more traditional
Tier 1 marketplace experience. BPOMS targets its marketing to middle-market
companies with revenues in the range of $100 million to $3 billion and employee
populations of 100 to 7,000 staff members. BPOMS believes approximately 50,000
businesses in the United States meet these criteria. BPOMS' sales force has not
focused on a more particular geographic area or industry.
63
The buyer of BPOMS' services in its target market is typically the
chief financial officer, who is the control point for all back-office business
functions and understands the potential cost savings and improved business
performance that effectively implemented BPO services can provide. While BPOMS
seeks to outsource discrete back-office business functions in their entirety,
thereby generating the desired recurring revenue relationship, new customers
often begin with an initial fee-based consulting services engagement in order to
address a specific business pain point (for example, an IT systems evaluation or
human resources effectiveness study). During this period, BPOMS' domain experts
seek to build greater confidence in BPOMS' end-to-end service capabilities and
to establish BPOMS as a "trusted advisor" to the customer chief financial
officer.
From this initial engagement, BPOMS leads new customers through an
outsourcing evaluation study, including suggested workflow improvement,
supporting systems implementation and a transition into an outsourced delivery
environment for the specific business process. BPOMS believes that this approach
allows both organizations the opportunity to grow with one another into an
outsourcing relationship, significantly increasing the probability of a
long-term and successful business relationship. In addition, BPOMS believes this
approach allows it to generate immediate revenue for all transition and
migration work, which is sometimes not the case in traditional Tier 1
outsourcing engagements where the provider is forced to recover the cost of the
initial transition phase by amortizing it over the expected life of the
contract.
Once BPOMS has successfully transitioned a specific business function
to an outsourced relationship, BPOMS seeks to expand its customer relationship
by offering other back-office support services, which can quickly increase its
revenue base within each particular customer engagement.
BPOMS anticipates that its typical per-customer contract revenues will
be between $0.5 million to $5.0 million of annual revenue, with an initial
contract term of three to five years. Given historic industry contract renewal
rates, which BPOMS believes exceed 95%, and the historic inertia in changing
service providers for important business functions, BPOMS anticipates that once
obtained, substantially all contracts should mature into long-term engagements.
BPOMS believes that its expected typical per-customer contract revenues will be
enough below the typical revenues for Tier 1 providers. Accordingly, BPOMS does
not expect to encounter significant competition from the Tier 1 providers, who
built their organizations to sell and service Global 1000 enterprises are not
expected to be responsive or cost-competitive for BPOMS' expected potential
customer base.
BPO service engagements require selling to high "C" level executives
and, accordingly, BPOMS has a small targeted senior sales team led by
experienced individuals in each functional area. BPOMS has established a
rigorous method of profiling opportunities based on a variety of characteristics
and metrics, which allows BPOMS to quickly identify and focus on those
opportunities which it believes represent the highest probability of success.
For the six months ended June 30, 2006 and for the period from July 26,
2005 (inception) to December 31, 2005, one customer, International Association
of Travel Agents, accounted for 16% and 74%, respectively, of BPOMS'
consolidated revenue. The relationship with this customer, pursuant to which
BPOMS provided document management services, ended in February 2006. No other
customer accounted for more than 10% of BPOMS' consolidated revenue during those
periods.
Most of BPOMS' services are provided by employees of BPOMS or its
subsidiaries, some of which BPOMS leases on a professional employer organization
("PEO") basis from another outsourcing provider. Under this arrangement, the PEO
is the actual employer and provides payroll, benefits and workers' compensation
insurance to these employees, who are in turn licensed to BPOMS. Some of BPOMS'
services are provided to customers through suppliers managed by BPOMS, where
appropriate for business or economic reasons. For example, payroll and 401(k)
plan administration in BPOMS' human resources outsourcing services may be
provided in such a manner.
64
Competition
-----------
The BPO industry is highly competitive. Leading Tier 1 BPO service
providers such as IBM, Accenture, EDS and ACS dominate the marketplace,
competing for the very large contracts from Global 1000 enterprises and
government agencies. Competition for BPO services provided to middle market
enterprises - BPOMS' target market - is highly fragmented, consisting of a few
large companies providing a narrowly focused solution and thousands of small,
mostly privately-held, companies offering a reduced subset of services and
solutions. BPO providers in this middle market compete on the basis of quality
of service and price for a selected BPO function. BPOMS believes that the
breadth of its BPO offerings differentiates it as able to offer greater customer
benefits relative to the many companies who provide only a few BPO services or
focus on a particular industry.
Employees
---------
BPOMS and its subsidiaries currently employ 81 full-time staff persons,
of which eight are leased by BPOMS on a PEO basis from another outsourcing
company.
Facilities
----------
BPOMS owns no real property and currently leases the following
facilities, which BPOMS believes are adequate for its current operations:
o 1,607 square feet of office space in downtown San Francisco,
California, which lease expires in 2010;
o 7,642 square feet of office space/data center facility in
Branchburg, New Jersey, which lease expires in 2011;
o 4,062 square feet of office space in Winnipeg, Canada, which
lease expires in 2006 and BPOMS does not intend to renew;
o 10,316 square feet of office space in Winnipeg, Canada, which
lease expires in 2007;
o 2,958 square feet of office space in Regina, Canada, which
lease expires in 2007; and
o 200 square feet of office space in Toronto, Canada, which is
leased on a month-to-month basis.
Legal Proceedings
-----------------
Two cases - PEAL ET AL. V. SKYTRACK SYSTEMS, INC. ET AL. (FILE NO. CI
06-01-47004) and MORRISON ET AL. V. SKYTRACK SYSTEMS, INC. ET AL. (FILE NO. CI
06-01-47005) -- were filed against BPOMS, the ADAPSYS subsidiaries and Skytrack
Systems, Inc. on May 12, 2006 in the Court of Queen's Bench of Manitoba in the
City of Winnipeg by a total of 28 former employees of ADAPSYS L.P., a
partnership of which ADAPSYS Transaction Processing, Inc. serves as general
partner. The plaintiffs allege that their employment was terminated in February
2006 without either reasonable notice or compensation in lieu of reasonable
notice, and that the defendants acted unfairly and improperly in effecting the
termination. The plaintiffs seek unspecified damages for severance payments owed
to them arising out of the termination. The defendants have filed statements of
defense.
65
Due to uncertainty regarding the litigation process, the outcome of
each of these matters is unpredictable and could be unfavorable to BPOMS, in
which event BPOMS could be required to pay damages and other expenses in amounts
that could adversely affect its financial condition.
Regulation
----------
BPOMS' human resource processes and other operations are subject to a
number of laws and regulations, including those applicable to payroll practices,
benefits administration, employment practices and data privacy. Because BPOMS'
clients operate in the United States and in Canada, BPOMS must perform its
services in compliance with the legal and regulatory requirements of multiple
jurisdictions.
Principal BPOMS Stockholders
----------------------------
As of September 29, 2006, BPOMS had 9,925,000 shares of common stock
issued and outstanding, 2,088,036 shares of Series A issued and outstanding,
2,000,000 shares of Series B issued and outstanding, and no shares of Series C
issued and outstanding. Each share of Series A and Series B is convertible into
one share of common stock. Dividends on shares of Series A are payable in
additional shares of Series A on the last day of each fiscal quarter.
The following table sets forth information about beneficial ownership
of BPOMS' voting stock as of September 29, 2006, plus dividends on Series A in
the form of an aggregate of 32,221 shares of Series A paid on September 30,
2006, by:
o each of BPOMS' directors and executive officers;
o all of BPOMS' directors and executive officers as a group; and
o each person known to BPOMS to beneficially own more than 5% of
the outstanding shares of any class of BPOMS' voting stock as
of the date of the table.
Shares of common stock underlying preferred stock, options and warrants
that are convertible into or exercisable for shares of common stock within 60
days after the date of the table are deemed outstanding for purposes of
computing the number of shares of common stock and percentage of shares of
common stock beneficially owned by each person, but are not deemed outstanding
for purposes of computing the number or percentage of shares of common stock
beneficially owned by any other person.
Messrs. Dolan and Cortens are executive officers of BPOMS. Messrs.
Dolan, Cortens and West are directors of BPOMS. Except as otherwise indicated,
to BPOMS' knowledge each of the beneficial owners listed below has sole voting
and dispositive power over the shares beneficially owned. The address of each
beneficial owner is c/o BPOMS, 19800 MacArthur Boulevard, Suite 820, Irvine,
California 92612.
NAME OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES PERCENT OF CLASS
------------------------ -------------- ---------------- ----------------
Patrick Dolan Common 5,825,990 (1) 50.1%
Series A Preferred 1,346,824 (2) 63.5%
James Cortens Common 4,036,766 (3) 37.3%
Series A Preferred 773,433 (4) 36.5%
Brian Meyer Common 1,247,231 (5) 11.7%
Series B Preferred 606,972 (6) 30.3%
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NAME OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES PERCENT OF CLASS
------------------------ -------------- ---------------- ----------------
Don West Common 2,607,063 (7) 23.3%
Series B Preferred 1,252,804 (8) 62.6%
Directors and executive officers Common 12,469,819 (1)(3)(7) 90.4%
as a group (3 persons) Series A Preferred 2,120,257 (2)(4) 100.00%
Series B Preferred 1,252,804 (8) 62.6%
- -------------------
(1) Represents 4,125,000 shares of issued and outstanding common stock,
1,346,824 shares underlying Series A (including 21,467 shares
underlying Series A dividends paid September 30, 2006), 187,500 shares
underlying options and 166,666 shares underlying warrants.
(2) Represents 1,346,824 shares underlying Series A (including 21,467
shares underlying Series A dividends paid September 30, 2006).
(3) Represents 3,125,000 shares of issued and outstanding common stock,
773,433 shares underlying Series A (including 10,754 shares underlying
Series A dividends paid September 30, 2006), 125,000 shares underlying
options and 13,333 shares underlying warrants.
(4) Represents 773,433 shares underlying Series A (including 10,754 shares
underlying Series A dividends paid September 30, 2006).
(5) Represents 279,644 shares of issued and outstanding common stock,
373,599 shares underlying Series B, 7,500 shares underlying warrants
and 69,742 shares underlying options held by Mr. Meyer, 233,373 shares
of issued and outstanding common stock and 233,373 shares underlying
Series B held by Mr. Meyer's wife, and 50,000 shares underlying
options held by a trust of which Mr. Meyer is trustee.
(6) Represents 373,599 shares underlying Series B held by Mr. Meyer and
233,373 shares underlying Series B held by Mr. Meyer's wife.
(7) Represents 730,373 shares of issued and outstanding common stock and
636,418 shares underlying Series B and 7,500 shares underlying
warrants held by Mr. West, 432,625 shares of issued and outstanding
common stock and 432,625 shares underlying Series B held by Mr. West's
wife, and 183,761 shares of issued and outstanding common stock and
183,761 shares underlying Series B held by a trust of which members of
the immediate family of Mr. West are beneficiaries.
(8) Represents 636,418 shares underlying Series B held by Mr. West,
432,625 shares underlying Series B held by Mr. West's wife, and
183,761 shares underlying Series B held by a trust of which members of
the immediate family of Mr. West are beneficiaries.
POST-CLOSING BENEFICIAL OWNERSHIP AND OPERATIONS
Pro Forma Principal Beneficial Owners Post-Closing
--------------------------------------------------
As of September 29, 2006, a total of 19,235,041 shares of our common
stock were issued and outstanding, and we had no shares of preferred stock
issued or outstanding. As of September 29, 2006, BPOMS had 9,925,000 shares of
common stock issued and outstanding, 2,088,036 shares of Series A issued and
outstanding, 2,000,000 shares of Series B issued and outstanding, and no shares
of Series C issued and outstanding. Each share of Series A and Series B is
convertible into one share of share of common stock. Dividends on shares of
Series A are payable in additional shares of Series A on the last day of each
fiscal quarter.
67
The following table sets forth pro forma principal beneficial ownership
information for the following categories of owners, prepared as if the merger
and sale transactions, the increase in our authorized number of shares of
preferred stock, a 1-for-30 reverse stock split and payment of dividends on
Series A in the form of an aggregate of 32,221 shares of Series A of BPOMS that
were due September 30, 2006 had all occurred as of September 29, 2006 and
therefore 4,236,997 shares of the combined company's common stock were
outstanding as of September 29, 2006:
o each of the proposed directors of the combined company named
under the "Management" subheading below;
o each of the proposed executive officers of the combined
company named under the "Management" subheading below;
o all of the proposed directors and proposed executive officers
of the combined company named under the "Management"
subheading below, as a group; and
o each person who, to our and BPOMS knowledge, would
beneficially have owned 5% or more of the outstanding shares
of the combined company's common stock as of the date of the
table if the transactions and events described above had
occurred as of that date.
The address of each of Messrs. Dolan, Cortens, Meyer and West is c/o
BPOMS, 19800 MacArthur Boulevard, Suite 820, Irvine, California 92612. Unless
otherwise indicated below, the address for each other named beneficial owner is
22700 Savi Ranch Parkway, Yorba Linda, California 92887. The information with
respect to each person is as supplied or confirmed by such person or based upon
statements filed with the Commission. The inclusion of shares in this table as
beneficially owned is not an admission of beneficial ownership.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Commission, and generally includes voting or investment power
with respect to securities. Except as indicated below, we and BPOMS believe each
holder possesses sole voting and investment power with respect to all of the
shares of common stock and preferred stock shown below as owned by that holder,
subject to community property laws where applicable. In computing the number of
shares beneficially owned by a holder and the percentage ownership of that
holder, shares of common stock subject to options, warrants or preferred stock
held by that holder that are currently exercisable or convertible or are
exercisable or convertible within 60 days after the date of the table are deemed
outstanding. Those shares, however, are not deemed outstanding for computing the
percentage ownership of any other person or group.
Messrs. Dolan, Cortens, Nelson and Dutta are expected to be appointed
as executive officers of the combined company. Messrs. Dolan, Cortens and
Paisley are expected to be appointed as directors of the combined company.
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NAME OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES PERCENT OF CLASS
------------------------ -------------- ---------------- ----------------
Patrick Dolan Common 2,110,763 (1) 43.5%
Series A Preferred 487,959 (2) 63.5%
James Cortens Common 1,462,526 (3) 32.0%
Series A Preferred 280,219 (4) 36.5%
Brian Meyer Common 451,876 (5) 10.0%
Series B Preferred 219,907 (6) 30.3%
Don West Common 944,544 (7) 20.1%
Series B Preferred 453,893 (8) 62.6%
Dale Paisley Common -- --
Bruce K. Nelson Common -- --
Koushik Dutta Common -- --
Proposed named directors and Common 4,517,833 (1)(3)(7) 80.1%
executive officers as a group Series A Preferred 768,178 (2)(4) 100.0%
(5 persons) Series B Preferred 453,893 (8) 62.6%
- ------------------
(1) Represents 1,494,488 shares of issued and outstanding common stock,
487,959 shares underlying Series A, 67,932 shares underlying options
and 60,384 shares underlying warrants.
(2) Represents 487,959 shares underlying Series A.
(3) Represents 1,132,188 shares of issued and outstanding common stock,
280,219 shares underlying Series A, 45,288 shares underlying options
and 4,831 shares underlying warrants.
(4) Represents 280,219 shares underlying Series A.
(5) Represents 101,316 shares of issued and outstanding common stock,
135,355 shares underlying Series B, 2,718 shares underlying warrants
and 25,268 shares underlying options held by Mr. Meyer, 84,552 shares
of issued and outstanding common stock and 84,552 shares underlying
Series B held by Mr. Meyer's wife, and 18,115 shares underlying
options held by a trust of which Mr. Meyer is trustee.
(6) Represents 135,355 shares underlying Series B held by Mr. Meyer and
84,552 shares underlying Series B held by Mr. Meyer's wife.
(7) Represents 264,615 shares of issued and outstanding common stock,
230,575 shares underlying Series B and 2,718 shares underlying
warrants held by Mr. West, 156,741 shares of issued and outstanding
common stock and 156,741 shares underlying Series B held by Mr. West's
wife, and 66,577 shares of issued and outstanding common stock and
66,577 shares underlying Series B held by a trust of which members of
the immediate family of Mr. West are beneficiaries.
(8) Represents 230,575 shares underlying Series B held by Mr. West,
156,741 shares underlying Series B held by Mr. West's wife, and 66,577
shares underlying Series B held by a trust of which members of the
immediate family of Mr. West are beneficiaries.
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Business
--------
Following the closing of the merger, BPOMS plans to consolidate our IT
services business with its existing IT outsourcing infrastructure hosting
business located in New Jersey. Both BPOMS' and our IT business units primarily
operate in the northeastern United States and provide complementary IT
outsourcing services to middle market companies. BPOMS believes there is a large
opportunity to exploit the customer relationships of each individual business by
cross-selling services within the combined customer base. Accordingly, BPOMS
anticipates that the combined company will seek to sell application portfolio
management services to BPOMS' infrastructure hosting clients and also sell
infrastructure hosting services to our application portfolio management
customers. In addition, BPOMS believes that the combined capability of these two
businesses will enhance its overall IT outsourcing service offering, enabling
the combined company to provide an end-to-end outsourcing solution to support
the IT requirements of middle market enterprises.
BPOMS plans to integrate our Web4 business unit with BPOMS' data and
document management business segment ("ECM"). Within this business segment, the
underlying core document view, markup and collaboration technology developed and
maintained by Web4 will be used to enhance BPOMS' ECM solutions. In addition to
continuing the historical method of selling individual product licenses to
enterprise customers, BPOMS anticipates that the Web4 technology will also be
offered under an on-demand, software as a service business model consistent with
BPOMS' outsourcing services approach. BPOMS believes there is a significant
opportunity to sell the Web4 technology into BPOMS' customer base and, more
importantly, to use the feature/functionality of this product set, which is an
enhancement to existing ECM software products, to expand channel partnerships
with industry leading enterprise software providers.
Following the close of the proposed merger and sale transactions, the
combined company will have a services agreement with REL, whereby REL will
provide the combined company with Indian-based resources that can be scaled as
required to support the combined company's projects. BPOMS believes this
arrangement will allow the combined company to provide a comprehensive BPO
service offering that maximizes the advantages of its onshore, near shore
(Canada) and offshore (India) outsourcing business model. BPOMS believes that
this blended multi-shore delivery capability will enable it to provide middle
market enterprises with capabilities and cost-efficiencies similar in nature to
those enjoyed by large, global corporations.
BPOMS expects that its corporate office will be consolidated into our
existing Yorba Linda, California corporate headquarters promptly after the
merger. BPOMS anticipates that the combined company will continue to provide BPO
services to support critical, yet non-core back-office business functions for
middle market enterprises located in the United States and Canada under four
specific business segments: human resources outsourcing; ECM solutions; IT
outsourcing; and finance and accounting services. Our Web4 and IT services
business units are expected to be consolidated into BPOMS' ECM and ITO business
segments, respectively.
Acquisition Strategy
--------------------
BPOMS believes that its target market of BPO services for middle market
enterprises is highly fragmented, consisting of a few large companies providing
a narrowly focused solution and thousands of small companies offering a reduced
subset of services and solutions. In order to complete its service offering,
BPOMS has acquired and plans for the combined company to continue to acquire
businesses operating in this fragmented middle market BPO industry in order to
add delivery capability, increase geographic coverage and build marketplace
critical mass. BPOMS is specifically targeting companies that have one or more
of the following attributes:
70
o Specific domain and/or technology expertise that complements
the combined company's service offering;
o Geographic coverage, particularly in areas with large
concentrations of middle market enterprises;
o Revenue, profitability and buy price parameters that fit
within the combined company's business plan and are
immediately accretive;
o Provide substantially the same services and are able to be
quickly consolidated into the existing combined company's
operations; and/or
o Application intellectual property enhancements or extensions
that can be easily integrated into the core service offering
of the combined company, including integration with
industry-leading enterprise applications developed by
application business partners, such as Oracle or Filenet, and
supported through BPOMS' web portal on a software-as-a-service
basis. The e-Review product is a good example.
Particularly attractive acquisition targets are small privately-held
companies that have no room for growth. This type of company, in many cases, can
be acquired for attractive multiples relative to public company valuations. In
addition, the owner/entrepreneur of such a company may be willing to sell at an
attractive price in exchange for the potentially enhanced value and liquidity
through share ownership in the combined company. The combined company may not be
able to acquire such companies, or any businesses, on favorable terms or at all.
See "The combined company's growth may depend on its successful acquisition of
other businesses in the business process outsourcing industry" under "Risk
Factors" beginning on page 13.
BPOMS' management has in the past successfully integrated acquired
business operations into its operations and considers the integration of
acquired business operations to be a core management competency. There can be no
assurance, however, that combined company will be able to effectively integrate
the businesses it will seek to acquire. See "If BPOMS is unable to integrate or
achieve the objectives of its recent or future acquisitions, the combined
company's overall business may suffer" under "Risk Factors" beginning on page
13.
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Management
----------
If the merger transaction is consummated, then our board of directors
would be reconstituted at the effective time of the merger in accordance with
the terms of the merger agreement, which permits BPOMS to select the initial
directors and executive officers of the combined company. BPOMS has selected the
following persons to serve as directors and executive officers of the combined
company immediately following the effective time of the merger:
NAME AGE POSITION
---- --- --------
Patrick Dolan 48 Chairman of the Board, Chief Executive Officer
and Director
James Cortens 50 President, Secretary and Director
Bruce K. Nelson 52 Chief Financial Officer
Koushik Dutta 42 Chief Technology Officer
Dale Paisley 65 Director
The appointment of the directors named above would constitute a change
in the majority of our board of directors. In addition, BPOMS plans to designate
two additional directors to serve on our board of directors immediately
following the effective time. BPOMS expects that those two additional directors
and Mr. Paisley would be considered "independent" under applicable Nasdaq
independence standards.
PATRICK DOLAN founded BPOMS and has served as its Chief Executive
Officer and Chairman of the Board since its inception in July 2005. Prior to
co-founding BPOMS, Mr. Dolan served as president and chief operating officer of
Infocrossing Inc., a provider of selective information technology outsourcing
solutions, from April 2004 through October 2004. For the two previous years,
prior to Infocrossing acquiring ITO Acquisition Corporation, doing business as
Systems Management Specialists ("SMS"), a California company, Mr. Dolan served
as its chairman and chief executive officer. In December 2002, Mr. Dolan led a
successful management team initiative, in conjunction with Los Angeles-based
private equity fund Riordan, Lewis & Haden, to re-purchase SMS from Marconi,
plc, which had acquired SMS from its prior owners in June 2000. Prior to that
time, Mr. Dolan was president and chief operating officer of SMS from November
1994. Mr. Dolan spent the early years of his career with Affiliated Computer
Services and subsequently, SHL Systemhouse. Mr. Dolan earned a B.S. in Economics
from New York University.
JAMES CORTENS founded BPOMS and has served as its Chief Financial
Officer, President and a director since its inception in July 2005. Prior to
co-founding BPOMS, Mr. Cortens served as executive vice president of
Infocrossing Inc., a provider of selective information technology outsourcing
solutions, from April 2004 through October 2004. For the two previous years,
prior to Infocrossing acquiring SMS, Mr. Cortens served as its president and
director. In December 2002, Mr. Cortens was part of a successful management team
initiative, in conjunction with Los Angeles-based private equity fund Riordan,
Lewis & Haden, to re-purchase SMS from Marconi, plc, which had acquired SMS from
its prior owners in June 2000. Prior to that time, Mr. Cortens was executive
vice president of business development of SMS from November 1994. Mr. Cortens
spent the early years of his career with SHL Systemhouse. Mr. Cortens earned a
B.Sc. in Computer Science from the University of Manitoba.
DALE PAISLEY has been a financial and accounting consultant to
primarily small public companies since 2000. He assists his clients with
regulatory reporting with the Commission and state regulators and has served as
temporary chief financial officer and chief executive officer of several public
and private companies. From October 2002 until December 2003, Mr. Paisley served
as president of SoCal Waste Group, Inc., and from February 2003 until December
2003, he served as chief executive officer and chief financial officer of USA
Biomass Corporation. Prior to that time, Mr. Paisley was a partner in the
international accounting firm of Coopers & Lybrand (now PriceWaterhouseCoopers).
Mr. Paisley earned a B.S. in accounting from San Diego State University.
72
Messrs. Nelson and Dutta currently are executive officers of netGuru.
Their biographical information is contained under the heading "Directors,
Director Nominees and Executive Officers" beginning at page 22.
Employment Agreements
---------------------
BPOMS has employment agreements with its two executive officers,
Patrick Dolan and James Cortens, dated July 29, 2005. Except as otherwise noted,
the terms of the employment agreements are identical.
The employment agreements provide that Mr. Dolan will serve as BPOMS'
Chief Executive Officer and Mr. Cortens will serve as BPOMS' President,
respectively, for an initial two and one-half year term. The employment
agreements include the following provisions:
o Initial base salary of not less than $225,000 in the case of
Mr. Dolan, and $200,000 in the case of Mr. Cortens, subject to
annual review and increase in the discretion of BPOMS' board
of directors. The board set 2005-2006 base salaries for Mr.
Dolan and Mr. Cortens at $250,000 and $225,000, respectively.
For the period through July 29, 2006, the officers accepted
their base salaries in shares of BPOMS' Series A Convertible
Preferred Stock at a $1.00-for-1 share ratio, in lieu of cash.
Since that time, BPOMS has not paid the officers any portion
of their salaries.
o Annual bonus in an amount, if any, as determined by the board
based on the achievement of BPOMS and individual performance
goals as established by the board.
o Participation in BPOMS' employee welfare, pension and benefit
plans as maintained for the benefit of BPOMS' employees.
o Six weeks of vacation annually.
o Reimbursement for all business, travel and entertainment
expenses incurred prior to, on or after July 29, 2005, with
respect to the business or prospective business of BPOMS, and
including expenses incurred in connection with the formation
of the company and the acquisition of ADAPSYS Document
Management, Inc. and ADAPSYS Transaction Processing, Inc.
o Reimbursement of telephone, cell phones, computer usage and
Internet access at home for business use, as well as a monthly
car allowance of $750.00 per month.
Upon execution of the employment agreements, Mr. Dolan and Mr. Cortens
were each granted options to purchase 750,000 and 500,000 shares, respectively,
of BPOMS' common stock, vesting 25% per year. In the event of a change of
control, or if the officer's employment is terminated by BPOMS without cause, or
by the officer for good reason, as defined in the agreements, then BPOMS will:
o Pay a lump sum equal to the sum of all accrued and unpaid base
salary and vacation pay through the date of termination, and
if no change of control has occurred, the officer's base
salary for the remainder of the employment period and two
times the highest annual bonus paid for any fiscal year, and
if no annual bonus has been paid, then two times the minimum
annual bonus;
73
o Continue to provide the officer and his eligible spouse and
dependents the various medical and life insurance provided for
in the agreement or economic equivalent as if he had remained
employed through the employment agreement term; and
o The officer's unvested stock options will become immediately
100% vested.
If BPOMS terminates the officer's employment for cause or the officer
terminates his employment without good reason, then BPOMS will:
o Pay a lump sum equal to all accrued and unpaid base salary and
vacation pay through the date of termination; and
o Have no further obligation to the officer except for the
benefits provided under any stock option grants and any other
agreements, plans or programs of BPOMS.
For purposes of the employment agreements, termination for "cause"
means the employee's willful gross misconduct or conviction of a felony that, in
either case, results in material and demonstrable damage to the business or
reputation of BPOMS, or the willful and continued failure to perform his duties
(subject to a 20-business day cure period), within twenty business days after
BPOMS delivers to him a written demand for performance that specifically
identifies the actions to be performed. Termination for "good reason" means,
subject to a ten-business day cure period,
o the assignment to the employee of duties inconsistent with
this Agreement or a change in his titles or authority;
o any failure by BPOMS to comply with sections of the agreement
regarding compensation and benefits in any material way;
o the requirement of the employee to relocate to locations other
than Orange County, California;
o the failure of BPOMS to comply with and satisfy its
obligations regarding any successor to its business and/or
assets;
o any material breach of the agreement by BPOMS; or
o a change in control of BPOMS.
A change in control under the agreements is the acquisition of BPOMS by
another entity by means of any transaction or series of related transactions
(including, without limitation, any stock acquisition, reorganization, merger or
consolidation) other than a transaction or series of transactions in which the
holders of the voting securities of BPOMS outstanding immediately prior to the
transaction continue to retain (either by such voting securities remaining
outstanding or by such voting securities being converted into voting securities
of the surviving entity), as a result of shares in BPOMS held by those holders
prior to those transactions, at least fifty percent (50%) of the total voting
power represented by the voting securities of BPOMS or the surviving entity
outstanding immediately after the transaction or series of transactions, or sale
of 80% or more of the assets of BPOMS. The merger transaction that is the
subject of this proposal 2 will not be deemed a change in control for purposes
of the employment agreements with Messrs. Dolan and Cortens.
74
BPOMS' management is negotiating employment agreements with Mr. Nelson,
as Chief Financial Officer, and Mr. Dutta, as Chief Technology Officer, to take
effect at the closing of the merger transaction. Although the terms of these
agreements have not been finalized, the proposed terms are described below and
include increases in base salary and the creation of car allowances and grant of
stock options. See "Employment Agreements, Termination of Employment and
Change-in-Control Arrangements" beginning on page 31 for information regarding
the current compensation arrangements for Messrs. Nelson and Dutta.
The proposed employment agreement for Mr. Nelson states that Mr. Nelson
will serve as Chief Financial Officer for a one-year term. The proposed
employment agreement includes the following provisions:
o Initial base salary of not less than $150,000, subject to
annual review and increase in the discretion of the board and
subject to a one-time potential 15% increase following two
consecutive fiscal quarters of positive earnings before
interest, taxes, depreciation and amortization expenses.
o Annual bonus of up to 50% of the then base salary based on
the achievement of company and individual performance goals as
established by the board.
o Participation in company employee welfare, pension and benefit
plans as maintained for the benefit of company employees.
o Six weeks of vacation annually.
o Reimbursement for all business, travel and entertainment
expenses incurred with respect to the business or prospective
business of the company
o Reimbursement of telephone, cell phones, computer usage and
Internet access at home for business use, as well as a monthly
car allowance of $600.
Upon execution of the employment agreement at the closing, Mr. Nelson
would be granted an option to purchase up to 100,000 shares of common stock,
vesting 25% after one month, an additional 25% six months after the closing, and
the remaining 50% twelve months after the closing. In the event of a change in
control, or if Mr. Nelson's employment is terminated without cause, or by Mr.
Nelson for good reason, as defined in the agreement, the option would become
100% vested immediately.
The proposed employment agreement for Mr. Dutta states that Mr. Dutta
will serve as Chief Technology Officer for a two-year term. The proposed
employment agreement includes the following provisions:
o Initial base salary of not less than $140,000, subject to
annual review and increase in the discretion of the board.
o Annual bonus equal to up to 50% of the then base salary based
on the achievement of company and individual performance goals
as established by the board.
o Participation in company employee welfare, pension and benefit
plans as maintained for the benefit of company employees.
o Four weeks of vacation annually.
75
o Reimbursement for all business, travel and entertainment
expenses incurred with respect to the business or prospective
business of the company
o Reimbursement of telephone, cell phones, computer usage and
Internet access at home for business use, as well as a monthly
car allowance of $600 per month.
Upon execution of the employment agreement, Mr. Dutta would be granted
an option to purchase up to 75,000 shares of common stock, vesting 25% for every
six months Mr. Dutta is employed full-time following the closing. In the event
of a change in control, or if Mr. Dutta's employment is terminated without
cause, or by Mr. Dutta for good reason, as defined in the agreements, the option
would become 100% vested immediately.
The employment agreements with Messrs. Dolan and Cortens and the
proposed employment agreements with Messrs. Nelson and Dutta also contain
confidentiality provisions.
BPOMS POTENTIAL FINANCING
In order for BPOMS and us to fund our combined operations and make
desired acquisitions following the merger, we, BPOMS or the combined company
must raise additional funds. BPOMS is currently seeking to raise up to $15
million for the combined company in one or a series of private transactions that
would close immediately following the merger. As part of the potential financing
transactions, BPOMS expects that the combined company would issue debt,
convertible debt and/or equity securities to investors and placement agencies on
terms yet to be negotiated.
Those securities may have rights, preferences and other characteristics
superior to one or more classes of the combined company's capital stock. In the
case of debt or preferred stock financings, the combined company may be subject
to various covenants, financial ratio undertakings, or security agreements, any
or all of which could restrict the combined company's ability to operate its
business in a manner consistent with BPOMS' current business plan. In the case
of common stock equity financings, convertible debt financings, or convertible
preferred stock financings, our current stockholders' ownership interests (in
addition to the ownership interests of the current BPOMS stockholders) in the
combined company may be subject to significant dilution, reducing their
aggregate percentage ownership in the combined company. It is also likely that,
in connection with any such financings, the combined company will also issue
warrants exercisable for shares of its common stock. The exercise of those
warrants may also subject our stockholders and BPOMS' stockholders to
significant dilution in their respective ownership interests in the combined
company. Our stockholders should carefully consider the requirement for and the
impact of potential financing transactions prior making their voting decisions
with respect to the merger transaction. See the "Risk Factors" section beginning
at page 13, including the risk factor "We and BPOMS will need financing to
conduct our combined post-merger operations . . . ."
The securities proposed to be offered in any private placement have not
been and will not be registered for issuance under the Securities Act and may
not be offered or sold in the United States absent registration or an applicable
exemption from the registration requirements. It is likely that any shares of
common stock issued, or issuable under derivative securities issued, in a
private placement would subsequently be registered for resale by the purchasers.
This proxy statement shall not constitute an offer to sell or the solicitation
of an offer to buy any securities, nor shall there be any sale of the securities
in any state or other jurisdiction in which such offer, solicitation or sale
would be unlawful.
76
BPOMS BRIDGE LOAN AGREEMENT
On August 18, 2006, BPOMS entered into a bridge loan agreement with
Patrick Dolan and James Cortens. Pursuant to the bridge loan agreement, Messrs.
Dolan and Cortens and/or their assigns may, in their discretion, provide
personal guarantees for a portion of or all of a bridge loan of up to $3 million
that may be arranged in favor of BPOMS. The guarantees would be subject to the
bridge loan meeting the conditions specified in the bridge loan agreement, which
include but are not limited to the granting of a first lien on all the assets of
BPOMS.
Under the terms of the bridge loan agreement, if the bridge loan and
personal guarantees are made, then Messrs. Dolan and Cortens and/or their
assigns will receive a seven-year warrant to purchase a number of shares of
common stock of BPOMS (or, if the merger has occurred, of netGuru) equal to
one-third of the amount drawn on the bridge loan, at an exercise price of $0.025
per share (subject to adjustment for the merger exchange ratio, stock splits and
the like). In addition, BPOMS will pay to Messrs. Dolan and Cortens and/or their
assigns a cash fee of 3% of the total amount that is initially available to be
drawn on the bridge loan.
On August 25, 2006 and September 20, 2006, bridge loans in the
aggregate principal amount of $500,000 were made to BPOMS by a limited liability
company controlled by Mr. Dolan and personally guaranteed by Mr. Dolan. In
accordance with the terms of the bridge loan agreement, Mr. Dolan received
warrants to purchase up to an aggregate of 166,666 shares of BPOMS common stock
and is entitled to a $15,000 cash fee.
On September 11, 2006, Mr. Cortens made to BPOMS a bridge loan in the
principal amount of $40,000, which was personally guaranteed by Mr. Cortens. In
accordance with the terms of the bridge loan agreement, Mr. Cortens received a
warrant to purchase up to 13,333 shares of BPOMS common stock and is entitled to
a $1,200 cash fee.
The bridge loan agreement also provides that if BPOMS requires
additional equity in order to meet the condition under the merger agreement that
BPOMS have at least $1.5 million in capital surplus immediately prior to the
closing of the merger, then Messrs. Dolan and Cortens and/or their assigns have
the right, but not the obligation, to purchase shares of Series C of BPOMS (or,
if the merger has occurred, of netGuru). The purchase price would equal the
amount of additional equity required to meet the $1.5 million capital surplus
requirement. The number of shares of Series C issued for such purchase price
would be equal to the purchase price divided by 50% of the value of the BPOMS
common stock (or, if the merger has occurred, the market value of the netGuru
common stock).
If the closing of the merger does not occur by March 31, 2007, or if
BPOMS is in default under a bridge loan, then Messrs. Dolan and Cortens and/or
their assigns will have the right, but not the obligation, to make a loan to
BPOMS (a "stockholder loan"), on terms substantially similar to the bridge loan,
to pay BPOMS' obligations under the bridge loan. BPOMS will pay all legal fees
and costs incurred by Messrs. Dolan and Cortens and/or their assigns to document
a stockholder loan. Further, for 60 days after the making of the stockholder
loan, Messrs. Dolan and Cortens may elect to convert the stockholder loan into
shares of Series C of BPOMS (or, if the merger has occurred, of netGuru). The
price for such a conversion will be the lesser of $0.50 or, if BPOMS' common
stock has been exchanged for our common stock, 50% of the market price of the
our common stock.
The bridge loan agreement provides that if a bridge loan is
outstanding, BPOMS will not prepay any other debt of the company, other than a
stockholder loan, trade payables, the existing operating capital line of credit
and other specified loans and leases. In addition, BPOMS has agreed that 25% of
the net proceeds from any debt or equity financing transactions will be applied
to the balance of any stockholder loan and then to the balance of the bridge
loan.
77
Concurrently with the bridge loan agreement, BPOMS entered into a
participation agreement with Patrick Dolan, James Cortens, Brian Meyer and
Donald West pursuant to which BPOMS agreed that, at any time prior to the
closing of the merger, Messrs. Meyer and West may choose to participate in the
rights and obligations under the bridge loan agreement on a pro rata basis up to
their respective proportionate stockholdings in BPOMS. In accordance with the
participation agreement, when we and BPOMS signed the merger agreement, Messrs.
Meyer and West each received a seven-year warrant to purchase up to 7,500 shares
of the common stock of BPOMS at a purchase price of $0.025 per share in
consideration for their personal guarantee of an existing loan made to ADAPSYS
Document Management LP, a BPOMS affiliate, by Business Development Bank of
Canada. The participation agreement also provides that if BPOMS at any time
repays any portion of the bridge loan or a stockholder loan, it must also
concurrently make a proportionate repayment of the existing bank loan made to
ADAPSYS Document Management LP.
OPINION OF OUR FINANCIAL ADVISOR
OPINION OVERVIEW
We engaged B. Riley to provide a fairness opinion to our board of
directors in connection with the sale or merger of our remaining assets, which
consist primarily of our IT services, Web4 and Indian operations. Our IT
services and Web4 divisions would be merged with BPOMS and our Indian operations
would be simultaneously sold to DFH.
On August 29, 2006, B. Riley rendered its opinion that, as of that date
and, based on and subject to certain matters stated therein, the aggregate
consideration proposed to be received by us in connection with the merger and
sale transactions (the "Transaction") is fair to our stockholders from a
financial point of view. The consideration we propose to receive is a cash
infusion of $3.5 million (estimated by management to be $1.5 million from BPOMS
and approximately $2.0 million from DFH), to be paid as a cash dividend to our
existing stockholders as of a record date to be set prior to the closing of the
merger and sale, with our stockholders retaining approximately 10% of the equity
interests anticipated to be outstanding post-merger on a fully-diluted basis but
excluding most new equity or equity-based securities we or BPOMS issue after
August 29, 2006. This opinion was also based upon and incorporated information
provided by our management, which B. Riley assumed to be accurate in all
material aspects. A copy of B. Riley's opinion is included as APPENDIX C to this
proxy statement.
In arriving at its opinion, B. Riley did not perform or obtain any
independent appraisal of the assets or liabilities (contingent or otherwise) of
netGuru, nor was B. Riley furnished with any such appraisals. B. Riley assumed
that the merger and sale would be completed in a timely manner and in accordance
with the terms of the merger agreement and sale agreement without any
limitations, restrictions, conditions, amendments or modifications, regulatory
or otherwise, that collectively would have a material effect on us. B. Riley
undertook no obligation to update its opinion following its delivery on August
29, 2006. B. Riley did not express any opinion as to the price or range of
prices at which our common stock may trade subsequent to the announcement of the
merger agreement and sale agreement.
We did not request, and B. Riley did not provide, separate fairness
determinations for the merger transaction and the sale transaction. The terms of
the merger agreement and the sale agreement explicitly provide that both of
those transactions must occur concurrently. Also, although under applicable laws
and regulations we would be submitting the merger transaction and the sale
transaction to our stockholders as separate numbered proposals in our proxy
statement, and despite the fact that the sale transaction would involve a sale
of REL to affiliates of ours, each of the two proposals would explicitly state
that the two transactions, if consummated, would be consummated simultaneously,
and that we have obtained a fairness determination indicating that the aggregate
consideration proposed to be received by us in the concurrent transactions is
fair to our stockholders from a financial point of view. In light of the
foregoing, and in light of the fact that we had no other credible offers, we
believed that obtaining separate fairness determinations would not have been
useful. Accordingly, we do not believe that obtaining separate fairness
determinations would have been an appropriate use of our resources given the
required concurrence of the two transactions and our ultimate receipt of a
fairness determination covering the simultaneous consummation of the two
transactions.
78
In the ordinary course of business, B. Riley and its affiliates may
actively trade our securities for their own account and for the accounts of
their customers and, accordingly, may at any time hold a long or short position
in our securities.
The following summary of the material financial analyses performed by
B. Riley in connection with rendering their fairness opinion to our board of
directors may not expressly set forth all of the information B. Riley used to
arrive at its opinion.
SELECTED PRECEDENT TRANSACTIONS ANALYSIS
B. Riley evaluated the financial metrics of numerous selected precedent
transactions as part of the evaluation of the Transaction. B. Riley selected
these particular transactions based upon the relative size of the transaction in
comparison to netGuru, the timing of when the transactions occurred, the
relative financial conditions of the target companies and the target companies'
industry and market relevance to netGuru's various businesses. Then using
publicly available information, B. Riley reviewed and analyzed certain financial
and operating data relating to the selected transactions such as transaction
values as a multiple of a company's revenue for a latest twelve-month ("LTM")
period.
B. Riley used the set of enterprise value to revenue ("EV/Revenue")
multiples (size and liquidity discount applied to multiples) in its analysis to
determine the valuation of netGuru. "Enterprise value" is calculated as the sum
of the value of the common equity on a fully-diluted basis plus the value of net
debt, any minority interest and preferred stock, less cash.
Since we are in a loss position, and enterprise value to earnings
before interest taxes, depreciation and amortization ("EV/EBITDA") is not
applicable. B. Riley determined that the Transaction has a favorable implied
revenue multiple of 0.90 times revenue (determined based upon the aggregate
consideration of $3.5 million which ascribes nominal or no value to the
remaining ownership of shares in the combined company due to the future
uncertainty of liquidity and trading volume) as compared to the precedent
transaction approximate high multiple of 0.50 times revenue (with an implied
aggregate consideration of $1.9 million), adjusted mean multiple of 0.45 times
revenue (with an implied aggregate consideration of $1.7 million) and low
multiple of 0.32 times revenue (with an implied aggregate consideration of $1.2
million). Accordingly, the selected precedent transaction analysis indicates
that the aggregate consideration proposed to be received by us in the
Transaction is favorable to our stockholders.
SELECTED PRECEDENT TRANSACTIONS ANALYSIS
ANNOUNCED SELLER BUYER
- -----------------------------------------------------------------------------------------------
03/01/06 Matrixone Inc. Dassault Systemes SA
02/08/06 Zen Technology, Inc. SI International Inc.
08/27/05 KSoft Systems, Inc. Virinchi Technologies Ltd.
08/10/05 DAOU Systems Inc. Proxicom, Inc.
07/26/05 BroadVision Inc. Vector Capital
04/13/05 Analysts International Corp. Computer Horizons Corp.
03/01/05 Whitbread Technology Partners, Inc. Zanett Inc.
12/09/04 Bell Business Solutions Inc. Bell Canada
09/10/04 VALSAR Consulting Group Nstein Technologies Inc.
08/10/04 Primus Knowledge Solutions Inc. Art Technology Group Inc.
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ANNOUNCED SELLER BUYER
- -----------------------------------------------------------------------------------------------
06/07/04 Harris Orkand Information Services Harris Corp.
04/02/04 Genisys Consulting Inc. Perficient Inc.
02/12/04 CMS Information Services, Inc. CACI International Inc.
02/11/04 Nims Associates, Inc. Keane Inc.
TRANSACTION VALUE MULTIPLES OF LTM REVENUE AND LTM EBITDA
EV/REVENUE EV/EBITDA
---------- ---------
High(1): 0.50x N/A
Low(1): 0.32x N/A
Median: 0.43x N/A
Mean: 0.50x N/A
Adj. Mean(2): 0.45x N/A
---------------
(1) High and low observations represent the 75th and 25th
percentiles, respectively.
(2) Adjusted mean excludes the high and low observations.
(3) Size and liquidity discount applied to multiples.
COMPARABLE PUBLIC COMPANY ANALYSIS
B. Riley evaluated the financial metrics of several comparable public
companies as part of its evaluation of the Transaction. B. Riley selected the
comparable public companies based upon the relative sizes of the companies in
relationship to us, the relative financial conditions and strengths of the
comparable companies, and the industry segments and the markets served by the
comparable public companies in relationship to us. In performing this analysis,
B. Riley reviewed certain financial information relating to us and compared such
information to the corresponding financial information of other publicly-traded
companies, which B. Riley deemed to be generally comparable to us.
B. Riley used the ratio of enterprise value to revenue as of July 26,
2006 for the selected comparable public companies to estimate the value of
netGuru. The ten publicly-traded companies that B. Riley deemed generally
comparable to netGuru were:
o A Consulting Team Inc.
o Allin Corp.
o American Software Inc.
o Carreker Corp.
o DataLogic International Inc.
o Formula Systems (1985) Ltd.
o Innodata Isogen Inc.
o Paradigm Holdings Inc.
o TechTeam Global Inc.
o Vitria Technology Inc.
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B. Riley calculated the low, mean, adjusted mean, median and high
multiples for the above public comparable companies.
COMPARABLE PUBLIC COMPANY MULTIPLES OF LTM REVENUE AND LTM EBITDA
EV/REVENUE EV/ EBITDA
---------- ----------
High(1): 0.46x N/A
Low(1): 0.30x N/A
Mean: 0.41x N/A
Median: 0.40x N/A
Adjusted Mean(2): 0.41x N/A
-------------
(1) High and low observations represent the 75th and 25th
percentiles, respectively.
(2) Adjusted mean excludes the high and low observations.
B. Riley used the set of enterprise value to revenue multiples (size
and liquidity discount applied to multiples) in its analysis of the valuation of
netGuru. Since we are in a loss position, EBITDA is not applicable. The
Transaction has a favorable implied revenue multiple of 0.90 times (determined
based upon the aggregate consideration of $3.5 million which ascribes nominal or
no value to the remaining ownership of shares in the combined company due to the
future uncertainty of liquidity and trading volume) as compared to the
comparable public company approximate high multiple of 0.46 times revenue (with
an implied aggregate consideration of $1.8 million), mean multiple of 0.41 times
revenue (with an implied aggregate consideration of $1.6 million) and low
multiple of 0.30 times revenue (with an implied aggregate consideration of $1.2
million). Accordingly, the comparable public company analysis indicates that the
aggregate consideration proposed to be received by us in the Transaction is
favorable to our stockholders.
DISCOUNTED CASH FLOW ANALYSIS
B. Riley performed a discounted cash flow analysis as part of its
valuation of netGuru, based upon the historical and projected cash flows
provided by our management. The discounted cash flow analysis also takes into
account the going concern opinion provided in the audit of our 2006 financial
statements.
The discounted cash flow analysis relates the value of an asset or
business to the present value of expected future cash flows to be generated by
that asset or business. Discounted cash flow has two components:
(1) the present value of the projected after-tax cash flows after
payment of any associated expenses and capital requirements
necessary to generate the related cash flows, which B. Riley
refers to as "after-tax free cash flows," for a determined
period, and
(2) the present value of the "terminal value" of the asset or
business at the end of that period.
Projected after-tax free cash flows exclude the impact of interest
income and interest expense. Terminal value is an estimate for the value of the
annual after-tax free cash flows of the asset or business beyond the terminal
year, projected into perpetuity.
Terminal value is determined by applying the range of EBITDA multiples
found in the selected precedent transactions analysis to the EBITDA of the asset
or business in the last year of the relevant projections.
B. Riley used cash flow projections provided by our management for
April 1, 2006 through December 31, 2006. The cash flow projections projected
that we did not have sufficient cash reserves to be able to continue our current
operations beyond December 31, 2006. Balance sheets used in the discounted cash
flow analysis were based on LTM financial statements as of March 31, 2006 and
cash reserve information provided by our management.
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The calculation for the range of cost of capital, or discount rate, was
calculated on a weighted-average cost of capital for netGuru based upon market
returns, cost of debt, the average comparable company beta (risk) factor, and a
risk premium based on company size, limited growth and the going concern opinion
issued by our auditors on our financial statements for the fiscal year ended
March 31, 2006.
B. Riley used a range of illustrative discount rates of 18.0% to 22.0%
and assumed that our terminal value was zero dollars due to our projections that
indicated we would not be able to operate past December 31, 2006. Accordingly,
B. Riley determined that the value of our projected cash flows was negative.
Therefore, the discounted cash flow analysis indicates that the $3.5 million
aggregate consideration proposed to be received by us in the Transaction is
favorable to our stockholders.
MISCELLANEOUS
In connection with rendering its opinion, B. Riley performed a variety
of financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to a partial analysis
or summary description. Accordingly, notwithstanding the analyses summarized
above, B. Riley believes that its analyses must be considered as a whole and
that selecting portions of the analyses and factors considered by them, without
considering all such analyses and factors, or attempting to ascribe relative
weights to some or all such analyses and factors, could create an incomplete
view of the evaluation process underlying the opinion.
In performing its analyses, B. Riley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of netGuru, including, among
other assumptions, a moderately improving economy, no significant fundamental
changes in the underlying market segments we serve and no rapid change in
interest rates and other factors affecting the cost of conducting business. The
analyses performed by B. Riley are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. B. Riley did not draw any specific conclusions from
or with regard to any one method of analysis. With respect to the analysis of
comparable companies and the analysis of selected precedent transactions
summarized above, no public company utilized as a comparison is identical to us,
and no transaction is identical to the Transaction. Accordingly, an analysis of
publicly traded comparable companies and comparable business combinations is not
mathematical; rather, it involves considerations and judgments concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values or announced merger
transaction values, as the case may be, of us and the companies to which we were
compared. The analyses do not purport to be appraisals or to reflect the prices
at which any securities may trade at the present time or at any time in the
future. In addition, B. Riley's opinion was just one of the many factors taken
into consideration by our board of directors. Consequently, B. Riley's analysis
should not be viewed as determinative of the decision of our board of directors
or management with respect to the fairness of the consideration as set forth in
the merger and sale agreements.
82
B. Riley's engagement and its fairness opinion are for the benefit of
our board of directors in its capacity as representatives of our stockholders,
and its fairness opinion was rendered in connection with our board of directors'
consideration of the Transaction. The fairness opinion is not intended and does
not constitute a recommendation to any stockholder as to whether such
stockholder should vote to approve the Transaction.
B. Riley relied upon and assumed, without independent verification,
that the financial information provided to it was reasonably prepared and
reflected the best currently available estimates of our financial results and
condition, and that there was no material change in our assets, financial
condition, business or prospects since the date of the most recent financial
statements made available to B. Riley. B. Riley also assumed that the
Transaction would be consummated in accordance with the merger and sale
agreements. Without limiting the generality of the foregoing, B. Riley undertook
no independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities to which we are a party or may
be subject, and B. Riley's fairness opinion makes no assumption concerning, and
therefore does not consider, the possible assertion of claims, outcomes or
damages arising out of any such matters. B. Riley did not independently verify
the accuracy and completeness of the information supplied to it with respect to
us and does not assume any responsibility with respect to it. B. Riley did not
make any physical inspection or independent appraisal of any of our properties
or assets. B. Riley's fairness opinion is necessarily based on business,
economic, market and other conditions as they existed and could be evaluated by
B. Riley at August 29, 2006.
B. Riley is an NASD member investment bank that since its inception has
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, leveraged buyouts and
valuations for estate, corporate and other purposes.
B. Riley was selected by our board of directors to render a fairness
opinion because of B. Riley's expertise and reputation in investment banking and
mergers and acquisitions and its familiarity with the engineering software
industry and our company. Also, B. Riley rendered a fairness opinion to us in
connection with our sale of assets in 2005. We and B. Riley entered into a
letter agreement including indemnification provisions, dated April 4, 2006,
relating to the services to be provided by B. Riley in connection with the
Transaction, under which we paid B. Riley a fee of $55,000 upon the rendering of
its opinion. We also agreed to reimburse B. Riley for certain out-of-pocket
expenses incurred in connection with the engagement. No part of B. Riley's
services or fees are contingent upon the Transaction occurring.
PRO FORMA FINANCIAL INFORMATION
APPENDIX D contains unaudited pro forma financial information derived
from our consolidated financial statements and the consolidated financial
statements of BPOMS, which have been combined and adjusted based on certain
assumptions to give effect to the merger and sale transactions.
The unaudited pro forma financial information presented in Appendix D
is for information purposes only. The information is not representative of our
future results of operations or financial position.
HISTORICAL FINANCIAL INFORMATION
Our audited historical financial statements as of and for the years
ended March 31, 2006 and 2005 and our unaudited historical financial statements
as of and for the three months ended June 30, 2006 and 2005 are incorporated by
reference into this proxy statement and our unaudited historical financial
statements for the three months ended September 30, 2005 and December 31, 2005
are included in this proxy statement. See "Annual and Quarterly Reports"
beginning on page 112 and Appendix E to this proxy statement.
Historical unaudited financial statements of REL as of and for the
years ended March 31, 2006 and 2005 and the three months ended June 30, 2006 and
2005 are included in APPENDIX E to this proxy statement.
83
Historical audited and unaudited financial statements of BPOMS and its
subsidiaries are included in APPENDIX F to this proxy statement. APPENDIX F also
includes a discussion and analysis provided by BPOMS' management relating to
BPOMS' financial statements and plan of operation.
ACCOUNTING TREATMENT
Because BPOMS' stockholders will hold the majority of the outstanding
common shares of the combined company after the merger, BPOMS will be treated as
the acquirer for accounting purposes, with the merger transaction reflected as a
reverse acquisition. BPOMS intends to account for the merger as a "purchase" of
us for financial reporting and accounting purposes, in accordance with
accounting principles generally accepted in the United States.
The purchase accounting transaction will result in a purchase price in
excess of net assets acquired. The purchase price is expected to be
approximately $4.6 million based on the average closing price of our common
stock for three days before and after August 30, 2006, the value of the net
assets, the value of the assumed options and warrants, and merger-related costs.
The allocation of the purchase price among net tangible assets acquired,
patents, tradenames, developed technology, customer relationships,
non-competition agreements, deferred stock-based compensation, and goodwill will
be based on the estimated fair value of the respective assets.
The allocation of the aggregate purchase price is preliminary. The
actual purchase accounting to reflect the fair values of our assets to be
acquired and liabilities to be assumed will be based upon valuation studies that
are not yet complete and management's evaluation of those assets and
liabilities. Accordingly, the pro forma condensed combined financial information
presented elsewhere in this document is subject to change pending the final
purchase price determination and allocations. Management does not expect the
differences between the preliminary and final purchase price allocations will
have a material impact on the combined company's pro forma financial position or
results of operations. However, there can be no assurance until completion of
the valuation studies.
We anticipate that upon consummation of the merger transaction, the
combined company will adopt the year end of the accounting acquirer, BPOMS,
which is December 31. The unaudited pro forma condensed combined financial
statements included in Appendix D were prepared using December 31 as the year
end, which is different from the accounting acquiree's fiscal year end of March
31.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
We and BPOMS intend that the merger transaction will qualify as a tax
deferred reorganization as defined in the Internal Revenue Code of 1986, as
amended. If the merger qualifies as a tax deferred reorganization, BPOMS
stockholders will generally not recognize gain or loss for United States federal
income tax purposes upon receipt of our stock in the merger, except in
connection with cash received instead of a fractional share of our common stock.
Our stockholders will not exchange their common stock in the merger
and, accordingly, will not recognize any taxable gain or loss as a result of the
merger. However, stockholders who participate in the $3.5 million cash
distribution we intend to pay following the merger transaction may be taxed as a
dividend on the distribution.
A cash distribution for federal income tax purposes is taxable to a
stockholder as a dividend to the extent a corporation has current year earnings
and profits and/or accumulated earnings and profits. Earnings and profits, both
current and accumulated, are broadly defined in the Internal Revenue Code. We
have no accumulated earnings and profits. If we operate profitably so as to
generate current earnings and profits during the fiscal year, our stockholders
84
may have a taxable dividend. For example, our sale of the stock of REL and
certain additional assets to DFH may generate a gain, which may create current
earnings and profits in the fiscal year. Thus, a cash dividend may be taxable to
our stockholders to the extent of their pro rata share of current earnings and
profit, if any.
If the proposed cash distribution to our stockholders exceeds current
earnings and profits, the excess distribution would first offset the adjusted
tax basis of the recipient's stock and then be treated as a capital gain.
Neither we nor BPOMS intends to obtain a legal opinion from our
respective counsel or a ruling from the Internal Revenue Service that the merger
will constitute a tax deferred reorganization. Tax matters are complicated and
the tax consequences of the merger transaction to any particular stockholder
will depend on the facts of his or her situation. Stockholders should consult
with their own tax advisors for a full understanding of the consequences of the
merger to them, including tax return reporting requirements, the applicability
and effects of federal, state, local and other tax laws and the effects of any
proposed changes in the tax laws.
ATTENDANCE OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS AT ANNUAL MEETING
A representative of our independent registered public accounting firm
for the current year and the most recently completed fiscal year is expected to
be present at the annual meeting and will be given the opportunity to make a
statement if he or she so desires and to respond to appropriate questions.
REGULATORY APPROVALS
There are no material United States federal or state regulatory
approvals required for completion of the merger transaction, other than the
approval of proposals 2, 3, 4, 5 and 6 by our stockholders under the corporate
law of the State of Delaware. However, in order to remain listed on The Nasdaq
Capital Market, we will need to obtain Nasdaq approval. See the risk factor
entitled "We may be delisted from The Nasdaq Capital Market . . ." beginning on
page 14 for further information.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Some of our directors and executive officers have interests in the
merger, sale and related transactions that are different from, or in addition
to, those of our stockholders generally. Our board of directors was aware of
these interests when it approved the merger and sale agreements.
New employment agreements with Bruce K. Nelson, who is our Chief
Financial Officer and who is proposed to serve as Chief Financial Officer of the
combined company, and Koushik Dutta, who is our Chief Operating Officer and who
is proposed to serve as Chief Technology Officer of the combined company, may be
entered into and become effective as of the closing of the merger transaction.
Mr. Dutta is not currently a party to an employment agreement with us. Mr.
Nelson's salary under the proposed new agreement would be $150,000, as compared
to his current salary of $127,000. Mr. Dutta's salary under the proposed new
agreement would be $140,000, as compared to his current salary of $115,000. In
addition, under the proposed new employment agreements, Messrs. Nelson and Dutta
would each become eligible for a monthly car allowance of $600 and annual bonus
equal to up to 50% of their base salary based on the achievement of company and
individual performance goals as may be established by the board.
Also, upon execution of the employment agreements at the closing, Mr.
Nelson would be granted an option to purchase up to 100,000 shares of common
stock, vesting 25% after one month, an additional 25% six months after the
closing, and the remaining 50% twelve months after the closing. In addition, Mr.
Dutta would be granted an option to purchase up to 75,000 shares of common
stock, vesting 25% for every six months Mr. Dutta is employed full-time
following the closing. In the event of a change in control, or if Mr. Nelson's
or Mr. Dutta's employment is terminated without cause or for good reason, the
options would become 100% vested immediately. See "Post-Closing Beneficial
Ownership and Operations" beginning on page 69 for additional information
regarding the proposed terms of the employment agreements.
Mr. Nelson has received and anticipates receiving under his existing
employment agreement bonus compensation tied to milestones that relate in part
to our progress in connection with the merger and sale transactions. To date,
Mr. Nelson has received approximately $95,250 under the milestone bonus
payments. The final payment will be $51,000 and is due to Mr. Nelson on November
18, 2006 regardless of the status of the merger and sale transactions. See
"Employment Agreements, Termination of Employment and Change-in-Control
Arrangements" beginning on page 31 for additional information regarding his
existing employment agreement.
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As indicated above, Mr. Dutta does not currently have an employment
agreement with us. However, Mr. Dutta is entitled to a cash bonus of $50,000
payable at the time of the closing. See "Certain Relationships and Related
Transactions" beginning on page 36 for more additional information regarding
that bonus.
Each of our non-employee directors has received $67,000 for serving on
a special committee of our board of directors that was charged with the task of
assisting in establishing a specific course of action for us to take after the
consummation of asset sale last year. See "Directors' Compensation" beginning on
page 26 for more specific information regarding director compensation.
Mr. Amrit K. Das and Mr. Santanu K. Das, two of our directors, are also
shareholders and officers of DFH, the entity to which we propose to sell our
interest in the capital stock of REL and certain additional assets and
liabilities in exchange for $2.0 million cash in the sale transaction.
Accordingly, each of these two directors has a direct financial interest in the
sale transaction and therefore abstained from voting on the proposed merger and
sale transactions. See "The Sale Agreement - General" beginning on page 91 for
further information regarding the sale transaction.
Also, at the closing of the sale transaction, we plan to enter into an
outsourcing services agreement with REL covering services that may be provided
to us by REL after the closing. The outsourcing services agreement has an
initial term of twelve months and will automatically renew for successive twelve
month periods unless terminated by either party. The agreement provides that
approximately ten persons who are employed by REL and who currently engage in
ongoing product development, testing and support work for our Web4 and netGuru
Systems divisions will continue to do those tasks, with us paying to REL their
gross pay, which totals approximately $4,500 per month, plus $500 per month
each. Other services to be provided under the agreement will be pursuant to
statements of work that would provide for fees commensurate with the type of
services and level of skill required. Offshore BPO services would be paid at
$7.00 per hour. Fees for software development services would range from $12.00
to $15.00 per hour. Onsite work fees would range from $20.00 to $70.00 per hour.
Telephone and Internet usage and other special services or software would be
billed at actual cost plus a 10% processing fee. See "Operations and Ownership
Prior to and Following the Closings - Operations to be Sold" for further
information regarding the sale transaction.
RISK FACTORS
Various risk factors relating to our consummation of, or failure to
consummate, the proposals described in the proxy statement, together with risk
factors relating to our current and proposed operations, are included under the
heading "Risk Factors" beginning on page 13.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of our common stock
entitled to vote on this proposal will constitute stockholder approval of this
proposal. We anticipate that the shares covered by the voting agreements will be
voted in favor of this proposal.
If stockholder approval of this proposal is not obtained, we will not
be in a position to consummate the transactions contemplated by merger agreement
and the sale agreement, and we will have to pay to BPOMS and DFH termination
fees totaling up to $400,000 as discussed in proposals 2 and 3.
THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
THAT STOCKHOLDERS A VOTE "FOR" APPROVAL OF THE MERGER TRANSACTION DESCRIBED IN
THIS PROPOSAL, THE SALE TRANSACTION DESCRIBED IN PROPOSAL 3, THE NAME CHANGE
DESCRIBED IN PROPOSAL 4, THE STOCK SPLIT DESCRIBED IN PROPOSAL 5, AND THE
INCREASE IN OUR AUTHORIZED SHARES OF PREFERRED STOCK DESCRIBED IN PROPOSAL 6 SO
THAT WE WILL BE IN A POSITION TO CONSUMMATE THE MERGER AND SALE TRANSACTIONS.
PLEASE BE AWARE THAT IN MAKING ITS RECOMMENDATION, OUR BOARD CONSIDERED
THE MERITS OF PROPOSALS 2 AND 3 IN THE AGGREGATE AND NOT SEPARATELY AND IS
THEREFORE NOT RECOMMENDING THAT YOU VOTE FOR EITHER PROPOSAL 2 OR PROPOSAL 3
WITHOUT VOTING FOR EACH OF PROPOSALS 2, 3, 4, 5 AND 6.
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PROPOSAL 3
SALE OF INDIAN SUBSIDIARY AND CERTAIN ASSETS AND LIABILITIES
GENERAL
As summarized above under the heading "Sale Transaction" beginning at
page 6 and as described further below, we have entered into an agreement to sell
and transfer to DFH our interest in REL and certain additional assets and
liabilities, concurrently with the consummation of the merger transaction
described in proposal 2. REL is our majority-owned Indian subsidiary that
conducts our engineering business process outsourcing operations. Our
engineering business process outsourcing operations involve provision of full
engineering technical support for engineering software companies and steel
detailing and fabrication companies in North America, through a qualified labor
pool of experienced engineers and detailers at REL's Kolkata, India office.
The following is a description of material aspects of the proposed sale
transaction with DFH and certain related agreements and transactions. While we
believe the following description covers the material terms of the sale
agreement and related transactions, the description may not contain all of the
information that is important to you. You should carefully read this document
and the other documents to which we refer for a more complete understanding of
the sale transaction. In particular, the following summaries of the sale and
other agreements are not complete and are qualified by reference to the copies
of those agreements attached as appendices to this proxy statement and
incorporated herein by reference.
You should be aware, however, that the terms and information in the
attached agreements should not be relied upon as disclosures about us or REL
without consideration of all of the public disclosures made by us in our public
reports filed with the Commission and as set forth elsewhere in this proxy
statement. The attached agreements are not intended to change or supplement the
disclosures contained in the public reports we have filed with the Commission.
This is particularly so because the terms of those agreements, including without
limitation, the representations and warranties contained in those agreements,
were made by the parties to those agreements solely for the benefit of one
another and are intended to govern the contractual rights and relationships, and
allocate risks, between the parties in relation to the sale and related
transactions. Accordingly, you should not rely on the representations and
warranties as characterizations of the actual state of facts, since they were
only made as of the date of those agreements and are modified in important part
by the underlying disclosure materials. We have provided additional specific
disclosures in our public filings to the extent we are aware of the existence of
any material facts that are required to be disclosed under federal securities
law and might otherwise contradict the representations and warranties contained
in the agreements.
BACKGROUND OF THE SALE TRANSACTION
The background of the sale transaction that is the subject of this
proposal is discussed under the heading "Background of the Merger and Sale
Transactions" beginning on page 38.
THE SALE AGREEMENT
The following section summarizes the material terms of the sale
agreement entered into between DFH and us on August 29, 2006. The sale agreement
is attached as Appendix B to this proxy statement. You are urged to, and should,
read the sale agreement carefully and in its entirety for a description of the
terms of the proposed sale transaction.
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GENERAL
Under the terms of the sale agreement, we have agreed to, concurrently
with the consummation of the merger transaction, sell and transfer our interest
in REL and certain additional assets and liabilities to DFH. DFH is owned and
controlled by the following DFH Holders: Amrit K. Das, who is our Chairman of
the Board, Chief Executive Officer and President and who beneficially owned more
than 10% of our outstanding common stock as of the record date; Santanu K. Das,
who is a director and former executive officer of our company, the son of Amrit
K. Das and brother of Sormistha Das, and who beneficially owned more than 10% of
our outstanding common stock as of the record date; and Sormistha Das, who is
the daughter of Amrit K. Das and sister of Santanu K. Das, served as our
assistant controller from October 2001 to September 15, 2006, and beneficially
owned more than 10% of our outstanding common stock as of the record date.
STOCK, ASSETS AND LIABILITIES TO BE SOLD AND TRANSFERRED
We have agreed to sell to DFH our majority ownership interest in REL.
In addition, we have agreed to sell to DFH various additional assets, including:
o Certain marks and Internet domain names, including the
"netGuru" name;
o A copy of the source code for our WEBWORKS(TM) software;
o Certain contracts, licenses and accounts receivable primarily
relating to REL's business; and
o Certain furniture and digital media equipment and productions.
DFH has agreed to assume certain obligations and liabilities,
including:
o Liabilities associated with payments demanded by or due or to
become due to Indian customs authorities relating to REL or
its business;
o Liabilities associated with our existing legal dispute with
Vital Communications;
o Liabilities, if any, associated with the retention agreement
and the split dollar life insurance agreement between us and
Amrit K. Das, which agreements are scheduled to terminate
immediately prior to the closing of the sale transaction; and
o Liabilities associated with the remaining balance payable in
connection with our acquisition of Apex Techno Consultants
Private Limited.
PURCHASE PRICE
DFH has agreed to pay us $2.0 million for our shares of REL and assets
we have agreed to transfer to them under the sale agreement. DFH will be
required to withhold taxes, if any, to be paid pursuant to the Indian Income Tax
Act. In addition, DFH has agreed to assume various liabilities, as described
above. Also, we have agreed that at the closing of the merger and sale
transactions, we will transfer to REL any cash and cash equivalents we may then
have in excess of U.S. reserved cash, as defined in Section 1.2(b)(i) of the
merger agreement.
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CLOSING
The sale transaction is subject to various closing conditions,
including approval by our stockholders and compliance with regulatory
requirements. If stockholder approval and other closing conditions are met, the
sale transaction is expected to close as soon as practicable following the
annual meeting but no later than December 22, 2006.
PRIOR, CONCURRENT AND SUBSEQUENT TRANSACTIONS
The sale would close concurrently with the closing of the merger
transaction described in proposal 2. Prior to the closings, we would conduct the
reverse stock split that is the subject of proposal 5 and declare a dividend to
our pre-merger stockholders of record as described under the heading "Use of
Proceeds" below. After the closings, we would change our name to BPO Management
Services, Inc. as described in proposal 4.
REPRESENTATIONS AND WARRANTIES
We made a number of representations and warranties, subject in some
cases to qualifications, to DFH in the sale agreement regarding our organization
and authority to enter into the sale agreement, our ownership of REL, and REL's
capitalization and ownership of other entities and other facts pertinent to the
sale transaction. DFH made a number of representations and warranties, subject
in some cases to qualifications, to us in the sale agreement regarding DFH's
organization, its authority to enter into the sale agreement, and other facts
pertinent to the sale transaction. The representations and warranties made by
both DFH and us will survive the consummation of the sale transaction for
limited time periods of either twelve months or the applicable statute of
limitations, as provided in Article 8 of the sale agreement.
CONDITIONS TO CLOSING
Our and DFH's respective obligations to complete the sale transaction
are subject to the satisfaction or waiver, at or prior to the closing, of each
of the following:
o any governmental or regulatory notices, approvals or other
requirements necessary to consummate the transactions
contemplated by the sale agreement and to continue to conduct
REL's business after the closing in all material respects as
it was conducted prior to the closing must have been given,
obtained or complied with;
o no court of competent jurisdiction or other governmental
entity may have issued a final and non-appealable order,
decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the
transactions contemplated by the sale agreement; and
o the merger transaction shall close simultaneous with the sale
transaction.
DFH's obligations to complete the sale transaction also are subject to
the satisfaction or waiver at or prior to the closing to each of the following:
o the sale transaction must have been approved by the requisite
vote of our stockholders;
o each of our representations and warranties must have been
accurate as of the closing as if made on such date, except
those representations or warranties are only as of a
particular date, and except where the failure to be accurate
would not reasonably be expected to have a NGRU Material
Adverse Effect or a material adverse effect on REL's business
or the transactions contemplated by the sale agreement;
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o we must have performed or complied with all of the covenants
and obligations required to be performed or complied with by
us under the terms of the sale agreement;
o we must have obtained all material or necessary consents,
approvals or waivers;
o we must deliver the following documents to DFH:
o bill of sale and assumption agreement;
o outsourcing services agreement covering services that
may be provided to us by REL after the closing;
o value-added reseller agreement covering our Web4
products that may be distributed by REL after the
closing;
o transition agreement covering the transition of the
netGuru name and mark and our hosting of the
"netguru.com" website for a limited time following
the closing; and
o agreement to pay unpaid taxes incurred to our
knowledge in connection with REL's (including any
predecessor entity's) operation of its business with
respect to all periods prior to the closing; and
o there must not have occurred any change, circumstance or event
concerning REL that has had or would be reasonably likely to
have a material adverse effect on REL or its business.
Our obligations to complete the sale transaction also are subject to
the satisfaction or waiver at or prior to the closing of each of the following
conditions:
o the sale transaction must have been approved by the requisite
vote of our stockholders;
o each of DFH's representations and warranties must have been
accurate as of the closing as if made on such date, except
where those representations and warranties are only as of a
particular date, and except where the failure to be accurate
would not reasonably be expected to have a material adverse
affect on DFH or the transactions contemplated by the sale
agreement;
o DFH must have performed or complied with all of the covenants
and obligations required to be performed or complied with by
it under the terms of the sale agreement;
o DFH must have obtained all necessary consents, approvals or
waivers;
o DFH must deliver the following documents to us:
o bill of sale and assumption agreement;
o outsourcing services agreement;
o value-added reseller agreement; and
o transition agreement.
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POST-SIGNING AND POST-CLOSING COVENANTS
Both parties have agreed to perform various obligations from and after
the signing or the closing of the sale transaction, including the following:
o DFH has agreed to deposit $125,000 cash at the closing into an
escrow account, with the cash to serve as a source of
indemnification for us until final resolution of DFH's assumed
obligations in connection with the Vital Communications
dispute, at which point the balance of the deposit, if any,
would be released to DFH;
o except as expressly permitted (and subject to payment of
termination fees if required), until the sale transaction is
completed or the sale agreement is terminated, we have agreed
not to, and not to authorize any of our or our affiliates'
respective officers, directors, investment bankers, attorneys
or accountants to, and not to permit any such person or entity
to, directly or indirectly encourage, solicit, or initiate
discussions or negotiations with, provide any information to,
or approve, endorse, recommend or execute a letter of intent
with any third party concerning most mergers, sales of assets,
sales of equity interests or similar transactions involving us
or REL;
o the sale agreement includes the following mutual 18-month
post-closing employee and customer non-solicitation
provisions:
o subject to limited exceptions, neither party nor any
of its subsidiaries may solicit any employee of the
other party or any of the other party's subsidiaries
to terminate his or her employment for employment by
such party or any of its subsidiaries;
o neither we nor any of our subsidiaries may solicit or
attempt to influence any of DFH's named customers to
purchase goods or services (as being provided by DFH)
from us or any of our subsidiaries; and
o neither DFH nor any of its subsidiaries may solicit
or attempt to influence any of our named customers to
purchase goods or services (as being provided by us)
from DFH or any of its subsidiaries;
o within six months following the closing of the merger
transaction, we must amend our certificate of incorporation to
delete the word "netGuru" from our corporate name and take all
actions reasonably necessary to change our trading symbol from
"NGRU";
o except as otherwise provided in a transition agreement,
neither we nor any of our affiliates may use the marks and
Internet domain names after the closing of the merger
agreement;
o we agreed to call and hold a meeting of our stockholders and
to solicit proxies in favor of the sale transaction in
accordance with the applicable Delaware law, at which meeting
our board of directors will recommend the approval of the sale
transaction (subject to limited exceptions) and our
stockholders will be asked to consider and to vote upon and
approve the sale transaction;
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o the DFH Holders, and certain affiliates, we and BPOMS have
entered into voting agreements and granted irrevocable proxies
to certain of our executive officers which provide that those
holders' shares will be voted in favor of the sale
transaction, the merger transaction and related matters;
o DFH has agreed to withhold from the purchase price and remit
to the relevant taxing authority any amount of taxes arising
from the sale transaction pursuant to the Indian Income Tax
Act; and
o except under limited circumstances, we must cause REL to
operate its business in the ordinary course and in the same
manner as operations have previously been conducted and use
commercially reasonable efforts to preserve REL's
organization, officers, employees, relationships and goodwill
until the closing of the sale transaction.
INDEMNIFICATION
We have agreed to indemnify, defend and hold harmless DFH and each of
its officers, directors, stockholders, employees, agents, representatives,
affiliates, successors, and assigns from and against and pay on behalf of or
reimburse such persons in respect of any loss they incur as a result of or
relating to:
o our breach of any representation or warranty in the sale
agreement or in any related closing certificate; and
o our breach of any covenant or agreement in the sale agreement.
DFH has agreed to indemnify, defend and hold harmless us and each of
our officers, directors, stockholders, employees, agents, representatives,
affiliates, successors, and assigns from and against and pay on behalf of or
reimburse such persons in respect of any loss they incur as a result of or
relating to:
o DFH's breach of any representation or warranty in the sale
agreement or any related closing certificate;
o DFH's breach of any covenant or agreement in the sale
agreement;
o DFH's failure to timely pay in full or fulfill all assumed
obligations;
o the operations of REL and its business;
o the use and ownership of the additional purchased assets after
the closing; and
o any additional taxes imposed upon us a result of any election
under Section 338 of the Internal Revenue Code made by DFH
under the sale agreement.
Article 8 of the sale agreement includes various limitations on the
indemnification rights set out in the sale agreement, including limitations on
the duration of the parties' rights to seek indemnification under the sale
agreement, a $2.0 million cap on the amount to be paid by either party under the
indemnification provisions, and a $25,000 deductible that must be exceeded
before the other party is obligated to make payments under the indemnification
provisions.
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TERMINATION
The sale agreement may be terminated in accordance with its terms at
any time prior to the closing of the sale transaction, whether before or after
the approval of the sale transaction by our stockholders at our annual meeting
of stockholders:
o by mutual written consent of us and DFH;
o by either us or DFH if:
o a court of competent jurisdiction or other
governmental entity shall have issued an order,
decree, ruling or other action restraining, enjoining
or otherwise prohibiting the transactions
contemplated by the sale agreement that has become
final and nonappealable, provided that the party
seeking to terminate used commercially reasonable
efforts to appeal the order, decree, ruling or other
action;
o the transactions contemplated by the sale agreement
have not been consummated on or before December 22,
2006 other than due to the failure of the party
seeking to terminate the sale agreement to perform
its obligations;
o the sale agreement and transactions contemplated by
the sale agreement have failed to receive required
approval of our stockholders; or
o the other party becomes unable to pay its liabilities
as they come due or seeks bankruptcy or similar
protection or fails to obtain dismissal of such a
proceeding within 60 days after it is instituted.
o by us if:
o DFH has breached any representation, warranty,
covenant or agreement and, as a result, certain
conditions to the closing would not be satisfied,
provided that if the breach is capable of being cured
by December 22, 2006 and DFH diligently proceeds to
cure the breach, then we may not terminate under this
provision unless DFH does not cured the breach by
that date;
o our board of directors of withdraws or modifies its
recommendation to our stockholders of the sale
transaction or we enter into a definitive agreement
providing for the implementation of another
acquisition proposal in accordance with Section 5.2
of the sale agreement; or
o there has been a material adverse effect on DFH's
ability to fulfill its obligations under the
transactions contemplated by sale agreement.
o by DFH if:
o we have breached any representation, warranty,
covenant or agreement and, as a result, certain
conditions to the closing would not be satisfied,
provided that if the breach is capable of being cured
by December 22, 2006 and we diligently proceed to
cure the breach, then DFH may not terminate under
this provision unless we do not cured the breach by
that date;
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o our board of directors of withdraws or modifies its
recommendation to our stockholders of the sale
transaction or we enter into a definitive agreement
providing for the implementation of another
acquisition proposal in accordance with the terms of
Section 5.2 of the sale agreement; or
o there has been a material adverse effect on REL or
the its business.
Upon termination of the sale agreement, all further obligations of the
parties under the sale agreement will terminate, except that the termination
fees and expenses provisions will continue to apply and no party will be
relieved of any obligations or other liabilities arising from any breach by that
party of any provisions of the sale agreement.
TERMINATION FEES
We have agreed to pay DFH a termination fee of $200,000 upon the
termination of the sale agreement by us or DFH if the merger agreement is
terminated and BPOMS pays us a termination fee in connection with the
termination of the merger agreement. However, if BPOMS pays us less than
$400,000 upon termination of the merger agreement (other than upon mutual
agreement of us and BPOMS), then we will pay DFH 50% of the lesser amount. If we
have not paid DFH a termination fee as described in the preceding sentence, then
we will be required to pay DFH a termination fee of $200,000 upon the
termination of the sale agreement:
o by DFH if we breach and fail to timely cure a representation,
warranty or covenant such that certain conditions to the
closing could not be satisfied;
o by DFH or us if our board of directors withdraws or modifies
adversely to DFH its approval or recommendation of the sale
agreement or we enter into a definitive agreement providing
for the implementation of another acquisition proposal in
accordance with the non-solicitation provisions of the sale
agreement; or
o by us other than as expressly permitted by the termination
provisions.
DFH has agreed to pay us a termination fee of $400,000 upon the
termination of the sale agreement:
o by us if DFH breaches and fails to timely cure a
representation, warranty or covenant such that certain
conditions to the closing could not be satisfied; or
o by DFH other than as expressly permitted by the termination
provisions.
EXPENSES
All fees and expenses incurred in connection with the sale agreement
and sale transaction are to be paid by the party incurring the expenses.
However, DFH has agreed to reimburse us for any taxes we may owe if DFH makes an
election under Section 338 of the Internal Revenue Code.
Our consummation of the transactions contemplated by the sale agreement
will involve various exit and disposal charges. We estimate cash outflows
related to the sale to be approximately $847,000. We anticipate the charges to
operations will be made up of approximately $326,000 in fees associated with the
sale and approximately $51,000 in additional legal and accounting fees.
Additional tax liabilities may be incurred at closing. We expect to incur
substantially all of the charges in our second and third quarters of fiscal
2007.
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ASSIGNMENTS
Either party may assign any or all of its rights and obligations under
the sale agreement to any wholly-owned subsidiary of that party. However, no
assignment may relieve a party of its obligations under the sale agreement if
the assignee does not perform those obligations.
AMENDMENTS AND WAIVERS
The parties may amend or modify the sale agreement in any respect in
writing. However, after we obtain stockholder approval, no amendment may be made
that would require further stockholder approval unless we obtain further
stockholder approval. The failure to enforce any provision of the sale agreement
will not operate as a waiver of the provision or any other provisions within the
sale agreement.
REASONS FOR THE SALE TRANSACTION
In reaching its decision to approve the sale agreement and the sale
transaction, our board of directors considered numerous potential benefits and
material factors pertaining to the merger and sale transactions, including those
discussed under the heading "Reasons for the Merger and Sale Transactions"
beginning on page 57.
USE OF PROCEEDS
Within ten business days following the consummation of the merger and
sale transactions, we plan to use the approximate $2.0 million cash proceeds
from the sale transaction and the $1.5 million cash to be supplied by BPOMS to
pay a $3.5 million cash dividend to our pre-merger stockholders of record.
OPERATIONS AND OWNERSHIP PRIOR TO AND FOLLOWING THE CLOSINGS
Our operations and ownership prior to and following the closings of the
proposed merger and sale transactions are described under the heading
"Operations and Ownership Prior to and Following the Closings" beginning on page
59.
OPINION OF OUR FINANCIAL ADVISOR
We engaged B. Riley to provide a fairness opinion to our board of
directors in connection with the sale and merger transactions. Information
regarding the fairness opinion is contained under the heading "Opinion of Our
Financial Advisor" beginning on page 79.
PRO FORMA FINANCIAL INFORMATION
APPENDIX D contains unaudited pro forma financial information derived
from our consolidated financial statements and the consolidated financial
statements of BPOMS, which have been combined and adjusted based on certain
assumptions to give effect to the merger and sale transactions.
The unaudited pro forma financial information presented in APPENDIX D
is for information purposes only. The information is not representative of our
future results of operations or financial position.
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HISTORICAL FINANCIAL INFORMATION
Our audited historical financial statements as of and for the years
ended March 31, 2006 and 2005 and our unaudited historical financial statements
as of and for the three months ended June 30, 2006 and 2005 are incorporated by
reference into this proxy statement and our unaudited historical financial
statements for the three months ended September 30, 2005 and December 31, 2005
are included in this proxy statement. See "Annual and Quarterly Reports"
beginning on page 112 and APPENDIX E to this proxy statement.
Historical unaudited financial statements of REL as of and for the
years ended March 31, 2006 and 2005 and unaudited financial statements the three
months ended June 30, 2006 and 2005 are included in APPENDIX E to this proxy
statement.
ACCOUNTING TREATMENT
We anticipate that upon completion of the sale transaction, we will
recognize a financial reporting gain equal to the net proceeds (the sum of the
purchase price received less the expenses relating to the sale transaction) less
the net book value of the stock of REL and assets sold and the fair value of the
liabilities retained.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
We anticipate that there will not be any material United States federal
income tax consequences to our stockholders as a result of the sale transaction.
However, stockholders who participate in the cash distribution we intend to pay
following the merger transaction may be taxed as a dividend on the distribution,
as described under the heading "Material United States Federal Income Tax
Consequences" beginning on page 99.
Tax matters are complicated and the tax consequences of the merger
transaction to any particular stockholder will depend on the facts of his or her
situation. Stockholders should consult with their own tax advisors for a full
understanding of the consequences of the merger to them, including tax return
reporting requirements, the applicability and effects of federal, state, local
and other tax laws and the effects of any proposed changes in the tax laws.
REGULATORY APPROVALS
There are no material United States federal or state regulatory
approvals required for completion of the sale transaction, other than the
approval of proposals 2, 3, 4, 5 and 6 by our stockholders under the corporate
law of the State of Delaware.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Some of our directors and executive officers have interests in the
merger, sale and related transactions that are different from, or in addition
to, those of our stockholders generally. Our board of directors was aware of
these interests when it approved the sale agreement. See "Interests of Our
Directors and Executive Officers" beginning on page 87.
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RISK FACTORS
Various risk factors relating to our consummation of, or failure to
consummate, the proposals described in the proxy statement, together with risk
factors relating to our current and proposed operations, are included under the
heading "Risk Factors" beginning on page 13.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of our common stock
entitled to vote on this proposal will constitute stockholder approval of this
proposal. We anticipate that the shares covered by the voting agreements will be
voted in favor of this proposal.
If stockholder approval of this proposal is not obtained, we will not
be in a position to consummate the sale transaction contemplated by sale
agreement or the merger transaction contemplated by the merger agreement, and we
will have to pay to DFH and BPOMS termination fees totaling up to $400,000 as
described in proposals 2 and 3.
THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
THAT STOCKHOLDERS A VOTE "FOR" APPROVAL OF THE SALE TRANSACTION DESCRIBED IN
THIS PROPOSAL, THE MERGER TRANSACTION DESCRIBED IN PROPOSAL 2, THE NAME CHANGE
DESCRIBED IN PROPOSAL 4, THE STOCK SPLIT DESCRIBED IN PROPOSAL 5, AND THE
INCREASE IN OUR AUTHORIZED SHARES OF PREFERRED STOCK DESCRIBED IN PROPOSAL 6 SO
THAT WE WILL BE IN A POSITION TO CONSUMMATE THE MERGER AND SALE TRANSACTIONS.
PLEASE BE AWARE THAT IN MAKING ITS RECOMMENDATION, OUR BOARD CONSIDERED
THE MERITS OF PROPOSALS 2 AND 3 IN THE AGGREGATE AND NOT SEPARATELY AND IS
THEREFORE NOT RECOMMENDING THAT YOU VOTE FOR EITHER PROPOSAL 2 OR PROPOSAL 3
WITHOUT VOTING FOR EACH OF PROPOSALS 2, 3, 4, 5 AND 6
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PROPOSAL 4
CORPORATE NAME CHANGE
THE PROPOSAL
The merger agreement described in proposal 2 requires that we change
our name to "BPO Management Services, Inc." at or following the effective time
of the merger with BPOMS. In addition, the sale agreement described in proposal
3 requires that we remove "netGuru" from our corporate name within six months
after the closing of the sale transaction.
Accordingly, our board of directors has approved an amendment to our
certificate of incorporation to change our name to "BPO Management Services,
Inc." at or following the effective time of the merger. Our proposed business to
be conducted after the consummation of the merger is described under the heading
"Post-Closing Beneficial Ownership and Operations" beginning on page 69. We
believe this new name would be appropriately descriptive of the business
proposed to be conducted by us if the merger and sale transactions are
consummated.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Some of our directors and executive officers have interests in the
merger, sale and related transactions that are different from, or in addition
to, those of our stockholders generally. Our board of directors was aware of
these interests when it approved the merger and sale agreements. See "Interests
of Our Directors and Executive Officers" beginning on page 87.
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RISK FACTORS
Various risk factors relating to our consummation of, or failure to
consummate, the proposals described in the proxy statement, together with risk
factors relating to our current and proposed operations, are included under the
heading "Risk Factors" beginning on page 13.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of our common stock
entitled to vote on this proposal will constitute stockholder approval of this
proposal. We anticipate that the shares covered by the voting agreements will be
voted in favor of this proposal.
The corporate name change would be effective upon filing with the
Secretary of State of Delaware an appropriate amendment to our certificate of
incorporation at or following the effective time of the merger. If this proposal
is not approved or the merger is not consummated, then we will not change our
corporate name to BPO Management Services, Inc.
If this proposal is not approved by our stockholders, then we will not
be in a position to consummate the merger and sale transactions, and we will
have to pay to BPOMS and DFH termination fees totaling up to $400,000 as
described in proposals 2 and 3.
THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
THAT STOCKHOLDERS A VOTE "FOR" APPROVAL OF THE CORPORATE NAME CHANGE DESCRIBED
IN THIS PROPOSAL, THE MERGER TRANSACTION DESCRIBED IN PROPOSAL 2, THE SALE
TRANSACTION DESCRIBED IN PROPOSAL 3, THE STOCK SPLIT DESCRIBED IN PROPOSAL 5,
AND THE INCREASE IN OUR AUTHORIZED SHARES OF PREFERRED STOCK DESCRIBED IN
PROPOSAL 6 SO THAT WE WILL BE IN A POSITION TO CONSUMMATE THE MERGER AND SALE
TRANSACTIONS.
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PROPOSAL 5
REVERSE STOCK SPLIT
THE PROPOSAL
Upon consummation of the merger transaction described in proposal 2, we
will be required to issue to BPOMS' stockholders shares of our common stock and
shares of three newly-created series of preferred stock in exchange for their
shares of BPOMS common stock and preferred stock. We also will be required to
assume BPOMS' obligations under its outstanding options and warrants to purchase
shares of BPOMS common stock.
Accordingly, the merger agreement requires that we create three series
of preferred stock and effect a reverse stock split prior to the consummation of
the merger. Under Delaware corporate law, stockholder approval is required for
the reverse stock split.
If the reverse stock split is approved and consummated as required by
the merger agreement, then we will need stockholder approval of proposal 6
relating to the proposed increase in our authorized number of shares of
preferred stock in order for our board of directors to create the three series
of preferred stock required by the merger agreement. The rights, preferences and
privileges of the three classes of preferred stock to be created are outlined in
APPENDIX G to this proxy statement and are subject to appropriate adjustments to
take into account the reverse stock split and other capitalization changes that
may occur prior to the closing of the merger transaction and are also subject to
any changes that may be required by applicable Nasdaq rules. The rights,
preferences and privileges include various conversion, liquidation, redemption,
voting, director election and board observation provisions, consistent with
those described under the heading "BPOMS' Capital Stock, Options and Warrants"
beginning on page 45.
We anticipate that the reverse stock split would be accomplished
through an amendment to our certificate of incorporation prior to, and
regardless of, the consummation of the merger transaction. The reverse stock
split would be within a range of 1-for-4 to 1-for-30, with any fractional shares
that would otherwise be issuable as a result of the split being rounded up to
the nearest share so as to avoid cashing out holders who may own less than the
number of shares needed to constitute one post-split share. Holders of
certificated shares will be required to exchange their certificates for
post-split certificates following the reverse stock split.
We intend that if approved by our stockholders, the reverse stock split
would occur regardless of whether the merger and sale transactions are
consummated, unless our board of directors determines the reverse stock split is
no longer necessary or in the best interests of our stockholders. We believe
that the reverse stock split may assist us in regaining compliance with Nasdaq's
quantitative listing standards that require, among other things, that listed
companies maintain a minimum closing bid price of $1.00. If we do not
successfully conduct a reverse split of our common stock or take other
appropriate actions that increase our stock price, or if we fail to meet other
Nasdaq requirements, we may be involuntarily delisted from The Nasdaq Capital
Market. See the risk factor entitled "We may be delisted from The Nasdaq Capital
Market . . ." beginning on page 14 for further information.
PRE-SPLIT AUTHORIZED AND OUTSTANDING COMMON STOCK AND DERIVATIVE SECURITIES
Our authorized capital stock currently consists of 150,000,000 shares
of common stock and 5,000,000 shares of preferred stock, $0.01 par value. As of
September 29, 2006, we had 19,235,041 shares of common stock issued and
outstanding, no shares of preferred stock issued and outstanding and 1,073,490
shares of common stock reserved for issuance under outstanding options and
warrants.
100
BPOMS' authorized capital stock currently consists of 15,000,000 shares
of common stock and 34,220,000 shares of preferred stock, par value $0.001 per
share, of which 2,220,000 shares are designated as Series A, 2,000,000 shares
are designated as Series B, and 30,000,000 shares are designated as Series C.
BPOMS plans to increase its authorized number of shares of common stock to
17,900,000 prior to the closing of the merger transaction. As of September 29,
2006, BPOMS had 9,925,000 shares of common stock issued and outstanding,
2,088,036 shares of Series A issued and outstanding, 2,000,000 shares of Series
B issued and outstanding, no shares of Series C issued and outstanding, and
2,762,999 shares of common stock reserved for issuance under outstanding options
and warrants.
POTENTIAL ANTI-TAKEOVER AND OTHER EFFECTS
The consummation of the reverse stock split will increase the number of
shares available for issuance in connection with the merger or otherwise. The
magnitude of this increase will depend upon the ratio (from 1-for-4 to 1-for-30)
selected by our board of directors for the reverse stock split, which in turn
will depend upon the ratio needed to facilitate compliance with applicable
Nasdaq initial or continued listing requirements. We anticipate that a ratio at
or near the 1-for-30 end of the range may be required in order to consummate the
merger transaction and obtain a Nasdaq listing for the combined company. If,
however, our stockholders approve the range provided in this proposal and the
closing of the merger transaction becomes unlikely, then we anticipate that to
the extent our board of directors deems a reverse stock split necessary to
maintain our Nasdaq listing, our board of directors may declare a reverse stock
split at a ratio that falls at or near the 1-for-4 end of the approved range.
The following table, which was prepared based on shares of our and
BPOMS' common stock issued and outstanding or underlying derivative securities
outstanding as of September 29, 2006, plus dividends paid by BPOMS on September
30, 2006 in shares of Series A, is intended to illustrate the potential effects
on the capitalization of our company or the combined company of reverse stock
splits consummated at each end of the possible range of split ratios, with and
without the effects of the issuance of securities of the combined company in the
merger. All figures are approximations and generally do not reflect rounding up
of fractional shares, which we anticipate will not be material. The figures
shown in the columns labeled "Combined Company After Merger . . ." assume that
the increase in our authorized number of preferred shares, which is the subject
of proposal 6, is approved by our stockholders and then implemented.
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
COMBINED
COMBINED COMPANY COMPANY AFTER
NETGURU OR COMBINED COMPANY NETGURU AFTER AFTER MERGER AND NETGURU AFTER MERGER AND
CAPITALIZATION BEFORE SPLIT 1-FOR-30 SPLIT 1-FOR-30 SPLIT 1-FOR-4 SPLIT 1-FOR-4 SPLIT
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
COMMON
Authorized 150,000,000 150,000,000 150,000,000 150,000,000 150,000,000
Outstanding 19,235,041 641,169 4,236,997 4,808,761 31,777,468
Available for Issuance 129,691,469 149,323,048 143,233,403 144,922,866 99,250,620
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
UNDESIGNATED PREFERRED
Available for Issuance 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
SERIES A
Authorized N/A N/A 804,306 N/A 6,032,295
Outstanding N/A N/A 768,178 N/A 5,761,277
Available for Issuance N/A N/A 36,128 N/A 271,018
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
101
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
COMBINED
COMBINED COMPANY COMPANY AFTER
NETGURU OR COMBINED COMPANY NETGURU AFTER AFTER MERGER AND NETGURU AFTER MERGER AND
CAPITALIZATION BEFORE SPLIT 1-FOR-30 SPLIT 1-FOR-30 SPLIT 1-FOR-4 SPLIT 1-FOR-4 SPLIT
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
SERIES B
Authorized N/A N/A 724,604 N/A 5,434,500
Outstanding N/A N/A 724,604 N/A 5,434,500
Available for Issuance N/A N/A 0 N/A 0
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
SERIES C
Authorized N/A N/A 10,869,000 N/A 81,517,500
Outstanding N/A N/A 0 N/A 0
Available for Issuance N/A N/A 10,869,000 N/A 81,517,500
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
OPTIONS AND WARRANTS
Outstanding 1,073,490 35,783 1,036,818 268,373 7,776,135
- ------------------------------ ------------- ------------------ ------------------ --------------- ----------------
The additional authorized shares of common stock that would become
available if this proposed reverse stock split amendment is approved by our
stockholders and filed with the Delaware Secretary of State may be issued from
time to time as our board of directors may determine, without prior notice to or
further action of our stockholders. The issuance of any or all of these
additional available shares of common stock from time to time would cause
dilution to the voting rights and earnings per share of our outstanding shares
of common stock. However, we believe that approval of the reverse stock split is
in the best interests of our company and our stockholders because the increase
would make additional shares of common stock available for issuance in the
merger, which cannot occur without the reverse stock split, and for additional
acquisitions or financings that could be used to enhance our business and
results of operations, such as those described in proposal 2 under the heading
"BPOMS Potential Financing" beginning on page 77.
Additional shares would also be available for present and future
benefit programs designed to attract, motivate and retain talented employees and
directors, and for other corporate purposes. Other than the issuances
contemplated in connection with the merger transaction, we have no current
plans, proposals or arrangements to issue shares of stock. Although we have no
definitive plans to utilize additional available shares to entrench present
management, we may, in the future, be able to use the additional available
shares of common stock as a defensive tactic against hostile takeover attempts
by issuing additional shares under a stockholder rights plan, in a private
placement or in another transaction that causes substantial dilution to a person
or group that attempts to acquire control of our company through a merger or
tender offer on terms or in a manner not approved by our board of directors,
whether or not our stockholders favorably view the change in control, merger or
tender offer. The availability of additional shares of common stock will have no
current anti-takeover effect, because no hostile takeover attempts are, to our
management's knowledge, currently threatened.
We currently have a number of provisions in our charter documents that
can, in some circumstances, operate as anti-takeover defenses. For example,
consistent with Delaware corporate law, we do not have cumulative voting
provisions in either our bylaws or certificate of incorporation. Under our
bylaws, special meetings of stockholders may be called only by our board of
directors, any person expressly authorized by our board of directors, or by
holders of shares entitled to cast not less than 10% of the votes at the
meeting. We also have advance notice provisions in our bylaws, as described
under the heading "Stockholder Proposals" at page 111, which restrict
stockholders' rights to present director nominations or stockholder proposals at
our stockholders' meetings.
102
As discussed under the heading "Employment Agreements, Termination of
Employment and Change-in-Control Arrangements" beginning on page 31, we are a
party to a retention agreement with Amrit K. Das, our Chairman, Chief Executive
Officer and President. The retention agreement provides for payments to Mr. Das
in the event of a change in control of our company. The sale agreement provides
that the retention agreement will terminate immediately prior to the
consummation of the sale transaction, and DFH will assume any obligations we may
have under the retention agreement.
Our board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. If proposal 6 is approved, then we will have the
right to amend our certificate of incorporation to increase the authorized
number of shares of preferred stock as described in that proposal. The rights of
the holders of our common stock are subordinate to and may be adversely affected
by the rights of the holders of any preferred stock that we may issue in the
future. The issuance of preferred stock, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, which would delay, defer or prevent a change in
control of our company. Furthermore, preferred stock may have other rights,
including economic and voting rights senior to common stock.
For example, we anticipate that to the extent permitted by applicable
Nasdaq rules, the holders of Series A that would be issued if the merger is
consummated following stockholder approval of proposals 2, 3, 4, 5 and 6 would
have the right to elect two members of the combined company's board of
directors. This right would give Messrs. Dolan and Cortens, who are the owners
of the outstanding Series A of BPOMS, the right to keep themselves or their
appointees on the board and otherwise render it more difficult to remove
incumbent management following the merger, even if removal would be beneficial
to the combined company's stockholders generally.
In addition, we anticipate that the holders of Series A would have the
right to control or substantially influence the outcome of various other
matters. For example, we anticipate that shares of Series A would vote together
with shares of common stock on an as-converted basis on matters submitted to a
vote of stockholders generally, and that the affirmative vote of a majority of
the outstanding shares of Series A would be required prior to:
o the sale, lease or other transfer of all or substantially all
of the combined company's assets;
o the merger or consolidation of the combined company into or
with any other corporation that results in the transfer of
more than 50% of the voting power of the combined company; or
o the acquisition in any manner or form, including through the
issuance of debt and/or stock and/or payment of cash, of all
or substantially all of the assets or business or capital
stock or ownership interest of another entity or business.
Section 203 of the Delaware corporate law prohibits us from engaging in
business combinations with interested stockholders, as defined by statute. These
provisions may have the effect of delaying or preventing a change in control of
our company without action by our stockholders, even if a change in control
would be beneficial to our stockholders.
103
Our stockholders do not possess preemptive rights that would entitle
such persons, as a matter of right, to subscribe for the purchase of any shares,
rights, warrants or other securities or obligations convertible into, or
exchangeable for, securities of our company. We do not presently have plans to
propose the adoption of other anti-takeover measures in future proxy
solicitations.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
The ratio to be used for the reverse stock split will depend upon
whether or not the merger and sale transactions are consummated. Some of our
directors and executive officers have interests in the merger, sale and related
transactions that are different from, or in addition to, those of our
stockholders generally. Our board of directors was aware of these interests when
it approved the merger and sale agreements. See "Interests of Our Directors and
Executive Officers" beginning on page 87.
RISK FACTORS
Various risk factors relating to our consummation of, or failure to
consummate, the proposals described in the proxy statement, together with risk
factors relating to our current and proposed operations, are included under the
heading "Risk Factors" beginning on page 13.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of our common stock
entitled to vote on this proposal will constitute stockholder approval of this
proposal. We anticipate that the shares covered by the voting agreements will be
voted in favor of this proposal. If stockholder approval of this proposal is not
obtained, then we will not be in a position to consummate the transactions
contemplated by the merger agreement and the sale agreement, and we will have to
pay to BPOMS and DFH termination fees totaling up to $400,000 as described in
proposals 2 and 3.
THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
A VOTE "FOR" APPROVAL OF THE REVERSE STOCK SPLIT DESCRIBED IN THIS PROPOSAL.
104
PROPOSAL 6
INCREASE IN AUTHORIZED NUMBER OF PREFERRED SHARES
THE PROPOSAL
Upon consummation of the merger transaction described in proposal 2, we
will be required to issue to BPOMS' stockholders shares of our common stock and
shares of three newly-created series of preferred stock in exchange for their
shares of BPOMS common stock and preferred stock. Accordingly, the merger
agreement requires that we create three series of preferred stock and effect a
reverse stock split prior to the consummation of the merger. Under Delaware
corporate law, stockholder approval is required for the reverse stock split. The
reverse stock split is the subject of proposal 5 beginning on page 103.
Even if the reverse stock split is approved and consummated as required
by the merger agreement, under Delaware law we will need stockholder approval of
this proposal 6 in order for our board of directors to have sufficient
authorized capital to create the three series of preferred stock required by the
merger agreement. The rights, preferences and privileges of the three classes of
preferred stock to be created are outlined in APPENDIX G to this proxy statement
and are subject to appropriate adjustments to take into account the reverse
stock split and other capitalization changes that may occur prior to the closing
of the merger transaction and are also subject to any changes that may be
required by applicable Nasdaq rules. The rights, preferences and privileges
include various conversion, liquidation, redemption, voting, director election
and board observation provisions, consistent with those described under the
heading "BPOMS' Capital Stock, Options and Warrants" beginning on page 45.
AUTHORIZED AND OUTSTANDING COMMON STOCK AND DERIVATIVE SECURITIES
Our authorized capital stock currently consists of 150,000,000 shares
of common stock and 5,000,000 shares of preferred stock, $0.01 par value. As of
September 29, 2006, we had 19,235,041 shares of common stock issued and
outstanding, no shares of preferred stock issued and outstanding and 1,073,490
shares of common stock reserved for issuance under outstanding options and
warrants.
BPOMS' authorized capital stock currently consists of 15,000,000 shares
of common stock and 34,220,000 shares of preferred stock, par value $0.001 per
share, of which 2,220,000 shares are designated as Series A, 2,000,000 shares
are designated as Series B, and 30,000,000 shares are designated as Series C.
BPOMS plans to increase its authorized number of shares of common stock to
17,900,000 prior to the closing of the merger transaction. As of September 29,
2006, BPOMS had 9,925,000 shares of common stock issued and outstanding,
2,088,036 shares of Series A issued and outstanding, 2,000,000 shares of Series
B issued and outstanding, no shares of Series C issued and outstanding, and
2,762,999 shares of common stock reserved for issuance under outstanding options
and warrants.
If this proposal is approved, then we will be authorized to amend our
certificate of incorporation to increase the authorized number of preferred
shares from 5,000,000 to a number equal to 5,000,000 plus the number of
preferred shares needed to accommodate the creation of the three series of
preferred stock for which the BPOMS preferred stock would be exchanged in the
merger transaction. We anticipate that the number of preferred shares needed to
cover the three new series of preferred shares would range from approximately
12,397,910 to 92,984,295, depending upon the ratio used to effect the reverse
stock split. However, we do not intend to file an amendment to increase our
authorized number of preferred shares unless the merger transaction is approved
and we anticipate that it will be consummated. For further information regarding
the number of preferred shares needed to cover the three new series of preferred
shares, see proposal 5 under the heading "Potential Anti-Takeover and Other
Effects" beginning on page 104.
105
POTENTIAL ANTI-TAKEOVER AND OTHER EFFECTS
The additional authorized shares of preferred stock that would become
available if this proposal is approved by our stockholders and we file an
appropriate certificate of amendment with the Delaware Secretary of State may be
issued from time to time as our board of directors may determine, without prior
notice to or further action of our common stockholders. The issuance of any or
all of these additional available shares of preferred stock from time to time
could cause dilution to the voting rights and earnings per share of our
outstanding shares of common stock. However, we believe that approval of the
increase in the authorized number of preferred shares is in the best interests
of our company and our stockholders because the increase would make a sufficient
number of preferred shares available for issuance in the merger and would
provide 5,000,000 shares of undesignated preferred that we may use for
additional acquisitions or financings that could enhance the combined company's
business and results of operations, such as those described in proposal 2 under
the heading "BPOMS Potential Financing" beginning on page 77.
The shares of preferred stock may operate as anti-takeover defenses. In
addition, we currently have a number of other provisions in our charter
documents that can, in some circumstances, operate as anti-takeover defenses.
See proposal 5 under the heading "Potential Anti-Takeover and Other Effects"
beginning at page 104 for further information regarding the potential
anti-takeover and other effects of the proposed reverse stock split and increase
in authorized number of preferred shares.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Some of our directors and executive officers have interests in the
merger, sale and related transactions that are different from, or in addition
to, those of our stockholders generally. Our board of directors was aware of
these interests when it approved the merger and sale agreements. See "Interests
of Our Directors and Executive Officers" beginning on page 87.
106
RISK FACTORS
Various risk factors relating to our consummation of, or failure to
consummate, the proposals described in the proxy statement, together with risk
factors relating to our current and proposed operations, are included under the
heading "Risk Factors" beginning on page 13.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of our common stock
entitled to vote on this proposal will constitute stockholder approval of this
proposal. We anticipate that the shares covered by the voting agreements will be
voted in favor of this proposal. If stockholder approval of this proposal is not
obtained, then we will not be in a position to consummate the transactions
contemplated by merger agreement and the sale agreement, and we will have to pay
to BPOMS and DFH termination fees totaling up to $400,000 as described in
proposals 2 and 3.
THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
A VOTE "FOR" APPROVAL OF THE INCREASE IN OUR AUTHORIZED NUMBER OF SHARES OF
PREFERRED STOCK SPLIT DESCRIBED IN THIS PROPOSAL.
THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
THAT STOCKHOLDERS A VOTE "FOR" APPROVAL OF THE CORPORATE NAME CHANGE DESCRIBED
IN THIS PROPOSAL, THE MERGER TRANSACTION DESCRIBED IN PROPOSAL 2, THE SALE
TRANSACTION DESCRIBED IN PROPOSAL 3, THE STOCK SPLIT DESCRIBED IN PROPOSAL 5,
AND THE INCREASE IN OUR AUTHORIZED SHARES OF PREFERRED STOCK DESCRIBED IN
PROPOSAL 6 SO THAT WE WILL BE IN A POSITION TO CONSUMMATE THE MERGER AND SALE
TRANSACTIONS. 107
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, proposals by
stockholders that are intended for inclusion in our proxy statement and proxy
card and to be presented at our next annual meeting must be received by us no
later than 120 calendar days in advance of the one-year anniversary of the date
of this proxy statement in order to be considered for inclusion in our proxy
materials relating to the next annual meeting. Such proposals must be addressed
to our Secretary at our corporate headquarters and may be included in next
year's annual meeting proxy materials if they comply with rules and regulations
of the Commission governing stockholder proposals.
Proposals by stockholders that are not intended for inclusion in our
proxy materials may be made by any stockholder who timely and completely
complies with the notice procedures contained in our bylaws, was a stockholder
of record at the time of giving of notice and is entitled to vote at the
meeting, so long as the proposal is a proper matter for stockholder action and
the stockholder otherwise complies with the provisions of our bylaws and
applicable law. However, stockholder nominations of persons for election to our
board of directors at a special meeting may only be made if our board of
directors has determined that directors are to be elected at the special
meeting.
To be timely, a stockholder's notice regarding a proposal not intended
for inclusion in our proxy materials must be delivered to our Secretary at our
corporate headquarters not later than:
o In the case of an annual meeting, the close of business on the
45th day before the first anniversary of the date on which we
first mailed our proxy materials for the prior year's annual
meeting of stockholders. However, if the date of the current
year's meeting has changed more than 30 days from the date of
the prior year's meeting, then in order for the stockholder's
notice to be timely it must be delivered to our Secretary a
reasonable time before we mail our proxy materials for the
current year's meeting. For purposes of the preceding
sentence, a "reasonable time" coincides with any adjusted
deadline we publicly announce.
o In the case of a special meeting, the close of business on the
7th day following the day on which we first publicly announce
the date of the special meeting.
Except as otherwise provided by law, if the chairperson of the meeting
determines that a nomination or any business proposed to be brought before a
meeting was not made or proposed in accordance with the procedures set forth in
our bylaws and summarized above, the chairperson may prohibit the nomination or
proposal from being presented at the meeting.
108
ANNUAL AND QUARTERLY REPORTS
A copy of our annual report to the Commission on Form 10-KSB for the
year ended March 31, 2006 ("2006 Annual Report") and a copy of our quarterly
report to the Commission on Form 10-QSB for the quarter ended June 30, 2006
("June 2006 Quarterly Report") are being distributed to persons from whom the
accompanying proxy is solicited. The following information is incorporated by
reference into this proxy statement from the 2006 Annual Report and June 2006
Quarter Report:
o The business and facilities disclosures contained in Item 1 of
Part I of our 2006 Annual Report;
o The legal proceedings disclosure contained in Item 3 of Part I
of our 2006 Annual Report and Item 1 of Part II of our June
2006 Quarterly Report;
o The disclosures regarding market price of and dividends on our
common equity and related stockholder matters contained in
Item 5 of Part II of our 2006 Annual Report;
o The risk factors contained in Item 6 of Part II of our 2006
Annual Report;
o The audited and unaudited financial statements contained in
Item 7 of Part II of our 2006 Annual Report and Item 1 of Part
I of our June 2006 Quarterly Report; and
o The management's discussion and analysis or plan of operation
disclosures contained in Item 6 of Part II of our 2006 Annual
Report and Item 2 of Part I of our June 2006 Quarterly Report.
Any statement in a document incorporated by reference into this proxy
statement is deemed to be modified or superseded to the extent that a statement
contained in this proxy statement, or in any other document we subsequently file
with the Commission, modifies or supersedes that statement. If any statement is
modified or superseded, it does not constitute a part of this proxy statement,
except as modified or superseded.
Notwithstanding the above, information that is "furnished to" the
Commission shall not be deemed "filed with" the Commission and shall not be
deemed incorporated by reference into this proxy statement.
109
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act.
In accordance with that act, we file reports, proxy statements and other
information with the Commission. These materials can be inspected and copied at
the Public Reference Room maintained by the Commission at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Commission at http://www.sec.gov.
An additional copy (without exhibits) of our annual report on Form
10-KSB for the year ended March 31, 2006 or our quarterly report on Form 10-QSB
for the quarter ended June 30, 2006 will be furnished by first class mail,
without charge to any person from whom the accompanying proxy is solicited upon
written or oral request to Investor Relations Department, netGuru, Inc., 22700
Savi Ranch Parkway, Yorba Linda, California 92887, telephone (714) 974-2500. If
exhibit copies are requested, a copying charge of $0.20 per page will be made.
OTHER MATTERS
Our board of directors knows of no other matters to be brought before
the annual meeting. However, if other matters should properly come before the
annual meeting, it is the intention of each of the persons named in the proxy to
vote such proxy in accordance with his judgment on such matters.
STOCKHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors
/s/ Amrit K. Das
Amrit K. Das
Chief Executive Officer
Yorba Linda, California
November 2, 2006
110
APPENDIX A
EXECUTION COPY
________________________________________________________________________________
AGREEMENT AND PLAN OF MERGER
AMONG
BPO MANAGEMENT SERVICES, INC.,
NETGURU, INC.
AND
BPO ACQUISITION CORP.
DATED AS OF AUGUST 29, 2006
________________________________________________________________________________
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Table of Contents
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Page
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RECITALS .........................................................................................................1
AGREEMENT.........................................................................................................1
ARTICLE 1 DESCRIPTION OF THE TRANSACTION..........................................................................2
Section 1.1 The NGRU Divestiture; Reverse Split....................................................2
Section 1.2 Ngru Dividend..........................................................................2
Section 1.3 The Merger.............................................................................3
Section 1.4 Effects of the Merger..................................................................3
Section 1.5 The Closing............................................................................3
Section 1.6 Effective Time.........................................................................3
Section 1.7 Certificate of Incorporation; By-laws..................................................3
Section 1.8 Directors and Officers.................................................................4
Section 1.9 Tax Consequences.......................................................................4
ARTICLE 2 CONVERSION OF SHARES....................................................................................4
Section 2.1 Conversion of Merger Sub Shares........................................................4
Section 2.2 Conversion of BPOMS Shares.............................................................4
Section 2.3 Conversion of BPOMS Preferred Stock...................................................5
Section 2.4 Conversion of BPOMS Employee Stock Options and Warrants...............................5
Section 2.5 Adjustments...........................................................................6
Section 2.6 Dissenting BPOMS Stockholders.........................................................6
ARTICLE 3 EXCHANGE OF SHARES.....................................................................................7
Section 3.1 Exchange of Certificates..............................................................7
Section 3.2 Exchange of Preferred Stock Certificates..............................................8
Section 3.3 Withholding Rights....................................................................9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BPOMS................................................................9
Section 4.1 Organization; Good Standing; Authority; Compliance With Law...........................9
Section 4.2 Authorization, Validity and Effect of Agreements......................................10
Section 4.3 Capitalization........................................................................11
Section 4.4 Subsidiaries..........................................................................12
Section 4.5 Other Interests.......................................................................12
Section 4.6 No Violation..........................................................................12
Section 4.7 Auditors..............................................................................13
Section 4.8 Financial Statements..................................................................13
Section 4.9 Litigation............................................................................13
Section 4.10 Absence of Certain Changes............................................................13
Section 4.11 Taxes. .............................................................................15
Section 4.12 Books and Records.....................................................................16
Section 4.13 Properties............................................................................16
Section 4.14 Environmental Matters.................................................................17
A-1-ii
Table of Contents
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(Continued)
Page
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Section 4.15 Brokers...............................................................................17
Section 4.16 [Reserved]............................................................................18
Section 4.17 Related Party Transactions............................................................18
Section 4.18 Contracts and Commitments.............................................................18
Section 4.19 Employee Matters and Benefit Plans....................................................19
Section 4.20 Intellectual Property.................................................................21
Section 4.21 Antitakeover Plan.....................................................................25
Section 4.22 Shareholder Vote Required.............................................................25
Section 4.23 Undisclosed Liabilities...............................................................25
Section 4.24 Insurance.............................................................................25
Section 4.25 Tax Treatment.........................................................................25
Section 4.26 Relationships With Suppliers, Licensors and Customers.................................25
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF NGRU AND MERGER SUB..................................................26
Section 5.1 Organization; Good Standing; Authority; Compliance With Law...........................26
Section 5.2 Authorization, Validity and Effect of Agreements......................................27
Section 5.3 Capitalization........................................................................27
Section 5.4 No Violation..........................................................................28
Section 5.5 Tax Treatment.........................................................................28
Section 5.6 [Reserved]............................................................................28
Section 5.7 [Reserved]............................................................................28
Section 5.8 Litigation............................................................................28
Section 5.9 Absence of Certain Changes............................................................29
Section 5.10 Ownership of Bpoms Shares.............................................................30
Section 5.11 Taxes.................................................................................30
Section 5.12 Books and Records.....................................................................31
Section 5.13 Properties............................................................................32
Section 5.14 Environmental Matters.................................................................32
Section 5.15 No Brokers............................................................................32
Section 5.16 Related Party Transactions............................................................33
Section 5.17 Employee Matters and Benefit Plans....................................................33
Section 5.18 Intellectual Property.................................................................35
Section 5.19 Antitakeover Matters..................................................................37
Section 5.20 Vote Required.........................................................................38
Section 5.21 Undisclosed Liabilities...............................................................38
Section 5.22 Insurance.............................................................................38
Section 5.23 Relationships With Suppliers, Licensors and Customers.................................38
Section 5.24 Continuity of Business Enterprise.....................................................38
Section 5.25 Sec Filings; Financial Statements.....................................................38
ARTICLE 6 COVENANTS AND OTHER AGREEMENTS.........................................................................40
Section 6.1 Conduct of Businesses.................................................................40
Section 6.2 Meeting of Stockholders...............................................................43
Section 6.3 Approvals; Other Action...............................................................45
Section 6.4 Access to Information; Due Diligence..................................................45
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Table of Contents
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(Continued)
Page
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Section 6.5 Publicity.............................................................................45
Section 6.6 Listing of Ngru Common Stock..........................................................46
Section 6.7 Further Action........................................................................46
Section 6.8 Tax Treatment.........................................................................46
Section 6.9 No Solicitation.......................................................................46
Section 6.10 Notice of Certain Events..............................................................48
Section 6.11 Capital Surplus.......................................................................49
Section 6.12 Directors and Officers................................................................49
Section 6.13 Indemnification and Insurance.........................................................49
Section 6.14 Shelf Registration....................................................................50
ARTICLE 7 CONDITIONS.............................................................................................52
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger............................52
Section 7.2 Conditions to Obligations of BPOMS to Effect the Merger...............................52
Section 7.3 Conditions to Obligations of NGRU and Merger Sub to Effect the Merger.................53
ARTICLE 8 TERMINATION............................................................................................54
Section 8.1 Termination...........................................................................54
Section 8.2 Effect of Termination.................................................................56
Section 8.3 Expenses and Termination Fees.........................................................56
Section 8.4 Extension; Waiver.....................................................................57
ARTICLE 9 GENERAL PROVISIONS.....................................................................................57
Section 9.1 Nonsurvival of Representations, Warranties and Agreements.............................57
Section 9.2 Notices...............................................................................57
Section 9.3 Assignment; Binding Effect; Benefit...................................................58
Section 9.4 Entire Agreement......................................................................58
Section 9.5 Confidentiality.......................................................................58
Section 9.6 Amendment.............................................................................58
Section 9.7 Governing Law; Attorneys' Fees........................................................59
Section 9.8 Counterparts..........................................................................59
Section 9.9 Headings..............................................................................59
Section 9.10 Waivers...............................................................................59
Section 9.11 Incorporation.........................................................................59
Section 9.12 Severability..........................................................................60
Section 9.13 Interpretation and Certain Definitions................................................60
Section 9.14 Specific Performance..................................................................60
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made and
entered into as of August 29, 2006, among BPO Management Services, Inc., a
Delaware corporation ("BPOMS"), netGuru, Inc., a Delaware corporation ("NGRU"),
and BPO Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
NGRU ("MERGER Sub"). Each of BPOMS, NGRU and Merger Sub are sometimes referred
to herein as a "PARTY" or, collectively, the "PARTIES."
RECITALS
A. BPOMS, NGRU and Merger Sub intend to effect a merger of Merger Sub
into BPOMS (the "Merger") in accordance with this Agreement and the Delaware
General Corporation Law, as a result of which Merger Sub will cease to exist,
and BPOMS will become a wholly owned subsidiary of NGRU.
B. BPOMS, NGRU and Merger Sub intend that the Merger qualify as a
tax-free reorganization within the meaning of Section 368(a) of the Code.
C. The Board of Directors of NGRU, after consideration of the fairness
opinion rendered by its investment bankers and other relevant factors, (i) has
determined that the proposed Merger, NGRU Divestiture and NGRU Dividend together
would secure the best value reasonably available to the stockholders of NGRU in
the short-term and therefore are in the best interests of NGRU and its
stockholders, (ii) has approved this Agreement, the Merger, the issuance of
shares of NGRU Common Stock to the stockholders of BPOMS pursuant to the terms
of this Agreement, the change of control of NGRU, and the other actions
contemplated by this Agreement and (iii) has determined to recommend that the
stockholders of NGRU vote to approve the issuance of shares of NGRU Common Stock
to the stockholders of BPOMS pursuant to the terms of this Agreement, the change
of control of NGRU and such other actions as contemplated by this Agreement.
D. The Board of Directors of Merger Sub (i) has determined that the
Merger is fair to, and in the best interests of, Merger Sub and its sole
stockholder, (ii) has approved this Agreement, the Merger, and the other actions
contemplated by this Agreement and (iii) has determined to recommend that the
stockholder of Merger Sub vote to approve the Merger and such other actions as
contemplated by this Agreement.
E. The Board of Directors of BPOMS and the stockholders of BPOMS have
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement.
F. As a condition and inducement to BPOMS entering into this Agreement
and incurring the obligations set forth herein, concurrently with the execution
and delivery of this Agreement, (i) NGRU is entering into a purchase agreement
(the "NGRU DIVESTITURE AGREEMENT") with Das Family Holdings with respect to the
NGRU Divestiture (defined herein) and (ii) the parties are entering into a
voting agreement with certain NGRU stockholders with respect to the voting of
their shares in connection with the transactions contemplated by this Agreement.
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AGREEMENT
In consideration of the foregoing, and of the representations,
warranties, covenants and agreements contained herein, the parties hereto hereby
agree as follows:
ARTICLE 1
DESCRIPTION OF THE TRANSACTION
Section 1.1 THE NGRU DIVESTITURE; REVERSE SPLIT.
At the Effective Time, NGRU shall sell one of its subsidiaries,
Research Engineers Ltd. (the "DIVESTED SUBSIDIARY"), to Das Family Holdings, an
entity controlled by Mr. Amrit Das and his family (the "NGRU DIVESTITURE"), for
aggregate net proceeds of no less than $2.0 million ("DIVESTITURE PROCEEDS").
Prior to the Closing Date, NGRU shall effect a reverse stock split of shares of
NGRU capital stock in a range to be determined by the Board of Directors of NGRU
(the "REVERSE SPLIT").
Section 1.2 NGRU DIVIDEND; PRE-CLOSING NGRU BALANCE SHEET.
(a) Prior to the Effective Time, NGRU shall declare a special
dividend in respect of the NGRU Common Stock to holders of record of
NGRU Common Stock immediately prior to the Effective Time in an
aggregate amount of $3,500,000 (the "NGRU DIVIDEND"). The NGRU Dividend
shall be paid out of the Divestiture Proceeds and the BPOMS Available
Cash (as defined in Section 6.11) and in accordance with applicable
provisions of the Delaware General Corporation Law ("DGCL"). Prior to
the Effective Time, the NGRU Board of Directors shall take all actions
necessary to approve the declaration and payment of the NGRU Dividend
and NGRU shall, at the Closing, deliver a certificate to BPOMS executed
by the Secretary of NGRU to the effect that the NGRU Dividend has been
approved by the NGRU Board of Directors. NGRU shall use commercially
reasonable efforts to pay the NGRU Dividend on the tenth (10th)
business day after the Closing Date and shall pay the NGRU Dividend in
no event later than ten (10) business days after the Closing Date
("DIVIDEND PAYABLE DATE").
(b) On the calendar day preceding the Closing Date (the
"BALANCE SHEET DATE")), the Parties shall complete preparation of: (1)
a pro forma consolidated balance sheet of NGRU and its Subsidiaries
("PRE-CLOSING NGRU BALANCE SHEET") and (2) a pro forma consolidated
balance sheet of NGRU and its Subsidiaries other than the Divested
Subsidiary ("U.S. BALANCE SHEET"). Each of the two balance sheets shall
be based upon financial information as of the close of business on the
fifth (5th) business day preceding the Balance Sheet Date and shall be
prepared in accordance with United States generally accepted accounting
principles ("GAAP"). The Parties shall cooperate with one another in
the timely preparation of the balance sheets and shall make available
to the other such personnel, work papers and other documents and
financial information relating to the balance sheets as the other may
request. Simultaneous with completion of the preparation of the balance
sheets, the Parties shall make the following calculations:
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(i) "U.S. RESERVED CASH" shall be calculated by
subtracting (x) the deferred gain on sale-leaseback, all
liabilities that are included in the calculation of U.S.
Working Capital and 80% of deferred maintenance revenues from
(y) the sum of the total amount of liabilities on the U.S.
Balance Sheet plus any Withheld Taxes (as defined in the NGRU
Divestiture Agreement) to be withheld by Das Family Holdings
in accordance with Section 2.7 of the NGRU Divestiture
Agreement, and then adding (z) the U.S. Working Capital
Shortfall, if any.
(ii) "U.S. WORKING CAPITAL" shall be calculated from
the U.S. Balance Sheet by subtracting (x) the sum of accounts
payable, accrued expenses, 20% of deferred maintenance
revenues, and income taxes payable from (y) the sum of
accounts receivable, prepaid expenses, deposits and deferred
income taxes.
(iii) "U.S. WORKING CAPITAL SHORTFALL" shall be the
amount by which U.S. Working Capital is less than $0,
reflected as a positive number.
(c) Any cash and cash equivalents on the Pre-Closing NGRU
Balance Sheet in excess of the amount calculated as U.S. Reserved Cash
shall be distributed at the Closing to the Divested Subsidiary via an
adjusting wire transfer from NGRU to the Divested Subsidiary, it being
understood that the Divestiture Proceeds shall not be distributed at
the Closing to the Divested Subsidiary but rather shall be held by NGRU
to applied to the payment of the NGRU Dividend.
Section 1.3 THE MERGER.
Upon the terms and subject to the conditions contained in this
Agreement, at the Effective Time (as defined in Section 1.6 hereof), Merger Sub
shall be merged with and into BPOMS, and the separate corporate existence of
Merger Sub shall thereupon cease (the "MERGER"). BPOMS shall continue as the
surviving corporation in the Merger (the "SURVIVING CORPORATION").
Section 1.4 EFFECTS OF THE MERGER.
The Merger shall have the effects provided in this Agreement and the
applicable provisions of the DGCL. As a result of the Merger, BPOMS will become
a wholly owned subsidiary of NGRU.
Section 1.5 THE CLOSING.
On the terms and subject to the conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of Rutan &
Tucker, LLP, 611 Anton Boulevard, Suite 1400, Costa Mesa, California 92626, at
10:00 a.m., local time, on (a) the third (3rd) business day immediately
following the day on which the last of the conditions set forth in Article 7
shall be fulfilled or waived in accordance herewith, or (b) at such other time,
date or place as BPOMS and NGRU may otherwise agree in writing. Unless the
parties shall otherwise agree and subject to Article 8, the parties shall use
their reasonable best efforts to cause the Closing to occur as soon as
practicable after the NGRU Meeting (as defined in Section 6.2). The date on
which the Closing occurs is hereinafter referred to as the "CLOSING DATE."
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Section 1.6 EFFECTIVE TIME.
If all the conditions to the Merger set forth in Article 7 shall have
been fulfilled or waived in accordance herewith, and this Agreement shall not
have been terminated as provided in Article 8, the parties hereto shall cause a
Certificate of Merger satisfying the requirements of the DGCL to be properly
executed, verified and delivered for filing in accordance with the DGCL on the
Closing Date. The Merger shall become effective upon the acceptance for record
of the Certificate of Merger by the Secretary of State of the State of Delaware
in accordance with the DGCL (but not earlier than the Closing Date) or at such
later time that the parties hereto shall have agreed upon and designated in such
filing in accordance with applicable law as the effective time of the Merger
(the "EFFECTIVE TIME").
Section 1.7 CERTIFICATE OF INCORPORATION; BY-LAWS.
At the Effective Time, unless otherwise determined by BPOMS and NGRU
prior to the Effective Time:
(a) The Certificate of Incorporation of the Surviving
Corporation shall be the Certificate of Incorporation of Merger Sub
immediately prior to the Effective Time, until thereafter amended as
provided by the DGCL and such Certificate of Incorporation.
(b) The Certificate of Incorporation of NGRU shall be the
Certificate of Incorporation of NGRU immediately prior to the Effective
Time, until thereafter amended as provided by the DGCL and such
Certificate of Incorporation; provided, however, that at the Effective
Time, NGRU shall file an amendment to its Certificate of Incorporation
(the "CHARTER AMENDMENT") to (i) change the name of NGRU to "BPO
MANAGEMENT SERVICES, INC.", and (ii) create three separate series of
Preferred Stock designated as Series A Convertible Preferred Stock (the
"NGRU SERIES A PREFERRED STOCK"), Series B Preferred Convertible
Preferred Stock (the "NGRU SERIES B PREFERRED STOCK") and Series C
Preferred Stock (the "NGRU SERIES C PREFERRED STOCK") having the
rights, powers and privileges set forth in EXHIBIT A hereto (to be
adjusted in accordance with Section 2.5).
(c) The By-laws of Merger Sub in effect immediately prior to
the Effective Time shall be the By-laws of the Surviving Corporation.
Section 1.8 DIRECTORS AND OFFICERS.
(a) The directors of BPOMS immediately prior to the Effective
Time shall initially be the directors of the Surviving Corporation as
of the Effective Time, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation,
until their respective successors are duly elected or appointed and
qualified.
(b) The officers of BPOMS immediately prior to the Effective
Time shall initially be the officers of the Surviving Corporation as of
the Effective Time, until their respective successors are duly elected
or appointed and qualified.
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Section 1.9 TAX CONSEQUENCES.
For federal income tax purposes, the Merger is intended to constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "CODE"), and the parties shall report the Merger
consistent therewith. The parties to this Agreement hereby adopt this Agreement
as a "plan of reorganization" within the meaning of Section 1.368-2(g) and
1.368-3(a) of the United States Treasury Regulations.
ARTICLE 2
CONVERSION OF SHARES
Section 2.1 CONVERSION OF MERGER SUB SHARES.
At the Effective Time, by virtue of the Merger and without any action
on the part of NGRU, Merger Sub, BPOMS or the holders thereof, each share of
common stock, $0.01 par value per share, of Merger Sub that is issued and
outstanding immediately prior to the Effective Time shall be converted into one
share of common stock, $0.01 par value per share, of the Surviving Corporation.
Section 2.2 CONVERSION OF BPOMS SHARES.
(a) At the Effective Time, by virtue of the Merger and without
any action on the part of NGRU, Merger Sub, BPOMS or the holders
thereof, each issued and outstanding share of common stock, par value
$0.001 per share (the "BPOMS COMMON STOCK"), of BPOMS (each a "BPOMS
SHARE" and collectively, the "BPOMS SHARES") shall be converted into
the right to receive a number of shares of common stock, par value
$0.01 per share, of NGRU (the "NGRU COMMON STOCK"), equal to 10.869 (to
be adjusted in accordance with Section 2.5) (the "EXCHANGE RATIO"). The
shares of NGRU Common Stock to be issued in connection with the Merger
are sometimes referred to as the "NGRU SHARES" and shall bear
appropriate restrictive legends.
(b) Each BPOMS Share held in BPOMS's treasury, if any,
immediately prior to the Effective Time (collectively, "CANCELLED BPOMS
SHARES") shall, at the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof, be canceled and
retired and cease to exist and no payment shall be made with respect
thereto.
(c) No fractional shares of NGRU Common Stock shall be issued
in connection with the Merger, and no certificates or scrip for any
such fractional shares shall be issued. Any holder of BPOMS Shares who
would otherwise be entitled to receive a fraction of a share of NGRU
Common Stock (after aggregating all fractional shares of NGRU Common
Stock issuable to such holder) shall, in lieu of such fraction of a
share and upon surrender of such holder's Certificate(s) (as defined in
Section 3.1(b)), one full share of NGRU Common Stock.
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Section 2.3 CONVERSION OF BPOMS PREFERRED STOCK.
(a) At the Effective Time, each share of BPOMS Series A
Preferred Stock (as defined in Section 4.3), BPOMS Series B Preferred
Stock (as defined in Section 4.3) and BPOMS Series C Preferred Stock
(as defined in Section 4.3) that is then outstanding and unconverted
shall cease to represent a right to acquire shares of BPOMS Common
Stock and shall be converted automatically into a right to receive one
share of NGRU Series A Preferred Stock, NGRU Series B Preferred Stock
or NGRU Series C Preferred Stock, as applicable (to be adjusted in
accordance with Section 2.5).
(b) Promptly following the date of this Agreement, BPOMS shall
file an amendment to its certificate of incorporation to revise the
terms of the BPOMS Series A Preferred Stock, BPOMS Series B Preferred
Stock and BPOMS Series C Preferred Stock to conform to the terms set
forth in EXHIBIT A to this Agreement. At or prior to the Effective
Time, NGRU shall reserve for issuance the number of shares of NGRU
Common Stock issuable upon conversion of the NGRU Series A Preferred
Stock, NGRU Series B Preferred Stock and NGRU Series C Preferred Stock
issued pursuant to Section 2.3(a).
Section 2.4 CONVERSION OF BPOMS EMPLOYEE STOCK OPTIONS AND
WARRANTS.
(a) At the Effective Time, each option or warrant, whether
vested or unvested, to purchase BPOMS Common Stock that is then
outstanding and unexercised (a "BPOMS OPTION" or a "BPOMS WARRANT," as
the case may be) shall cease to represent a right to acquire shares of
BPOMS Common Stock and shall be converted automatically into an option
or warrant to acquire, under the same terms and conditions as were
applicable to such BPOMS Option or BPOMS Warrant immediately prior to
the Effective Time, shares of NGRU Common Stock, and NGRU shall assume
each BPOMS Option and BPOMS Warrant and each option plan or agreement
pursuant to which any such BPOMS Option and BPOMS Warrant were granted;
provided, however, that from and after the Effective Time, (i) the
number of shares of NGRU Common Stock purchasable upon exercise of such
BPOMS Option or BPOMS Warrant shall be equal to the number of shares of
BPOMS Common Stock that were purchasable under such BPOMS Option or
BPOMS Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio rounding down to the nearest whole share, and (ii) the
per share exercise price under each such BPOMS Option and BPOMS Warrant
shall be adjusted by dividing the per share exercise price of each such
BPOMS Option and BPOMS Warrant by the Exchange Ratio, rounding up to
the nearest cent. The terms of each BPOMS Option and BPOMS Warrant
shall be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, recapitalization or other similar
transaction with respect to NGRU Common Stock on or subsequent to the
Effective Time.
(b) As soon as practicable after the Effective Time, NGRU
shall deliver to each holder of an outstanding BPOMS Option or BPOMS
Warrant an appropriate notice setting forth such holder's rights
pursuant thereto, and such BPOMS Option and BPOMS Warrant shall
continue in effect on the same terms and conditions (including
antidilution provisions).
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(c) At or prior to the Effective Time, NGRU shall reserve for
issuance the number of shares of NGRU Common Stock subject to BPOMS
Options and BPOMS Warrants assumed pursuant to Section 2.4(a) hereof.
Promptly following the Effective Time, NGRU shall file with the
Securities and Exchange Commission ("SEC") a registration statement on
Form S-8 (to the extent such form is available) under the Securities
Act of 1933, as amended (the "SECURITIES ACT"), with respect to the
shares of NGRU Common Stock subject to BPOMS Options and BPOMS Warrants
assumed pursuant to Section 2.4(a) hereof and eligible for inclusion on
Form S-8 under applicable securities laws, and shall use its reasonable
best efforts to maintain the current status of the prospectus contained
therein, as well as to comply with any applicable state securities or
"BLUE SKY" laws, for one year after the Effective Time.
Section 2.5 ADJUSTMENTS.
If at any time during the period between the date of this Agreement and
the Effective Time, any change in the BPOMS Common Stock or NGRU Common Stock
shall occur by reason of any reclassification, recapitalization, stock dividend,
stock split or combination (including the Reverse Split), exchange or
readjustment of shares, or any stock dividend thereon with the record date
during such period, the Exchange Ratio shall be appropriately adjusted.
Section 2.6 DISSENTING BPOMS STOCKHOLDERS.
Notwithstanding any provision of this Agreement to the contrary, if
required by the DGCL but only to the extent required thereby, shares of BPOMS
Common Stock that are issued and outstanding immediately prior to the Effective
Time and that are held by holders of such shares of BPOMS Common Stock who have
properly exercised appraisal rights with respect thereto (the "DISSENTING COMMON
STOCK") in accordance with Section 262 of the DGCL will not be exchangeable for
the right to receive the per share amount of the merger consideration described
in Section 2.2(a) attributable to such shares of Dissenting Common Shares, and
holders of such shares of Dissenting Common Stock will be entitled to receive
payment of the appraised value of such shares of Dissenting Common Stock in
accordance with the provisions of such Section 262 unless and until such holders
fail to perfect or effectively withdraw or lose their rights to appraisal and
payment under the DGCL. If, after the Effective Time, any such holder fails to
perfect or effectively withdraws or loses such right, such shares of Dissenting
Common Stock will thereupon be treated as if they had been converted into and
have become exchangeable for, at the Effective Time, the right to receive the
merger consideration attributable to such shares of Dissenting Common Stock.
Notwithstanding anything to the contrary contained in this Section 2.6, if the
Merger is not consummated, then the right of any stockholder to be paid the fair
value of such stockholder's Dissenting Common Stock pursuant to Section 262 of
the DGCL shall cease. BPOMS will promptly comply with its obligations under
Section 262 of the DGCL and will give NGRU prompt notice of any demands and
withdrawals of such demands received by BPOMS for appraisals of shares of
Dissenting Common Stock.
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ARTICLE 3
EXCHANGE OF SHARES
Section 3.1 EXCHANGE OF CERTIFICATES.
(a) Prior to the Effective Time, NGRU shall designate either
its transfer agent as of the date hereof or a bank or trust company as
shall be reasonably acceptable to BPOMS, to act as Exchange Agent in
connection with the Merger (the "EXCHANGE AGENT"). At, or immediately
prior to, the Effective Time, NGRU will take all steps necessary to
deposit with the Exchange Agent for the benefit of the holders of BPOMS
Shares (i) certificates representing the aggregate number of shares of
NGRU Common Stock issuable pursuant to Section 2.2 in exchange for
outstanding BPOMS Shares and (ii) cash in lieu of fractional shares of
NGRU Common Stock (the "EXCHANGE FUND").
(b) Promptly after the Effective Time, NGRU and the Surviving
Corporation shall cause the Exchange Agent to mail to each Person who
was a record holder, as of the Effective Time, of an outstanding
certificate or certificates that immediately prior to the Effective
Time represented BPOMS Shares (the "CERTIFICATES"), a letter of
transmittal (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), instructions for
use in effecting the surrender of the Certificates in exchange for
certificates evidencing NGRU Shares and cash in lieu of fractional
shares. Upon surrender to the Exchange Agent of a Certificate, together
with such letter of transmittal duly executed, and any other required
documents, the holder of such Certificate shall be entitled to receive
in exchange therefor (i) a certificate representing the number of whole
shares of NGRU Common Stock, if any, to which such holder shall be
entitled pursuant to Section 2.2, (ii) a check representing the amount
of cash in respect of fractional shares, if any, to which such holder
shall be entitled in accordance with Section 2.2(d), and (iii) any
dividends or other distributions to which such holder is entitled
pursuant to Section 3.1(c) (the NGRU Shares and cash paid pursuant to
Section 2.2(d) and Section 3.1(c) being referred to, collectively as
the "EXCHANGE MERGER CONSIDERATION") and such Certificate shall
forthwith be canceled. If payment is to be made to a Person other than
the Person in whose name the Certificate surrendered is registered, it
shall be a condition of payment that the transfer not be prohibited
under applicable law and the Certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer as
determined by the Exchange Agent, and that the Person requesting such
payment shall pay any transfer, or other taxes required by reason of
the payment to a Person other than the registered holder of the
Certificate surrendered or established to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable.
Until surrendered in accordance with the provisions of this Section
3.1, each Certificate (other than Certificates representing Canceled
BPOMS Shares and other than Certificates representing Dissenting Common
Stock) shall represent for all purposes only the right to receive the
Exchange Merger Consideration, without any interest thereon. In the
event of a transfer of ownership of BPOMS Shares which is not
registered in the stock transfer records of BPOMS, the Exchange Merger
Consideration may be issued to such a transferee if the transfer is not
prohibited under applicable law and the certificate representing BPOMS
Shares is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
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(c) No dividends or other distributions declared or made after
the Effective Time with respect to shares of NGRU Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of NGRU Common
Stock they are entitled to receive until the holder of such Certificate
shall surrender such Certificate. Subject to applicable law, following
surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of NGRU Common
Stock issued in exchange therefor, without interest, at the time of
such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to
such whole shares of NGRU Common Stock.
(d) Any portion of the Exchange Fund that remains unclaimed by
the former stockholders of BPOMS one year after the Effective Time
shall be returned to NGRU (provided that NGRU shall issue such shares
of NGRU Common Stock and/or pay such cash in accordance with this
Article 3 to former stockholders of BPOMS who thereafter surrender
their Certificates), subject to the provisions and effect of applicable
abandoned property, escheat or similar laws. Any former stockholders of
BPOMS who have not theretofore complied with this Article 3 shall
thereafter look only to NGRU for issuance or payment of the Exchange
Merger Consideration, without any interest thereon. Neither the
Surviving Corporation, the Exchange Agent nor NGRU shall be liable to
any holder of a BPOMS Share for any consideration set forth in Section
2.2 hereof delivered in respect of such BPOMS Share to a public
official pursuant to any abandoned property, escheat or other similar
law.
(e) After the Effective Time there shall be no registration on
the share transfer books of the Surviving Corporation of transfers of
the BPOMS Shares that were outstanding immediately prior to the
Effective Time, and as of the Effective Time, the share ledger of BPOMS
shall be closed. All Exchange Merger Consideration paid upon the
surrender of Certificates in accordance with the terms of this Article
3 shall be deemed to have been paid in full satisfaction of all rights
pertaining to the BPOMS shares previously evidenced by Certificates.
After the Effective Time, the holders of BPOMS Shares outstanding at
the Effective Time shall cease to have any rights with respect to such
BPOMS Shares except as provided herein or by applicable law. If, after
the Effective Time, certificates evidencing BPOMS Shares are presented
to the Surviving Corporation, they shall be canceled and exchanged for
the Exchange Merger Consideration as provided in this Article 3.
(f) In the event any Certificates 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, such shares of NGRU Common Stock as
may be required pursuant to Section 2.2, cash for fractional shares, as
may be required by Section 2.2(d) and any dividends or distributions
payable pursuant to Section 3.1(c), provided, however, that NGRU may,
in its discretion and as a condition precedent to the issuance and/or
payment thereof, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against NGRU, the
Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
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Section 3.2 EXCHANGE OF PREFERRED STOCK CERTIFICATES.
(a) Promptly after the Effective Time, NGRU shall mail to each
Person who was a holder, as of the Effective Time, of an outstanding
certificate or certificates which immediately prior to the Effective
Time represented shares of BPOMS Series A Preferred Stock or BPOMS
Series B Preferred Stock or BPOMS Series C Preferred Stock (the
"PREFERRED CERTIFICATES"), a letter of transmittal (which shall specify
that delivery shall be effected, and the risk of loss and title to the
Preferred Certificates shall pass, only upon proper delivery of the
Preferred Certificates to NGRU), instructions for use in effecting the
surrender of the Preferred Certificates in exchange for certificates
evidencing shares of NGRU Series A Preferred Stock, NGRU Series B
Preferred Stock or NGRU Series C Preferred Stock, as applicable. Upon
surrender to NGRU of a Preferred Certificate, together with such letter
of transmittal duly executed, and any other required documents, the
holder of such Preferred Certificate shall be entitled to receive in
exchange therefore a certificate representing the number of shares of
NGRU Series A Preferred Stock, NGRU Series B Preferred Stock or NGRU
Series C Preferred Stock, as applicable, to which such holder shall be
entitled pursuant to Section 2.3 and such Preferred Certificate shall
forthwith be cancelled.
(b) In the event any Preferred Certificates shall have been
lost, stolen or destroyed, NGRU shall issue in exchange for such lost,
stolen or destroyed Preferred Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of NGRU
Series A Preferred Stock, NGRU Series B Preferred Stock or NGRU Series
C Preferred Stock as may be required pursuant to Section 2.3, provided,
however, that NGRU may, in its discretion and as a condition precedent
to the issuance and/or payment thereof, require the owner of such lost,
stolen or destroyed Preferred Certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may
be made against NGRU with respect to the Preferred Certificates alleged
to have been lost, stolen or destroyed.
Section 3.3 WITHHOLDING RIGHTS.
NGRU and the Surviving Corporation shall be entitled to deduct and
withhold from the number of shares of NGRU Common Stock otherwise deliverable
under the Agreement such amounts as NGRU and the Surviving Corporation are
required to deduct and withhold with respect to such delivery and payment under
the Code or any provision of state, local, provincial or foreign tax law. To the
extent that amounts are so withheld, such withheld amounts shall be treated for
all purposes of this Agreement as having been delivered and paid to the holder
of shares of BPOMS Common Stock, BPOMS Series A Preferred Stock or BPOMS Series
B Preferred Stock or BPOMS Series C Preferred Stock in respect of which such
deduction and withholding was made by NGRU and the Surviving Corporation.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BPOMS
BPOMS hereby represents and warrants to NGRU and Merger Sub as follows,
except as set forth in the written disclosure letter delivered at or prior to
the execution hereof to NGRU (the "BPOMS DISCLOSURE Letter"). The BPOMS
Disclosure Letter shall be arranged in sections or subsections corresponding to
the number and lettered sections and subsections contained in this Article 4.
The disclosures in any section or subsection of the BPOMS Disclosure Letter
shall qualify the correspondingly numbered representation and warranty and such
other representations and warranties in this Article 4 to the extent it is
reasonably clear from a reading of the disclosure that such disclosure is
applicable to such other representations and warranties.
Section 4.1 ORGANIZATION; GOOD STANDING; AUTHORITY; COMPLIANCE
WITH LAW.
(a) BPOMS is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has
all requisite power and authority to own, lease and operate its
properties and to carry on its business as now conducted. BPOMS is duly
licensed or qualified and is in good standing to transact business as a
foreign corporation in each jurisdiction in which the character of the
properties owned or leased by it therein or in which the nature of its
business makes such qualification or licensing necessary, except where
the failure to be so licensed or qualified would not have, individually
or in the aggregate, a BPOMS Material Adverse Effect. For purposes of
this Agreement, a "BPOMS MATERIAL ADVERSE EFFECT" means a material
adverse effect on the business, assets (including intangible assets),
financial condition or results of operations of BPOMS and the BPOMS
Subsidiaries (as defined in Section 4.4) taken as a whole.
(b) Each of the BPOMS Subsidiaries is a corporation,
partnership or limited liability company duly incorporated or
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the corporate,
partnership or limited liability company power and authority to own its
properties and to carry on its business as it is now being conducted,
and is duly qualified to transact business and is in good standing in
each jurisdiction in which the ownership of its property or the conduct
of its business requires such qualification, except for jurisdictions
in which such failure to be so qualified or to be in good standing
would not, individually or in the aggregate, have a BPOMS Material
Adverse Effect.
(c) The business of BPOMS and the BPOMS Subsidiaries has been
operated in compliance with all laws, ordinances, regulations and
orders of all governmental entities, except for violations that would
not have, individually or in the aggregate, a BPOMS Material Adverse
Effect. BPOMS and the BPOMS Subsidiaries have all permits,
certificates, licenses, approvals, consents and other authorizations
(collectively, "GOVERNMENT APPROVALS") of all governmental agencies,
entities, commissions, boards, bureaus, tribunals, officials or
authorities, whether Federal, state or local (collectively,
"GOVERNMENTAL AGENCIES"), required by law with respect to the operation
of their businesses, except those the absence of which would not,
individually or in the aggregate, have a BPOMS Material Adverse Effect
or prevent or delay consummation of the Merger. All such Government
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Approvals are in full force and effect, and, BPOMS and the BPOMS
Subsidiaries are in compliance with all conditions and requirements of
the Government Approvals and with all rules and regulations relating
thereto, other than failures that would not have a BPOMS Material
Adverse Effect. BPOMS has not received any notices of violations of any
Federal, state and local laws, regulations and ordinances relating to
its business, operations or assets which, if it were determined that a
violation had occurred, would have a BPOMS Material Adverse Effect.
(d) The certificate of incorporation or other charter
documents, bylaws, organizational documents and partnership,
shareholder, joint venture or similar agreements (and in each such
case, all amendments thereto) of BPOMS and each of the BPOMS
Subsidiaries are listed in Section 4.1(d) of the BPOMS Disclosure
Letter, true and correct copies of which have previously been delivered
to NGRU or its counsel.
Section 4.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
BPOMS has the requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The Board of Directors of BPOMS and the holders of BPOMS Shares have taken all
necessary corporate action to approve this Agreement, the Merger, and the
transactions contemplated by this Agreement. BPOMS has taken all action
necessary to exempt the transactions contemplated by this Agreement from the
operation of any "fair price," "moratorium," "control share acquisition," or
other similar anti-takeover statute or regulation enacted under the state or
federal laws of the United States. The execution by BPOMS of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly authorized by all requisite corporate action on the part of BPOMS. This
Agreement constitutes the valid and legally binding obligation of BPOMS,
enforceable against BPOMS in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
Section 4.3 CAPITALIZATION.
The authorized capital stock of BPOMS consists of 15,000,000 shares of
BPOMS Common Stock and 34,220,000 shares of preferred stock, par value $0.001
per share, of which 2,220,000 shares are designated as Series A (the "BPOMS
SERIES A PREFERRED SHARES"), 2,000,000 shares are designated as Series B (the
"BPOMS SERIES B PREFERRED SHARES"), and 30,000,000 shares are designated as
Series C (the "BPOMS SERIES C PREFERRED SHARES"). As of the date hereof, there
are 9,925,000 BPOMS Shares issued and outstanding, 2,088,036 BPOMS Series A
Preferred Shares issued and outstanding, 2,000,000 BPOMS Series B Preferred
Shares issued and outstanding and zero shares of BPOMS Series C Preferred Shares
issued and outstanding. All outstanding shares of BPOMS are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights or
rights of first refusal created by statute, the Certificate of Incorporation or
Bylaws of BPOMS or any agreement to which BPOMS is a party or by which it is
bound, and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof or under applicable
federal or state securities or "blue sky" laws. Except as set forth in Section
4.3 of the BPOMS Disclosure Letter, BPOMS has no outstanding bonds, debentures,
notes or other obligations the holders of which have or upon the happening of
certain events would have the right to vote (or which are convertible into or
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exercisable or exchangeable for securities having the right to vote) with the
stockholders of BPOMS on any matter. Each holder of shares of capital stock or
securities that are or may become convertible into or exercisable or
exchangeable for shares of capital stock of BPOMS qualifies as an "accredited
investor" as defined in Regulation D promulgated under the Securities Act, or if
such holder does not qualify as an "accredited investor," that such holder is
not a "U.S. person" as defined in Regulation S promulgated under the Securities
Act and did not acquire and does not hold shares of capital stock or securities
that are or may become convertible into or exercisable or exchangeable for
shares of capital stock of BPOMS for the account or benefit of any U.S. person.
Except as set forth in Section 4.3 of the BPOMS Disclosure Letter, there are no
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements, stock appreciation rights or similar derivative
securities or instruments or commitments which obligate BPOMS to issue, transfer
or sell any BPOMS Shares or make any payments in lieu thereof. Except as set
forth in Section 4.3 of the BPOMS Disclosure Letter, there are no agreements or
understandings to which BPOMS or any BPOMS Subsidiary is a party with respect to
the voting of any BPOMS Shares or which restrict the transfer of any such
shares, nor does BPOMS have knowledge of any such agreements or understandings
with respect to the voting of any such shares or which restrict the transfer of
any such shares. There are no outstanding contractual obligations of BPOMS or
any BPOMS Subsidiary to repurchase, redeem or otherwise acquire any BPOMS Shares
or any other securities of BPOMS or any BPOMS Subsidiary. Except as set forth in
Section 4.3 of the BPOMS Disclosure Letter, neither BPOMS nor any BPOMS
Subsidiary is under any obligation, contingent or otherwise, by reason of any
agreement to register any of their securities under the Securities Act. Section
4.3 of the BPOMS Disclosure Letter contains a complete and correct list setting
forth as of the date hereof (i) the number of options and warrants outstanding,
(ii) the dates on which such options or warrants were granted, (iii) the dates
on which such options or warrants shall vest and expire and (iv) the exercise or
conversion price of each outstanding option or warrant, as the case may be. The
terms of the options and warrants permit the assumption or substitution of
options to purchase NGRU Common Stock as provided in this Agreement, without the
consent or approval of the holders of such securities or BPOMS stockholders.
True and complete copies of all agreements and instruments relating to the
securities described above and in Section 4.3 of the BPOMS Disclosure Letter
have been provided to NGRU and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments in any case from the form provided
to NGRU. The shares of BPOMS Common Stock issued under options or warrants were
issued in transactions which qualified for exemptions under either Section 4(2)
of, or Rule 701 under, the Securities Act for stock issuances under compensatory
benefit plans.
Section 4.4 SUBSIDIARIES.
Section 4.4 of the BPOMS Disclosure Letter lists all Subsidiaries (as
defined in Section 9.13) of BPOMS (the "BPOMS SUBSIDIARIES" and, individually, a
"BPOMS SUBSIDIARY"). BPOMS owns directly or indirectly all of the outstanding
shares of capital stock or other equity interests of each of the BPOMS
Subsidiaries. All of the outstanding shares of capital stock in each of the
BPOMS Subsidiaries are duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in Section 4.4 of the BPOMS Disclosure
Letter, all of the outstanding shares of capital stock of each of the BPOMS
Subsidiaries owned, directly or indirectly, by BPOMS are owned free and clear of
all liens, pledges, security interests, claims or other encumbrances. Except as
set forth in Section 4.4 of the BPOMS Disclosure Letter, there are no options,
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warrants, calls, subscriptions, convertible securities, or other rights,
agreements or commitments which obligate BPOMS or any BPOMS Subsidiary to issue,
transfer or sell any shares of capital stock of any BPOMS Subsidiary. The
following information for each BPOMS Subsidiary is set forth in Section 4.4 of
the BPOMS Disclosure Letter: (i) its name and jurisdiction of incorporation and
(ii) its authorized capital stock.
Section 4.5 OTHER INTERESTS.
Except for interests in the BPOMS Subsidiaries, neither BPOMS nor any
BPOMS Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or other entity (other than investments in short term investment securities).
Section 4.6 NO VIOLATION.
Except as set forth in Section 4.6 of the BPOMS Disclosure Letter,
neither the execution and delivery by BPOMS of this Agreement nor the
consummation by BPOMS of the transactions contemplated by this Agreement in
accordance with its terms will: (i) conflict with or result in a breach of any
provisions of BPOMS's Certificate of Incorporation or Bylaws; (ii) violate,
result in a breach of any provision of, or constitute a default under, or
require any approval or consent under or result in the termination or in a right
of termination or cancellation of, or accelerate the performance required by or
result in a material adverse change to, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties owned or
leased by BPOMS under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument to which BPOMS or any of the
BPOMS Subsidiaries is a party, or by which BPOMS or any of the BPOMS
Subsidiaries or any of the properties owned or leased by BPOMS is bound or
affected, except for any of the foregoing matters in this clause which,
individually or in the aggregate, would not have a BPOMS Material Adverse Effect
and would not reasonably be expected to prevent, materially alter or materially
delay any of the transactions contemplated by this Agreement; (iii) contravene
or conflict with or constitute a violation of any provision of any law, rule,
regulation, judgment, injunction, order or decree binding upon or applicable to
BPOMS or any BPOMS Subsidiary; or (iv) other than the filings provided for in
this Agreement, required under the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), the Securities Act or applicable state securities and
"Blue Sky" laws (collectively, the "REGULATORY FILINGS"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority which has not been obtained or made, except
where the failure to obtain any such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a BPOMS Material Adverse Effect and could not
reasonably be expected to prevent, materially alter or materially delay any of
the transactions contemplated by this Agreement.
Section 4.7 AUDITORS.
To BPOMS's knowledge, the auditor of the BPOMS financial statements
provided to NGRU pursuant to this Agreement has at all times since the date of
enactment of the Sarbanes-Oxley Act been: (i) a registered public accounting
firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act); (ii)
"independent" with respect to BPOMS and the BPOMS Subsidiaries within the
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meaning of Regulation S-X under the Exchange Act; and (iii) to the knowledge of
BPOMS, in compliance with subsections (g) through (l) of Section 10A of the
Exchange Act and the rules and regulations promulgated by the SEC and the Public
Company Accounting Oversight Board thereunder.
Section 4.8 FINANCIAL STATEMENTS.
BPOMS has delivered to NGRU true and complete copies of the audited
consolidated balance sheets of BPOMS at December 31, 2005, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flow for each of the fiscal years then ended, and unaudited consolidated balance
sheets of BPOMS at June 30, 2006, and the related unaudited consolidated
statements of income, changes in stockholders' equity, and cash flow for the six
(6) month periods then ended (collectively, the "BPOMS Financials"). The BPOMS
Financials (i) were prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except as may be indicated in the
footnotes to the BPOMS Financials and that the interim financial statements may
not have notes thereto and other presentation items that may be required by GAAP
and are subject to normal and recurring year-end adjustments that are not
reasonably expected to be material in amount), (ii) fairly present in all
material respects the consolidated financial position and operating results and
cash flows of BPOMS as of the dates and for the periods indicated therein, (iii)
comply as to form in all material respects with the published rules and
regulations of the SEC as would be applicable thereto if BPOMS were subject to
the reporting requirements of the Exchange Act, and (iv) in the case of the
interim financial statements, have been reviewed by the auditor of BPOMS to the
same extent as if BPOMS were subject to the reporting requirements of the
Exchange Act.
Section 4.9 LITIGATION.
Except as set forth in Section 4.9 of the BPOMS Disclosure Letter,
there are (i) no continuing orders, injunctions or decrees of any court,
arbitrator or governmental authority to which BPOMS or any BPOMS Subsidiary is a
party or by which any of its properties or assets are bound or likely to be
affected and (ii) no actions, suits or proceedings pending against BPOMS or any
BPOMS Subsidiary or to which any of their respective properties or assets are
subject or, to the knowledge of BPOMS, threatened against BPOMS or any BPOMS
Subsidiary or to which any of their respective properties or assets are subject,
at law or in equity, that in each such case could, individually or in the
aggregate, have a BPOMS Material Adverse Effect.
Section 4.10 ABSENCE OF CERTAIN CHANGES.
Except as set forth in Section 4.10 of the BPOMS Disclosure Letter,
since December 31, 2005, BPOMS and the BPOMS Subsidiaries have conducted their
business only in the ordinary course of such business and consistent with past
practices and there has not been any:
(a) BPOMS Material Adverse Effect;
(b) amendment or change in the Certificate of Incorporation or
By-Laws of BPOMS or in any similar organizational documents of any
BPOMS Subsidiaries;
(c) incurrence, creation or assumption by BPOMS or any of the
BPOMS Subsidiaries of (i) any mortgage, deed of trust, security
interest, pledge, lien, title retention device, collateral assignment,
claim, charge, restriction or other encumbrance of any kind on any of
the assets or properties of BPOMS or any of the BPOMS Subsidiaries; or
(ii) any obligation or liability of any indebtedness for borrowed
money;
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(d) issuance or sale of any debt or equity securities of BPOMS
or any of the BPOMS Subsidiaries, or the issuance or grant of any
options, warrants or other rights to acquire from BPOMS or any of the
BPOMS Subsidiaries, directly or indirectly, any debt or equity
securities of BPOMS or any of the BPOMS Subsidiaries (except upon the
exercise of then outstanding BPOMS Options and BPOMS Warrants);
(e) payment or discharge by BPOMS or any of the BPOMS
Subsidiaries of any security interest, lien, claim, or encumbrance of
any kind on any asset or property of BPOMS or any of the BPOMS
Subsidiaries, or the payment or discharge of any liability that was not
either shown or reflected on the BPOMS Financials or incurred in the
ordinary course of BPOMS's business after the December 31, 2005, in an
amount in excess of $50,000 for any single liability to a particular
creditor;
(f) purchase, license, sale, assignment or other disposition
or transfer, or any agreement or other arrangement for the purchase,
license, sale, assignment or other disposition or transfer, of any of
the assets, properties or goodwill of BPOMS other than a license or
sale of any product or products of BPOMS or any of the BPOMS
Subsidiaries made in the ordinary course of BPOMS's business;
(g) damage, destruction or loss of any property or asset,
whether or not covered by insurance, having (or likely with the passage
of time to have) a BPOMS Material Adverse Effect;
(h) declaration, setting aside or payment of any dividend on,
or the making of any other distribution in respect of, the capital
stock of BPOMS, any split, combination or recapitalization of the
capital stock of BPOMS or any direct or indirect redemption, purchase
or other acquisition of the capital stock of BPOMS or any change in any
rights, preferences, privileges or restrictions of any outstanding
security of BPOMS;
(i) increase in the compensation payable or to become payable
to any of the officers, directors, or employees of BPOMS or any of the
BPOMS Subsidiaries, or any bonus or pension, insurance or other benefit
payment or arrangement (including without limitation stock awards,
stock option grants, stock appreciation rights or stock option grants)
made to or with any of such officers, employees or agents;
(j) obligation or liability incurred by BPOMS or any of the
BPOMS Subsidiaries to any of its officers, directors or stockholders
except for normal and customary compensation and expense allowances
payable to officers in the ordinary course of BPOMS's business
consistent with past practice;
(k) making by BPOMS or any of the BPOMS Subsidiaries of any
loan, advance or capital contribution to, or any investment in, any
officer, director or stockholder of BPOMS or any BPOMS Subsidiary or
any firm or business enterprise in which any such Person had a direct
or indirect material interest at the time of such loan, advance,
capital contribution or investment;
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(l) entering into, amendment of, relinquishment, termination
or non-renewal by BPOMS or any BPOMS Subsidiary of any contract, lease,
transaction, commitment or other right or obligation other than in the
ordinary course of its business or any written or oral indication or
assertion by the other party thereto of any material problems with
BPOMS's or any BPOMS Subsidiary's services or performance under such
contract, lease, transaction, commitment or other right or obligation
or of such other party's demand to amend, terminate or not renew any
such contract, lease, transaction, commitment or other right or
obligation;
(m) material change in the manner in which BPOMS or any BPOMS
Subsidiary extends discounts, credits or warranties to customers or
otherwise deals with its customers;
(n) entering into by BPOMS or any of the BPOMS Subsidiaries of
any transaction, contract or agreement that by its terms requires or
contemplates a required minimum current and/or future financial
commitment, expenses (inclusive of overhead expenses) or obligation on
the part of BPOMS or any of the BPOMS Subsidiaries involving in excess
of $50,000 (provided that the amount of such financial commitments and
expenses for all such transactions, contracts or agreements does not
exceed $150,000 in the aggregate) or that is not entered into in the
ordinary course of BPOMS's business, or the conduct of any business or
operations by BPOMS or any BPOMS Subsidiary that is other than in the
ordinary course of BPOMS's or such BPOMS Subsidiary's business; or
(o) license, transfer or grant of a right under any BPOMS
Intellectual Property (as defined in Section 4.20 below), other than
those licensed, transferred or granted in the ordinary course of
business consistent with its past practices.
Section 4.11 TAXES.
Except as set forth in Section 4.11 of the BPOMS Disclosure Letter or
where such failure would not have, individually or in the aggregate, a BPOMS
Material Adverse Effect:
(a) BPOMS and each of the BPOMS Subsidiaries has paid or
caused to be paid all federal, state, local, foreign, and other taxes,
and all deficiencies, or other additions to tax, interest, fines and
penalties (collectively, "TAXES"), owed or accrued by it and due and
payable through the date hereof (including any Taxes payable pursuant
to Treasury Regulation ss.1.1502-6 (and any similar state, local or
foreign provision)).
(b) BPOMS and each of the BPOMS Subsidiaries has timely filed
all federal, state, local and foreign tax returns (collectively "TAX
RETURNS") required to be filed by any of them through the date hereof,
and all such returns accurately set forth the amount of any Taxes
relating to the applicable period.
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(c) BPOMS and each of the BPOMS Subsidiaries has withheld and
paid all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor,
creditor, shareholder or other party.
(d) The BPOMS Financials reflect adequate reserves for Taxes
payable by BPOMS and each BPOMS Subsidiary for all taxable periods and
portions thereof through the date of such financial statements.
(e) Since December 31, 2005, each of BPOMS and the BPOMS
Subsidiaries has made sufficient accrual for Taxes in accordance with
GAAP with respect to periods for which Tax Returns have not been filed.
(f) There are no outstanding agreements, waivers or
arrangements extending the statutory period of limitations applicable
to any claim for, or the period for the collection or assessment of,
Taxes due from BPOMS or any BPOMS Subsidiary for any taxable period and
there have been no deficiencies proposed, assessed or asserted for such
Taxes.
(g) There are no closing agreements that could affect Taxes of
BPOMS or any BPOMS Subsidiary for periods after the Effective Time
pursuant to Section 7121 of the Code or any similar provision under
state, local or foreign tax laws.
(h) No audit or other proceedings by any court, governmental
or regulatory authority or similar authority has occurred, been
asserted or is pending and none of BPOMS or any BPOMS Subsidiary has
received notice that any such audit or proceeding may be commenced.
(i) No election has been made or filed by or with respect to,
and no consent to the application of, Section 341(f)(2) of the Code has
been made by or with respect to, BPOMS, any BPOMS Subsidiary or any of
their properties or assets.
(j) None of BPOMS or any BPOMS Subsidiary has agreed to, or
filed application for, or is required, to make any changes or
adjustment to its accounting method.
(k) There is no contract, agreement, plan or arrangement
covering any Person that, individually or collectively, could give rise
to the payment of any amount that would not be deductible by BPOMS or
any BPOMS Subsidiary by reason of Section 280G or Section 162(m) of the
Code.
Section 4.12 BOOKS AND RECORDS.
(a) The books of account and other financial records of BPOMS
and each of the BPOMS Subsidiaries are true, complete and correct in
all material respects, have been maintained in accordance with good
business practices, and are accurately reflected in all material
respects in the BPOMS Financials.
(b) The minute books and other records of BPOMS and each of
the BPOMS Subsidiaries contain accurate records of all meetings and
accurately reflect all other action of the stockholders and Board of
Directors and any committees of the Board of Directors of BPOMS and
each of the BPOMS Subsidiaries.
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Section 4.13 PROPERTIES.
(a) Section 4.13(a) of the BPOMS Disclosure Letter sets forth
a list of all real property currently, or at any time in the past five
years, owned or leased by BPOMS or any of the BPOMS Subsidiaries, and,
with respect to all real property currently leased by BPOMS or any of
the BPOMS Subsidiaries, the name of the lessor, the date of the lease
and each amendment thereto and the aggregate annual rental and/or other
fees payable under any such lease. All such current leases are, to the
knowledge of BPOMS, in full force and effect, are valid and effective
in accordance with their respective terms, and there is not to the
knowledge of BPOMS any existing material default or event of default
under any such lease (or event which with notice or lapse of time, or
both, would constitute such a material default).
(b) BPOMS and each of the BPOMS Subsidiaries has good and
valid title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its tangible properties and assets,
real, personal and mixed, used or held for use in its business, free
and clear of any liens, except as reflected in the BPOMS Financials or
in Section 4.13(b) of the BPOMS Disclosure Letter and except for liens
for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or
materially interfere with the present use, of the property subject
thereto or affected thereby.
Section 4.14 ENVIRONMENTAL MATTERS.
Except as set forth in Section 4.14 of the BPOMS Disclosure Letter,
neither BPOMS nor any of the BPOMS Subsidiaries is in violation of any laws,
regulations, judgments or consent decrees relating to hazardous substances or
hazardous waste (collectively, "ENVIRONMENTAL LAWS") which violation could
reasonably be expected to result in a BPOMS Material Adverse Effect. Except as
set forth in Section 4.14 of the BPOMS Disclosure Letter, neither BPOMS, any of
the BPOMS Subsidiaries, nor, to the knowledge of BPOMS, any third party, has
used, released, discharged, generated, manufactured, produced, stored, or
disposed of in, on, or under or about its owned or leased property or other
assets, or transported thereto or therefrom, any hazardous substances or
hazardous wastes, including asbestos, lead and petroleum, during the period of
BPOMS's or the BPOMS Subsidiary's ownership or lease of such property in a
manner that could reasonably be expected to subject BPOMS or any BPOMS
Subsidiary to a material liability under the Environmental Laws. None of BPOMS
or any of the BPOMS Subsidiaries has received written notice from any
governmental authority that any property owned or leased by BPOMS or any of the
BPOMS Subsidiaries is in violation of any Environmental Laws. There is no
pending civil, criminal or administrative suit or other legal proceeding against
BPOMS or any of the BPOMS Subsidiaries with respect to any Environmental Laws.
BPOMS has provided NGRU complete copies of all environmental reports,
assessments and studies in BPOMS's possession and control with respect to
properties owned or leased by BPOMS or any BPOMS Subsidiary. As used in this
Agreement, the terms "HAZARDOUS SUBSTANCES" and "HAZARDOUS WASTES" shall have
the meanings set forth in the Comprehensive Environmental Response, Compensation
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and Liability Act, as amended, and the regulations thereunder; the Resource
Conservation and Recovery Act, as amended, and the regulations thereunder; the
Federal Clean Water Act, as amended, and the regulations thereunder; the Clean
Air Act, 42 U.S.C. Sections 7401 et seq.; the Federal Insecticide, Fungicide and
Rodenticide Act, 7 U.S.C. Sections 136 et seq.; the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. Sections 11001 et seq.; the Occupational
Safety and Health Act of 1970; the Hazardous Materials Transportation Act, as
amended by the Hazardous Materials Transportation Authorization Act of 1994, 49
U.S.C. Sections 5101 et seq.; the Toxic Substances Control Act, 15 U.S.C.
Sections 2601 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. Sections 2701 et
seq.; as each of these may be amended from time to time; and any and state or
local analogues to any of these statutes.
Section 4.15 BROKERS.
Except as set forth on Section 4.15 of the BPOMS Disclosure Letter,
neither BPOMS nor any of the BPOMS Subsidiaries has entered into any contract,
arrangement or understanding with any Person or firm that may result in the
obligation of such entity or NGRU or the Surviving Corporation to pay any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby. BPOMS is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby other than as set forth in
Section 4.15 of the BPOMS Disclosure Letter.
Section 4.16 [Reserved].
Section 4.17 RELATED PARTY TRANSACTIONS.
Section 4.17 of the BPOMS Disclosure Letter sets forth all
arrangements, agreements and contracts or understandings entered into by BPOMS
or any of the BPOMS Subsidiaries (which are or will be in effect as of or after
the date of this Agreement) with (i) any consultant (X) involving payments in
excess of $60,000 or (Y) which may not be terminated at will by BPOMS or the
BPOMS Subsidiary which is a party thereto without penalty, or (ii) any Person
who is an officer, director or affiliate of BPOMS or any of the BPOMS
Subsidiaries. All such documents are listed (and any unwritten arrangement or
understanding is accurately and completely described) in Section 4.17 of the
BPOMS Disclosure Letter and the copies of such documents, and such descriptions,
all of which have previously been provided to NGRU and its counsel, are true,
complete and correct copies. Except as disclosed in Section 4.17 of the BPOMS
Disclosure Letter, BPOMS (including all BPOMS Subsidiaries) has not made any
payments to, received any services from, or is dependent on any services of, any
affiliate of BPOMS other than services provided by officers and directors in
such capacities and payments to such officers and directors of BPOMS in such
capacities. Neither BPOMS nor any of the BPOMS Subsidiaries is a party to any
arrangement, agreement, contract or understanding of the type that would be
grandfathered in or prohibited by Section 402 of the Sarbanes-Oxley Act of 2002
if BPOMS were subject to Section 402.
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Section 4.18 CONTRACTS AND COMMITMENTS.
(a) Except as set forth in Section 4.18(a) of the BPOMS
Disclosure Letter, neither BPOMS nor any of the BPOMS Subsidiaries has,
or is party to or is bound by:
(i) any consulting or sales agreement, contract or
commitment under which any firm or other organization provides
services to BPOMS or any of the BPOMS Subsidiaries;
(ii) any fidelity or surety bond or completion bond;
(iii) any agreement of indemnification or guaranty;
(iv) any agreement, contract, commitment, transaction
or series of transactions for any purpose other than in the
ordinary course of BPOMS's or any of the BPOMS Subsidiaries'
business relating to capital expenditures or commitments or
long term obligations in excess of $50,000;
(v) any agreement, contract or commitment relating to
the disposition or acquisition of assets or any interest in
any business enterprise outside the ordinary course of BPOMS's
or any of the BPOMS Subsidiaries' business.
(vi) any mortgages, indentures, loans or credit
agreements, security agreements or other arrangements or
instruments relating to the borrowing of money or extension of
credit, including guaranties referred to in clause (iii)
hereof:
(vii) any purchase order or contract for the purchase
of inventory or other materials involving $50,000 or more;
(viii) any distribution, joint marketing or
development agreement;
(ix) any assignment, license or other agreement with
respect to any form of intangible property; or
(x) any other agreement, contract or commitment that
involves $50,000 or more or is not cancelable without penalty
within thirty (30) days.
Collectively, any of (i) through (x) above shall be referred to herein as
"CONTRACTS".
(b) Except as would not individually or in the aggregate have
a BPOMS Material Adverse Effect, all such Contracts are valid and
binding on BPOMS and are in full force and effect and enforceable
against BPOMS in accordance with their respective terms. Except as
disclosed in Section 4.18(b) of the BPOMS Disclosure Letter, no
approval or consent of, or notice to any Person the failure of which to
obtain would have a BPOMS Material Adverse Effect is needed in order
that such Contracts shall continue in full force and effect in
accordance with its terms without penalty, acceleration or rights of
early termination following the consummation of the transactions
contemplated by this Agreement. Except to the extent any of the
following would not individually or in the aggregate have a BPOMS
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Material Adverse Effect, BPOMS is not in violation of, breach of or
default under any such Contract nor, to BPOMS's knowledge, is any other
party to any such Contract. Except as set forth in Section 4.18 of the
BPOMS Disclosure Letter, BPOMS is not in violation or breach of or
default under any such Contract (including leases of real property)
relating to non-competition, indebtedness, guarantees of indebtedness
of any other Person, employment, or collective bargaining.
Section 4.19 EMPLOYEE MATTERS AND BENEFIT PLANS.
(a) With the exception of the definition of "AFFILIATE" set
forth in Section 4.19(a)(i) below (which definition shall apply only to
this Section 4.19 and Section 5.17), for purposes of this Agreement,
the following terms shall have the meanings set forth below:
(i) "AFFILIATE" shall mean any other Person under
common control with or otherwise required to be aggregated
with a Person or any Subsidiary of such Person as set forth in
Section 414(b), (c), (m) or (o) of the Code and the
regulations thereunder;
(ii) "EMPLOYEE" shall mean any current, former or
retired employee, officer, or director of a Person or any
Subsidiary or any Affiliate of such Person;
(iii) "EMPLOYEE AGREEMENT" shall refer to any
material management, employment, severance, consulting,
relocation, repatriation, expiration, visas, work permit or
similar agreement or contract between a Person or any
Subsidiary or Affiliate of such Person and any Employee or
consultant that is not an Employee Plan;
(iv) "EMPLOYEE PLAN" shall refer to any plan,
program, policy, practice, contract, agreement or other
arrangement providing for compensation, severance, termination
pay, performance awards, stock or stock related awards, fringe
benefits or other employee benefits or remuneration of any
kind, whether formal or informal, funded or unfunded and
whether or not legally binding, including without limitation,
each "EMPLOYEE BENEFIT PLAN" within the meaning of Section
3(3) of ERISA (as defined below), which is or has been
maintained, contributed to, or required to be contributed to,
by a Person or any of its Subsidiaries or any Affiliate for
the benefit of any "EMPLOYEE," and pursuant to which such
Person or any of its Subsidiary or any Affiliate has or may
have any material liability contingent or otherwise;
(v) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "MULTIEMPLOYER PLAN" shall mean any "PENSION
PLAN" (as defined below) which is a "multiemployer plan," as
defined in Sections 3(37) and 4001(a)(3) of ERISA; and
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(viii) "PENSION PLAN" shall refer to each BPOMS and
Subsidiary Employee Plan that is an "employee pension benefit
plan," within the meaning of Section 3(2) of ERISA.
(b) Section 4.19(b) of the BPOMS Disclosure Letter contains an
accurate and complete list of each Employee Agreement of BPOMS. BPOMS
has no Employee Plans. No benefits under any Employee Agreement of
BPOMS will be increased, or subject to accelerated vesting, by the
occurrence of any of the transactions contemplated by this Agreement,
nor will the value of any of the benefits thereunder be calculated on
the basis of any transactions contemplated by this Agreement. Except as
set forth in Section 4.19(b) of the BPOMS Disclosure Letter, neither
BPOMS nor any of its Subsidiaries or Affiliates has any announced plan
or commitment, whether legally binding or not, to establish any new
Employee Plan or Employee Agreement, to modify any Employee Agreement
(except to the extent required by law or to conform any such Employee
Agreement to the requirements of any applicable law, in each case as
previously disclosed to NGRU in writing, or as required by this
Agreement), or to enter into any Employee Plan or Employee Agreement,
nor does it have any intention or commitment to do any of the
foregoing.
(c) BPOMS has provided to NGRU correct and complete copies of
all material documents embodying or relating to each Employee
Agreement.
(d) Neither BPOMS nor any of the BPOMS Subsidiaries or
Affiliates currently maintain, sponsor, participate in or contribute
to, nor have they ever maintained, established, sponsored, participated
in, or contributed to, any Pension Plan which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the
Code.
(e) At no time has BPOMS or any of the BPOMS Subsidiaries or
Affiliates contributed to or been requested or obligated to contribute
to any Multiemployer Plan.
(f) Except as set forth in Section 4.19(g) of the BPOMS
Disclosure Letter or as required by local, state or federal law, no
Employee Agreement provides, or is required to provide, life insurance,
medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, and BPOMS and
each of the BPOMS Subsidiaries has never represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be
provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment.
(g) The execution of this Agreement and the consummation of
the transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Employee Agreement, trust or loan that will or may result in
any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any Employee,
except as set forth in Schedule 4.19(h) of the BPOMS Disclosure Letter.
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(h) Except as set forth in Section 4.19(i) of the Disclosure
Letter, BPOMS and each of the BPOMS Subsidiaries (i) is in compliance
in all respects with all applicable foreign, federal, state and local
laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in
each case, with respect to Employees except as would not have a BPOMS
Material Adverse Effect; (ii) is not liable for any arrears of wages of
any taxes or any penalty for failure to comply with any of the
foregoing; and (iii) is not liable for any payment to any trust or
other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other
benefits or obligations for Employees (other than routine payments to
be made in the normal course of business and consistent with past
practice).
(i) No work stoppage or labor strike against BPOMS or any
BPOMS Subsidiary is pending or, to the knowledge of BPOMS, threatened.
Neither BPOMS nor any of the BPOMS Subsidiaries is involved in or, to
the knowledge of BPOMS, threatened with, any labor dispute, grievance,
administrative proceeding or litigation relating to labor, safety,
employment practices or discrimination matters involving any Employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, have a BPOMS Material Adverse Effect.
Neither BPOMS nor any of the BPOMS Subsidiaries has engaged in any
unfair labor practices within the meaning of the National Labor
Relations Act that would, individually or in the aggregate, directly or
indirectly have a BPOMS Material Adverse Effect. Neither BPOMS nor any
of the BPOMS Subsidiaries or Affiliates has ever been a party to any
agreement with any labor organization or union, and none of the BPOMS
Employees are represented by any labor organization or union, nor have
any BPOMS Employees threatened to organize or join a union or filed a
petition for representation with the National Labor Relations Board.
(j) There are no (i) bonus or severance payments that could be
payable to Employees of BPOMS under existing Employee Agreements on
account of the transactions contemplated by this Agreement (without
regard to termination of employment), or (ii) severance obligations
that could be payable to Employees of BPOMS under existing Employee
Agreements on account of terminations of employment following the
Effective Time, except as disclosed in Section 4.19(k) of the BPOMS
Disclosure Letter.
Section 4.20 INTELLECTUAL PROPERTY.
(a) For the purposes of this Agreement, the following terms
have the following definitions:
(i) "INTELLECTUAL PROPERTY" shall mean any or all of
the following and all rights in, arising out of, or associated
therewith: (a) all United States, international and foreign
patents and applications therefor and all reissues, divisions,
renewals, extensions, provisionals, continuations and
continuations in part thereof; (b) all inventions (whether
patentable or not), invention disclosures, improvements, trade
secrets, proprietary information, know how, technology,
technical data, customer lists, proprietary processes and
formulae, all source and object code, algorithms,
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architectures, structures, display screens, layouts,
inventions, development tools and all documentation and media
constituting, describing or relating to the above, including,
without limitation, manuals, memoranda and records; (c) all
copyrights, copyrights registrations and applications
therefor, and all other rights corresponding thereto
throughout the world; (d) all industrial designs and any
registrations and applications therefor throughout the world;
(e) all trade names, logos, common law trademarks and service
marks, trademark and service mark registrations and
applications therefor throughout the world; (f) all
proprietary databases and data collections and all rights
therein throughout the world; and (g) any equivalent rights to
any of the foregoing anywhere in the world.
(ii) "BPOMS INTELLECTUAL PROPERTY" shall mean that
Intellectual Property owned by or licensed to or controlled by
BPOMS or any of the BPOMS Subsidiaries.
(iii) "BPOMS REGISTERED INTELLECTUAL PROPERTY" means
those United States, international and foreign: (a) patents
and patent applications (including provisional applications);
(b) registered trademarks and service marks, applications to
register trademarks or service marks, intent to use
applications, or other registrations or applications related
to trademarks or service marks; and (c) registered copyrights
and applications for copyright registration, owned by BPOMS.
(iv) "UTILIZE" or "UTILIZATION" means to make,
manufacture, use, market, import, export, distribute, sell,
dispose, assign, license, develop, publish, display, modify
and/or amend.
(b) Section 4.20(b) of the BPOMS Disclosure Letter lists all
material proceedings or actions known to BPOMS before any court,
tribunal (including the United States Patent and Trademark Office
("PTO") or equivalent authority anywhere in the world) related to any
BPOMS Intellectual Property. No BPOMS Intellectual Property is the
subject of any outstanding decree, order, judgment, agreement, or
stipulation restricting in any manner the use, transfer, or licensing
thereof by BPOMS or any of the BPOMS Subsidiaries, or which may affect
the validity, use or enforceability of any BPOMS Intellectual Property.
(c) Section 4.20(c) of the BPOMS Disclosure Letter lists all
BPOMS Registered Intellectual Property. With respect to each item of
BPOMS Registered Intellectual Property, necessary registration,
maintenance and renewal fees in connection with such BPOMS Registered
Intellectual Property have been made and all necessary documents and
certificates in connection with such BPOMS Registered Intellectual
Property have been filed with the relevant patent, trademark or
copyright authorities in the United States or other jurisdictions for
the purposes of maintaining such BPOMS Registered Intellectual
Property.
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(d) BPOMS and each BPOMS Subsidiary has the right to prevent
others from using, marketing, distributing, selling or licensing all
BPOMS Intellectual Property used in its business as presently conducted
and as it is expected to be conducted as of the Effective Time,
including without limitation, all Intellectual Property used or to be
used in the BPOMS Products (as defined below), and such rights to
Utilize the BPOMS Intellectual Property are sufficient for such conduct
of their respective businesses.
(e) To BPOMS's knowledge, neither the manufacture,
development, publication, marketing, license, sale, distribution or use
intended by BPOMS or any of the BPOMS Subsidiaries of any BPOMS
Intellectual Property currently being licensed, produced or sold by
BPOMS or any of the BPOMS Subsidiaries or currently under development
or consideration by BPOMS or any of the BPOMS Subsidiaries (the "BPOMS
PRODUCTS") violates any license or agreement between BPOMS or any of
the BPOMS Subsidiaries and any third party or, to BPOMS's knowledge,
infringes any Intellectual Property right, moral right or right of
publicity or privacy of any other party, and BPOMS has not received
notice of any pending or threatened claim or litigation contesting the
validity, ownership or right to Utilize any BPOMS Intellectual Property
nor, to the knowledge of BPOMS, is there any basis for any such claim
under applicable law, nor has BPOMS or any of the BPOMS Subsidiaries
received any notice asserting that any BPOMS Intellectual Property or
the Utilization thereof conflicts or will conflict with the rights of
any other party. Section 4.20(e) of the BPOMS Disclosure Letter sets
forth a list of all BPOMS Products.
(f) BPOMS and the BPOMS Subsidiaries have timely and
satisfactorily fulfilled their respective obligations under all
material agreements pursuant to which BPOMS or any of the BPOMS
Subsidiaries, as the case may be, has agreed to program, design or
develop on behalf of a third party, whether for original use or for
porting or conversion (for use on a different hardware platform or in a
different language), any software products or any part thereof, except
where the failure to so comply would not reasonably be expected to have
a BPOMS Material Adverse Effect.
(g) Except as set forth in Section 4.20(g) of the BPOMS
Disclosure Letter, to the extent that any work, invention, or material
has been developed or created by a third party for BPOMS or any of the
BPOMS Subsidiaries, to BPOMS's knowledge, BPOMS and each of the BPOMS
Subsidiaries has a written agreement with such third party with respect
thereto and BPOMS and each of the BPOMS Subsidiaries thereby has
obtained ownership of, and is the exclusive owner of, or has a valid
license to use, all BPOMS Intellectual Property in such work, material
or invention by operation of law or by valid assignment or by
agreement, as the case may be.
(h) Section 4.20(h) of the BPOMS Disclosure Letter lists all
material contracts, licenses and agreements to which BPOMS or any of
the BPOMS Subsidiaries is a party that are currently in effect (i) with
respect to BPOMS Intellectual Property licensed or offered to any third
party; or (ii) pursuant to which a third party has licensed or
transferred any Intellectual Property to BPOMS or any of the BPOMS
Subsidiaries. Except as set forth in Section 4.20(h) of the BPOMS
Disclosure Letter, neither BPOMS nor any of the BPOMS Subsidiaries has
transferred ownership of, or granted any license with respect to, any
BPOMS Intellectual Property, to any third party.
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(i) Except as set forth in Section 4.20(i) of the BPOMS
Disclosure Letter, the contracts, licenses and agreements listed in
Section 4.20(h) are in full force and effect to BPOMS's knowledge. The
consummation of the transactions contemplated by this Agreement will
not violate or result in the breach, modification, cancellation,
termination, or suspension of such contracts, licenses and agreements
listed in Section 4.20(i) and will not cause the forfeiture or
termination or give rise to a right of forfeiture or termination of any
rights of BPOMS to any BPOMS Intellectual Property or impair the right
of BPOMS or any of the BPOMS Subsidiaries or the Surviving Corporation
to Utilize any BPOMS Intellectual Property or portion thereof. BPOMS
and each of the BPOMS Subsidiaries is in material compliance with, and
has not materially breached any term any of such contracts, licenses
and agreements listed in Section 4.20(i) and, to the knowledge of
BPOMS, all other parties to such contracts, licenses and agreements
listed in Section 4.20(i) are in compliance with, and have not breached
any term of, such contracts, licenses and agreements. Except as set
forth in Section 4.20(i) of the BPOMS Disclosure Letter, following the
Effective Time, the Surviving Corporation will be permitted to exercise
all of BPOMS's and each of the BPOMS Subsidiaries', if any, rights
under the contracts, licenses and agreements listed in Section 4.20(h)
to the same extent BPOMS and such BPOMS Subsidiary would have been able
to had the transactions contemplated by this Agreement not occurred and
without the payment of any additional funds other than ongoing fees,
royalties or payments which BPOMS or such BPOMS Subsidiary would
otherwise be required to pay.
(j) [Reserved.]
(k) Except as set forth in Section 4.20(k) of the BPOMS
Disclosure Letter, (a) BPOMS and each of the BPOMS Subsidiaries
(including each of their executive officers, directors and, to the
knowledge of BPOMS, employees) has not received any notice or claim
(whether written, oral or otherwise) challenging BPOMS's ownership or
rights in the BPOMS Intellectual Property or claiming that any other
Person or entity has any legal or beneficial ownership with respect
thereto; (b) all the BPOMS Intellectual Property rights owned by BPOMS
and embodied in its products are, to BPOMS's knowledge, legally valid
and enforceable without any material qualification, limitation or
restriction on their use, and BPOMS has not received any notice or
claim (whether written or oral) challenging the validity or
enforceability of any of the BPOMS Intellectual Property rights; and
(c) to BPOMS's knowledge, no third party is infringing or
misappropriating any part of the BPOMS Intellectual Property.
(l) BPOMS and each of the BPOMS Subsidiaries has taken
reasonable and practicable measures designed to protect their
respective rights in their respective confidential information and
trade secrets or any trade secrets or confidential information of third
parties provided to BPOMS or any of the BPOMS Subsidiaries. None of
BPOMS or any of the BPOMS Subsidiaries, or any employees or, to BPOMS's
knowledge, consultants of BPOMS or any of the BPOMS Subsidiaries, has
permitted any such confidential information or trade secrets to be
used, divulged or appropriated for the benefit of Persons to the
material detriment of BPOMS or any of the BPOMS Subsidiaries.
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(m) Section 4.20(m) of the BPOMS Disclosure Letter sets forth
a list of all Internet domain names used by BPOMS in its business
(collectively, the "DOMAIN NAMES"). BPOMS has, and after the Effective
Time, to BPOMS's knowledge, the Surviving Corporation will have, a
valid registration and all material rights (free of any material
restriction) in and to the Domain Names, including, without limitation,
all rights necessary to continue to conduct BPOMS's business as it is
currently conducted.
(n) Neither BPOMS nor any of the BPOMS Subsidiaries is or
has been a party to any Government Contract relating to or affecting ownership
or Utilization of any BPOMS Intellectual Property. For purposes of this
paragraph, the term "GOVERNMENT CONTRACT" means any Government Prime Contract,
Government Subcontract, Bid or Teaming Agreement. "GOVERNMENT PRIME CONTRACT"
means any prime contract, basic ordering agreement, letter contract, purchase
order, delivery order, change, arrangement or other commitment of any kind, on
which final payment has not been made, between a party and either the U.S.
Government or a State Government. "GOVERNMENT SUBCONTRACT" means any
subcontract, basic ordering agreement, letter subcontract, purchase order,
delivery order, change, arrangement, or other commitment of any kind, on which
final payment has not been made, between a party and any prime contractor to
either the U.S. Government or a State Government or any subcontractor with
respect to a Government Prime Contract. "STATE GOVERNMENT" means any state,
territory or possession of the United States or any department, agency or
instrumentality thereof, or any department or agency of any of the above with
statewide jurisdiction and responsibility, or any municipal or local government,
department, agency or instrumentality. "TEAMING AGREEMENT" has same meaning as
the term "contractor team arrangement(s)" as defined in the Federal Acquisition
Regulation (FAR) Subpart 9.601. "U.S. GOVERNMENT" means the United States
Government or any department, agency or instrumentality thereof.
Section 4.21 ANTI-TAKEOVER PLAN.
Neither BPOMS nor any BPOMS Subsidiary has in effect any plan, scheme,
device or arrangement, commonly or colloquially known as a "poison pill" or, an
"anti-takeover" plan or any similar plan, scheme, device or arrangement.
Section 4.22 SHAREHOLDER VOTE REQUIRED.
The only vote of the holders of any class or shares of capital stock of
BPOMS necessary to approve the Merger and the transactions contemplated by this
Agreement is (i) the affirmative vote of holders of a majority of the
outstanding BPOMS Common Stock, (ii) the affirmative vote of the holders of a
majority of the outstanding BPOMS Series A Preferred Shares, and (iii) the
affirmative vote of the holders of a majority of the outstanding BPOMS Series B
Preferred Shares. BPOMS has obtained the required votes described in this
Section 4.22 and timely complied with its obligations under Section 262 of the
DGCL.
Section 4.23 UNDISCLOSED LIABILITIES.
Except as and to the extent reflected, reserved against or otherwise
disclosed in the BPOMS Financials (including the notes thereto) or as set forth
in Section 4.23 of the BPOMS Disclosure Letter, to BPOMS's knowledge, neither
BPOMS nor any BPOMS Subsidiary has any liabilities or obligations of any kind,
whether accrued, absolute, asserted or unasserted, contingent or otherwise,
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whether or not such liabilities would have been required to be reflected in a
balance sheet prepared in accordance with GAAP consistently applied, which would
have, individually or in the aggregate, a BPOMS Material Adverse Effect.
Section 4.24 INSURANCE.
BPOMS maintains, and has maintained or caused to be maintained, without
interruption, during its existence, policies or binders of insurance covering
such risk, and events, including personal injury, property damage, errors and
omissions and general liability in amounts BPOMS reasonably believes adequate
for its business and operations, and its current insurance policies (other than
directors' and officers' insurance) will not terminate due to the consummation
of the Merger. Section 4.24 of the BPOMS Disclosure Letter sets forth a summary
of all current insurance policies (including, without limitation, limits,
deductibles and terms) maintained by BPOMS and the BPOMS Subsidiaries.
Section 4.25 TAX TREATMENT.
Neither BPOMS nor any of the BPOMS Subsidiaries has taken any action or
engaged in any activities that would preclude the treatment of the Merger as a
reorganization under Section 368(a) of the Code. In addition, neither BPOMS nor
any of the BPOMS Subsidiaries has any plan or intention to take any action or
engage in any activities that would preclude the treatment of the Merger as a
reorganization under Section 368(a) of the Code.
Section 4.26 RELATIONSHIPS WITH SUPPLIERS, LICENSORS AND
CUSTOMERS.
No current distributor, customer of or supplier to BPOMS or any of the
BPOMS Subsidiaries has notified BPOMS or such BPOMS Subsidiary of an intention
to terminate or substantially alter its existing business relationship with
BPOMS or such BPOMS Subsidiary, nor has any licensor under a license agreement
with BPOMS or any of the BPOMS Subsidiaries notified BPOMS or such BPOMS
Subsidiary of an intention to terminate or substantially alter BPOMS's or such
BPOMS Subsidiary's rights under such license, which termination or alteration
would have a BPOMS Material Adverse Effect.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF NGRU AND MERGER SUB
NGRU and Merger Sub hereby represent and warrant to BPOMS as follows,
except as set forth in the written disclosure letter delivered at or prior to
the execution hereof to BPOMS (the "NGRU DISCLOSURE Letter"). The NGRU
Disclosure Letter shall be arranged in sections or subsections corresponding to
the number and lettered sections and subsections contained in this Article 5.
The disclosures in any section or subsection of the NGRU Disclosure Letter shall
qualify the correspondingly numbered representation and warranty and such other
representations and warranties in this Article 5 to the extent it is reasonably
clear from a reading of the disclosure that such disclosure is applicable to
such other representations and warranties.
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Section 5.1 ORGANIZATION; GOOD STANDING; AUTHORITY; COMPLIANCE
WITH LAW.
(a) NGRU is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and Merger Sub
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of NGRU and Merger Sub
has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now conducted. NGRU is duly
licensed or qualified and is in good standing to transact business as a
foreign corporation in each jurisdiction in which the character of the
properties owned or leased by it therein or in which the nature of its
business makes such qualification or licensing necessary, except where
the failure to be so licensed or qualified would not have, individually
or in the aggregate, a NGRU Material Adverse Effect. For purposes of
this Agreement, a "NGRU MATERIAL ADVERSE EFFECT," means a material
adverse effect on the business, assets (including intangible assets),
financial condition or results of operations of NGRU and its
Subsidiaries, taken as a whole; provided that any actual or anticipated
failure to maintain NGRU's Nasdaq listing or obtain a new listing shall
not be considered in determining whether a NGRU Material Adverse Effect
has occurred or is likely to occur.
(b) Each of the Subsidiaries of NGRU (the "NGRU SUBSIDIARIES")
is a corporation, partnership or limited liability company duly
incorporated or formed, validly existing and in good standing under the
laws of its jurisdiction of incorporation or formation, has the
corporate, partnership or limited liability company power and authority
to own its properties and to carry on its business as it is now being
conducted, and is duly qualified to transact business and is in good
standing in each jurisdiction in which the ownership of its property or
the conduct of its business requires such qualification, except for
jurisdictions in which such failure to be so qualified or to be in good
standing would not have, individually or in the aggregate, a NGRU
Material Adverse Effect. Except for a nominal amount of shares of NGRU
Subsidiaries in India held by Indian residents pursuant to applicable
law, each of the NGRU Subsidiaries is wholly-owned, directly or
indirectly, by NGRU. Except for its interests in the NGRU Subsidiaries,
neither NGRU nor any NGRU Subsidiary owns directly or indirectly any
interest or investment (whether equity or debt) in any corporation,
partnership, joint venture, business, trust or other entity (other than
investments in short term investment securities).
(c) Except as described in the NGRU SEC Documents (as defined
in Section 5.25), the business of NGRU and the NGRU Subsidiaries has
been operated in compliance with all laws, ordinances, regulations and
orders of all governmental entities, except for violations which would
not have, individually or in the aggregate, a NGRU Material Adverse
Effect. NGRU and the NGRU Subsidiaries have all Government Approvals of
all Governmental Agencies, required by law with respect to the
operation of their businesses, except those the absence of which would
not, individually or in the aggregate, have a NGRU Material Adverse
Effect or prevent or delay consummation of the Merger. All such
Government Approvals are in full force and effect, and NGRU and the
NGRU Subsidiaries are in compliance with all conditions and
requirements of the Government Approvals and with all rules and
regulations relating thereto other than failures that would not have a
NGRU Material Adverse Effect. NGRU has not received any notices of
violations of any Federal, state and local laws, regulations and
ordinances relating to its business, operations or assets which, if it
were determined that a violation had occurred, would have a NGRU
Material Adverse Effect.
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(d) The Certificate of Incorporation or other charter
documents and Bylaws (and in each such case, all amendments thereto) of
NGRU are described in the NGRU SEC Documents, and true and correct
copies have previously been delivered or made available to BPOMS and
its counsel.
Section 5.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
NGRU and Merger Sub each has the requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. To the extent required by law, the Board of
Directors of each of NGRU and Merger Sub have approved this Agreement, the
Merger, and the transactions contemplated by this Agreement. The execution by
NGRU and Merger Sub of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all requisite action
on the part of NGRU and Merger Sub, subject to the approvals described in
Section 6.2. This Agreement constitutes the valid and legally binding obligation
of NGRU and Merger Sub, enforceable against NGRU and Merger Sub in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
Section 5.3 CAPITALIZATION.
(a) The authorized capital stock of NGRU consists of
150,000,000 shares of NGRU Common Stock and 5,000,000 shares of
preferred stock, $0.01 par value (the "NGRU PREFERRED SHARES"). As of
the date hereof, there are 19,235,041 shares of NGRU Common Stock
issued and outstanding and zero NGRU Preferred Shares issued and
outstanding. All such outstanding shares of NGRU are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive
rights. The authorized capital stock of Merger Sub consists of 100
shares of common stock, par value $0.01. As of the date hereof, 100
shares of common stock of Merger Sub are issued and outstanding, fully
paid and non-assessable and owned by NGRU. Except as described in the
NGRU SEC Documents or as called for by this Agreement, NGRU has no
outstanding bonds, debentures, notes or other obligations the holders
of which have or upon the happening of certain events would have the
right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of NGRU on
any matter. Except as described in the NGRU SEC Documents or as called
for in this Agreement or the employment agreements contemplated to be
entered into with Bruce Nelson and Koushik Dutta prior to the Closing
Date, there are no existing options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements, stock appreciation
rights or similar derivative securities or instruments or commitments
which obligate NGRU to issue, transfer or sell any Shares of NGRU
Common Stock or make any payments in lieu thereof other than options
granted to employees, directors and consultants after the date of the
most recent SEC Report.
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(b) The shares of NGRU Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid and
unassessable and free of preemptive rights of any nature.
(c) Section 5.3(c) of the NGRU Disclosure Letter describes
NGRU's outstanding and effective employee or director stock purchase or
option plans, each of which has been approved and adopted by the Board
of Directors of NGRU and approved by the stockholders of NGRU.
Section 5.4 NO VIOLATION.
Neither the execution and delivery by NGRU and Merger Sub of this
Agreement nor the consummation by NGRU and Merger Sub of the transactions
contemplated by this Agreement in accordance with its terms will: (i) conflict
with or result in a breach of any provisions of NGRU's or Merger Sub's
respective certificate of incorporation or by-laws; (ii) violate, result in a
breach of any provision of, or constitute a default under, or require any
approval or consent under or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by or
result in a material adverse change to, or result in the creation of any lien,
security interest, charge or encumbrance upon any of NGRU's or Merger Sub's
properties under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust or any license, franchise, permit, lease,
contract, agreement or other instrument to which NGRU or Merger Sub is a party,
or by which NGRU or Merger Sub or any of their properties is bound or affected,
except for any of the foregoing matters in this clause which, individually or in
the aggregate, would not have a NGRU Material Adverse Effect; (iii) contravene
or conflict with or constitute a violation of any provision of any law, rule,
regulation, judgment, injunction, order or decree binding upon or applicable to
NGRU or Merger Sub; or (iv) other than the filings provided for in this
Agreement and the Regulatory Filings, require any consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority which has not been obtained or made, except where the
failure to obtain any such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a NGRU Material Adverse Effect.
Section 5.5 TAX TREATMENT.
Neither NGRU nor Merger Sub has taken any action or engaged in any
activities that would preclude the treatment of the Merger as a reorganization
under Section 368(a) of the Code. In addition, neither NGRU nor Merger Sub has
any plan or intention to take any action or engage in any activities that would
preclude the treatment of the Merger as a reorganization under Section 368(a) of
the Code.
Section 5.6 [Reserved].
Section 5.7 [Reserved].
Section 5.8 LITIGATION.
Except as set forth in Section 5.8 of the NGRU Disclosure Letter, there
are (i) no continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which NGRU or any NGRU Subsidiary is a party or by
which any of its properties or assets are bound or likely to be affected and
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(ii) no actions, suits or proceedings pending against NGRU or any NGRU
Subsidiary as to which any of their respective properties or assets are subject
or, to the knowledge of NGRU threatened against NGRU or any NGRU Subsidiary or
to which any of their respective properties or assets are subject, at law or in
equity, that in each such case could, individually or in the aggregate, have an
NGRU Material Adverse Effect.
Section 5.9 ABSENCE OF CERTAIN CHANGES.
Except as set forth in the NGRU Disclosure Letter or the NGRU SEC
Documents, since March 31, 2006, NGRU and the NGRU Subsidiaries have conducted
their business only in the ordinary course of such business and consistent with
past practices and there has not been any:
(a) NGRU Material Adverse Effect;
(b) amendment or change in the Certificate of Incorporation or
By-Laws of NGRU or any of the NGRU Subsidiaries; other than as
contemplated in this Agreement;
(c) incurrence, creation or assumption by NGRU or any of the
NGRU Subsidiaries of (i) any mortgage, deed of trust, security
interest, pledge, lien, title retention device, collateral assignment,
claim, charge, restriction or other encumbrance of any kind on any of
the assets or properties of NGRU or any of the NGRU Subsidiaries; or
(ii) any obligation or liability of any indebtedness for borrowed
money;
(d) issuance or sale of any debt or equity securities of NGRU
or any of its Subsidiaries, or the issuance or grant of any options,
warrants or other rights to acquire from NGRU or any NGRU Subsidiaries,
directly or indirectly, any debt or equity securities of NGRU or any of
its Subsidiaries, other than the granting of stock options to
employees, directors and consultants and other than upon exercise of
then outstanding options and warrants;
(e) payment or discharge by NGRU or any of the NGRU
Subsidiaries of any security interest, lien, claim, or encumbrance of
any kind on any asset or property of NGRU or any of the NGRU
Subsidiaries, or the payment or discharge of any liability that was not
either shown or reflected in the NGRU SEC Documents or incurred in the
ordinary course of NGRU's business after March 31, 2006 in an amount in
excess of $50,000 for any single liability to a particular creditor;
(f) purchase, license, sale, assignment or other disposition
or transfer, or any agreement or other arrangement for the purchase,
license, sale, assignment or other disposition or transfer, of any of
the assets, properties or goodwill of NGRU other than a license or sale
of any product or products of NGRU or any of the NGRU Subsidiaries made
in the ordinary course of NGRU's business and other than as
contemplated in connection with the NGRU Divestiture;
(g) damage, destruction or loss of any property or asset,
whether or not covered by insurance, having (or likely with the passage
of time to have) a NGRU Material Adverse Effect;
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(h) declaration, setting aside or payment of any dividend on,
or the making of any other distribution in respect of, the capital
stock of NGRU, any split, combination or recapitalization of the
capital stock of NGRU or any direct or indirect redemption, purchase or
other acquisition of the capital stock of NGRU or any change in any
rights, preferences, privileges or restrictions of any outstanding
security of NGRU, other than the NGRU Dividend and the Reverse Split;
(i) except as provided in the employment agreements
contemplated to be entered into with Bruce Nelson and Koushik Dutta
prior to the Closing Date, increase in the compensation payable or to
become payable to any of the officers, directors, or employees of NGRU
or any of the NGRU Subsidiaries, or any bonus or pension, insurance or
other benefit payment or arrangement (including without limitation
stock awards, stock option grants, stock appreciation rights or stock
option grants) made to or with any of such officers, employees or
agents;
(j) obligation or liability incurred by NGRU or any of the
NGRU Subsidiaries to any of its officers, directors or stockholders
except for normal and customary compensation and expense allowances
payable to officers in the ordinary course of NGRU's business
consistent with past practice;
(k) making by NGRU or any of the NGRU Subsidiaries of any
loan, advance or capital contribution to, or any investment in, any
officer, director or stockholder of NGRU or any NGRU Subsidiary or any
firm or business enterprise in which any such Person had a direct or
indirect material interest at the time of such loan, advance, capital
contribution or investment;
(l) entering into, amendment of, relinquishment, termination
or non-renewal by NGRU or any NGRU Subsidiary of any contract, lease,
transaction, commitment or other right or obligation other than in the
ordinary course of its business or any written or oral indication or
assertion by the other party thereto of any material problems with
NGRU's or any NGRU Subsidiary's services or performance under such
contract, lease, transaction, commitment or other right or obligation
or of such other party's demand to amend, terminate or not renew any
such contract, lease, transaction, commitment or other right or
obligation;
(m) material change in the manner in which NGRU or any NGRU
Subsidiary extends discounts, credits or warranties to customers or
otherwise deals with its customers;
(n) entering into by NGRU or any of the NGRU Subsidiaries of
any transaction, contract or agreement that by its terms requires or
contemplates a required minimum current and/or future financial
commitment, expenses (inclusive of overhead expenses) or obligation on
the part of NGRU or any of the NGRU Subsidiaries involving in excess of
$50,000 (provided that the amount of such financial commitments and
expenses for all such transactions, contracts or agreements does not
exceed $150,000 in the aggregate, excluding legal and accounting fees
associated with this Agreement and the transactions contemplated hereby
and fees described in Section 5.15) or that is not entered into in the
ordinary course of NGRU's business, or the conduct of any business or
operations by NGRU or any NGRU Subsidiary that is other than in the
ordinary course of NGRU's or such NGRU Subsidiary's business; or
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(o) license, transfer or grant of a right under any NGRU
Intellectual Property (as defined in Section 5.18 below), other than
those licensed, transferred or granted in the ordinary course of
business consistent with its past practices.
Section 5.10 OWNERSHIP OF BPOMS SHARES.
As of the date hereof, and during the three (3) year period immediately
preceding the date hereof, neither NGRU nor, to NGRU's knowledge, any affiliate
or associate (as defined in Section 203 of the DGCL) thereof, is an "interested
stockholder" of BPOMS within the meaning of Section 203 of the DGCL.
Section 5.11 TAXES.
Except as set forth in Section 5.11 of the NGRU Disclosure Letter or
where such failure would not have, individually or in the aggregate, a NGRU
Material Adverse Effect:
(a) NGRU and each of the NGRU Subsidiaries has paid or caused
to be paid all Taxes, owed or accrued by it and due and payable through
the date hereof (including any Taxes payable pursuant to Treasury
Regulation ss.1.1502-6 (and any similar state, local or foreign
provision)).
(b) NGRU and each of the NGRU Subsidiaries has timely filed
all Tax Returns required to be filed by any of them through the date
hereof, and all such returns accurately set forth the amount of any
Taxes relating to the applicable period.
(c) NGRU and each of the NGRU Subsidiaries has withheld and
paid all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor,
creditor, shareholder or other party.
(d) The financial statements included in the NGRU SEC
Documents reflect adequate reserves for Taxes payable by NGRU and each
NGRU Subsidiary for all taxable periods and portions thereof through
the date of such financial statements.
(e) Since March 31, 2006, each of NGRU and the NGRU
Subsidiaries has made sufficient accrual for Taxes in accordance with
GAAP with respect to periods for which Tax Returns have not been filed.
(f) There are no outstanding agreements, waivers or
arrangements extending the statutory period of limitations applicable
to any claim for, or the period for the collection or assessment of,
Taxes due from NGRU or any NGRU Subsidiary for any taxable period and
there have been no deficiencies proposed, assessed or asserted for such
Taxes.
(g) There are no closing agreements that could affect Taxes of
NGRU or any NGRU Subsidiary for periods after the Effective Time
pursuant to Section 7121 of the Code or any similar provision under
state, local or foreign tax laws.
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(h) No audit or other proceedings by any court, governmental
or regulatory authority or similar authority has occurred, been
asserted or is pending and none of NGRU or any NGRU Subsidiary has
received notice that any such audit or proceeding may be commenced.
(i) No election has been made or filed by or with respect to,
and no consent to the application of, Section 341(f)(2) of the Code has
been made by or with respect to, NGRU, any NGRU Subsidiary or any of
their properties or assets.
(j) None of NGRU or any NGRU Subsidiary has agreed to, or
filed application for, or is required, to make any changes or
adjustment to its accounting method.
(k) There is no contract, agreement, plan or arrangement
covering any Person that, individually or collectively, could give rise
to the payment of any amount that would not be deductible by NGRU or
any NGRU Subsidiary by reason of Section 280G or Section 162(m) of the
Code.
Section 5.12 BOOKS AND RECORDS.
(a) The books of account and other financial records of NGRU
and each of the NGRU Subsidiaries are true, complete and correct in all
material respects, have been maintained in accordance with good
business practices, and are accurately reflected in all material
respects in the NGRU SEC Documents.
(b) The minute books and other records of NGRU and each of the
NGRU Subsidiaries contain accurate records of all meetings and
accurately reflect all other action of the stockholders and Board of
Directors and any committees of the Board of Directors of NGRU and each
of the NGRU Subsidiaries.
Section 5.13 PROPERTIES.
(a) Section 5.13(a) of the NGRU Disclosure Letter sets forth a
list of all real property currently owned or leased by NGRU or any of
the NGRU Subsidiaries, and, with respect to all real property currently
leased by NGRU or any of the NGRU Subsidiaries, the name of the lessor,
the date of the lease and each amendment thereto and the aggregate
annual rental and/or other fees payable under any such lease. All such
current leases are, to the knowledge of NGRU, in full force and effect,
are valid and effective in accordance with their respective terms, and
there is not to the knowledge of NGRU any existing material default or
event of default under any such lease (or event which with notice or
lapse of time, or both, would constitute such a material default).
(b) NGRU and each of the NGRU Subsidiaries has good and valid
title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its tangible properties and assets,
real, personal and mixed, used or held for use in its business, free
and clear of any liens, except as reflected in the NGRU SEC Documents
or in Section 5.13(b) of the NGRU Disclosure Letter and except for
liens for taxes not yet due and payable and such imperfections of title
and encumbrances, if any, which are not material in character, amount
or extent, and which do not materially detract from the value, or
materially interfere with the present use, of the property subject
thereto or affected thereby.
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Section 5.14 ENVIRONMENTAL MATTERS.
Except as set forth in Section 5.14 of the NGRU Disclosure Letter,
neither NGRU nor any of the NGRU Subsidiaries is in violation of any
Environmental Laws which violation could reasonably be expected to result in a
NGRU Material Adverse Effect. Except as set forth in Section 5.14 of the NGRU
Disclosure Letter, neither NGRU, any of the NGRU Subsidiaries, nor, to the
knowledge of NGRU, any third party, has used, released, discharged, generated,
manufactured, produced, stored, or disposed of in, on, or under or about its
owned or leased property or other assets, or transported thereto or therefrom,
any hazardous substances or hazardous wastes, including asbestos, lead and
petroleum, during the period of NGRU's or the NGRU Subsidiary's ownership or
lease of such property in a manner that could reasonably be expected to subject
NGRU or any NGRU Subsidiary to a material liability under the Environmental
Laws. None of NGRU or any of the NGRU Subsidiaries has received written notice
from any governmental authority that any property owned or leased by NGRU or any
of the NGRU Subsidiaries is in violation of any Environmental Laws. There is no
pending civil, criminal or administrative suit or other legal proceeding against
NGRU or any of the NGRU Subsidiaries with respect to any Environmental Laws.
NGRU has provided BPOMS complete copies of all environmental reports,
assessments and studies in NGRU's possession and control with respect to
properties owned or leased by NGRU or any NGRU Subsidiary.
Section 5.15 NO BROKERS.
Neither NGRU nor Merger Sub has entered into any contract, arrangement
or understanding with any Person or firm which may result in the obligation of
such entity or BPOMS to pay any finder's fees, brokerage or agent's commissions
or other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except as
set forth in the NGRU Disclosure Letter. Except as set forth in the NGRU
Disclosure Letter, neither NGRU nor Merger Sub is aware of any claim for payment
directly by NGRU or Merger Sub of any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
Section 5.16 RELATED PARTY TRANSACTIONS.
Except as set forth in the NGRU SEC Documents, or the NGRU Disclosure
Letter, since March 31, 2006, no event has occurred that would be required to be
reported by NGRU pursuant to Item 404 of Regulation S-B promulgated under the
Securities Act.
Section 5.17 EMPLOYEE MATTERS AND BENEFIT PLANS.
(a) Section 5.17(a) of the NGRU Disclosure Letter contains an
accurate and complete list of each NGRU Employee Plan (including for
each such plan a description of 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 of the value of any of the benefits of which will be
calculated on the basis of any transactions contemplated by this
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Agreement) and each Employee Agreement of NGRU. Except as set forth in
Section 5.17(a) of the NGRU Disclosure Letter, neither NGRU nor any of
the NGRU Subsidiaries or Affiliates has any announced plan or
commitment, whether legally binding or not, to establish any new
Employee Plan or Employee Agreement, to modify any Employee Plan or
Employee Agreement (except to the extent required by law or to conform
any such Employee Plan or Employee Agreement to the requirements of any
applicable law, in each case as previously disclosed to BPOMS in
writing, or as required by this Agreement), or to enter into any
Employee Plan or Employee Agreement, nor does it have any intention or
commitment to do any of the foregoing.
(b) NGRU has provided or made available to BPOMS correct and
complete copies of all material documents embodying or relating to each
NGRU Employee Plan and Employee Agreement including: (i) all amendments
thereto and written interpretations thereof; (ii) the most recent
annual actuarial valuations, if any, prepared for each NGRU Employee
Plan; (iii) the three most recent annual reports (Series 5500 and all
schedules thereto), if any, required under ERISA or the Code in
connection with each NGRU Employee Plan or related trust; (iv) if the
NGRU Employee Plan is funded, the most recent annual and periodic
accounting of Employee Plan assets; (v) the most recent summary plan
description together with the most recent summary of material
modifications, if any, required under ERISA with respect to each NGRU
Employee Plan; (vi) all IRS determination letters and rulings relating
to NGRU Employee Plans and copies of all applications and
correspondence to or from the IRS or DOL with respect to any NGRU
Employee Plan; and (vii) all communications material to any Employee or
Employees relating to any NGRU Employee Plan and any proposed NGRU
Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of
payments or vesting schedules or other events which would result in any
material liability to NGRU or any NGRU Subsidiary.
(c) (i) Except as set forth in Section 5.17(c) of the NGRU
Disclosure Letter, NGRU and each of the NGRU Subsidiaries and
Affiliates has performed in all material respects all obligations
required to be performed by them under each NGRU Employee Plan, and
each NGRU Employee Plan has been established and maintained in all
material respects in accordance with its terms and in compliance with
all applicable laws, statutes, orders, rules and regulations, including
but not limited to ERISA and the Code; (ii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Section
406 of ERISA for which no class or statutory exemption is available,
has occurred with respect to any NGRU Employee Plan; (iii) there are no
material actions, suits or claims pending or, to the knowledge of NGRU,
threatened or anticipated (other than routine claims for benefits)
against any NGRU Employee Plan or against the assets of any NGRU
Employee Plan; (iv) such NGRU Employee Plan can be amended, terminated
or otherwise discontinued after the Effective Time in accordance with
its terms, without material liability to NGRU or any of the NGRU
Subsidiaries or any of its Affiliates (other than ordinary
administration expenses typically incurred in a termination event); (v)
there are no audits, inquiries or proceedings pending or, to the
knowledge of NGRU, threatened by the IRS or DOL with respect to any
NGRU Employee Plan; (vi) neither NGRU nor any of the NGRU Subsidiaries
is subject to any penalty or tax with respect to any NGRU Employee Plan
under Section 402(i) of ERISA or Section 4975 through 4980 of the Code;
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and (vii) all contributions, including any top heavy contributions,
required to be made prior to the Closing by NGRU or any ERISA Affiliate
to any Employee Plan have been made or shall be made on or before the
Closing Date.
(d) Neither NGRU nor any of the NGRU Subsidiaries or
Affiliates currently maintain, sponsor, participate in or contribute
to, nor have they ever maintained, established, sponsored, participated
in, or contributed to, any Pension Plan which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the
Code.
(e) At no time has NGRU or any of the NGRU Subsidiaries or
Affiliates contributed to or been requested or obligated to contribute
to any Multiemployer Plan.
(f) Except as set forth in Section 5.17(f) of the NGRU
Disclosure Letter or as required by local, state or federal law, no
Employee Plan or any other Employment Agreement to which NGRU is a
party provides, or is required to provide, life insurance, medical or
other employee benefits to any Employee upon his or her retirement or
termination of employment for any reason, and NGRU and each of the NGRU
Subsidiaries has never represented, promised or contracted (whether in
oral or written form) to any Employee (either individually or to
Employees as a group) that such Employee(s) would be provided with life
insurance, medical or other employee welfare benefits upon their
retirement or termination of employment.
(g) The execution of this Agreement and the consummation of
the transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any NGRU Employee Plan, Employee Agreement, trust or loan that
will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any NGRU Employee, except as set forth in Schedule 5.17(g)
of the NGRU Disclosure Letter.
(h) NGRU and each of the NGRU Subsidiaries (i) is in
compliance in all respects with all applicable foreign, federal, state
and local laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in
each case, with respect to Employees except as would not have an NGRU
Material Adverse Effect; (ii) has withheld all amounts required by law
or by agreement to be withheld from the wages, salaries, and other
payments to Employees; (iii) is not liable for any arrears of wages of
any taxes or any penalty for failure to comply with any of the
foregoing; and (iv) is not liable for any payment to any trust or other
fund or to any governmental or administrative authority, with respect
to unemployment compensation benefits, social security or other
benefits or obligations for Employees (other than routine payments to
be made in the normal course of business and consistent with past
practice).
(i) No work stoppage or labor strike against NGRU or any NGRU
Subsidiary is pending or, to the knowledge of NGRU, threatened. Neither
NGRU nor any of the NGRU Subsidiaries is involved in or, to the
knowledge of NGRU, threatened with, any labor dispute, grievance,
administrative proceeding or litigation relating to labor, safety,
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employment practices or discrimination matters involving any Employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, have a NGRU Material Adverse Effect.
Neither NGRU nor any of the NGRU Subsidiaries has engaged in any unfair
labor practices within the meaning of the National Labor Relations Act
which would, individually or in the aggregate, directly or indirectly
have a NGRU Material Adverse Effect. Neither NGRU nor any of the NGRU
Subsidiaries or Affiliates has ever been a party to any agreement with
any labor organization or union, and none of the NGRU Employees are
represented by any labor organization or union, nor have any NGRU
Employees threatened to organize or join a union or filed a petition
for representation with the National Labor Relations Board.
(j) Section 5.17(j) of the NGRU Disclosure Letter sets forth
(i) the aggregate amounts of bonus and severance payments that could be
payable to Employees of NGRU under existing Employee Agreements or
Employee Plans on account of the transactions contemplated by this
Agreement (without regard to termination of employment), and (ii) the
aggregate amounts of severance obligations that could be payable to
Employees of NGRU under existing Employee Agreements and Employee Plans
on account of terminations of employment following the Effective Time,
separately stating the amounts that are payable by reason of a
termination following a change of control of NGRU.
Section 5.18 INTELLECTUAL PROPERTY.
(a) Section 5.18(a) of the NGRU Disclosure Letter lists all
material proceedings or actions known to NGRU before any court,
tribunal (including the PTO or equivalent authority anywhere in the
world) related to any Intellectual Property owned by, or licensed to,
or controlled by NGRU or any of the NGRU Subsidiaries (the "NGRU
INTELLECTUAL PROPERTY"). No NGRU Intellectual Property is the subject
of any outstanding decree, order, judgment, agreement, or stipulation
restricting in any manner the use, transfer, or licensing thereof by
NGRU or any of the NGRU Subsidiaries, or which may affect the validity,
use or enforceability of any NGRU Intellectual Property.
(b) Section 5.18(b) of the NGRU Disclosure Letter lists all
United States, international and foreign: (a) patents and patent
applications (including provisional applications); (b) registered
trademarks and service marks, applications to register trademarks or
service marks, intent to use applications, or other registrations or
applications related to trademarks or service marks; and (c) registered
copyrights and applications for copyright registration owned by NGRU
(collectively, the "NGRU REGISTERED INTELLECTUAL PROPERTY"). With
respect to each item of NGRU Registered Intellectual Property, all
material registration, maintenance and renewal fees necessary in
connection with such NGRU Registered Intellectual Property have been
made and all material documents and certificates necessary in
connection with such NGRU Registered Intellectual Property have been
filed with the relevant patent, trademark or copyright authorities in
the United States or other jurisdictions for the purposes of
maintaining such NGRU Registered Intellectual Property.
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(c) NGRU and each NGRU Subsidiary has the right to prevent
others from using, marketing, distributing, selling or licensing all
NGRU Intellectual Property used in its business as presently conducted
and as it is expected to be conducted as of the Effective Time,
including without limitation, all Intellectual Property used or to be
used in the NGRU Products (as defined below), and such rights to
Utilize are sufficient for such conduct of their respective businesses.
(d) To NGRU's knowledge, neither the manufacture, development,
publication, marketing, license, sale, distribution or use intended by
NGRU or any of the NGRU Subsidiaries of any NGRU Intellectual Property
currently being licensed, produced or sold by NGRU or any of the NGRU
Subsidiaries or currently under development or consideration by NGRU or
any of the NGRU Subsidiaries (the "NGRU PRODUCTS") violates any license
or agreement between NGRU or any of the NGRU Subsidiaries and any third
party or, to NGRU's knowledge, infringes any Intellectual Property
right, moral right or right of publicity or privacy of any other party,
and, except as set forth in Section 5.18(d) of the Disclosure Letter,
NGRU has not received notice of any pending or threatened claim or
litigation contesting the validity, ownership or right to Utilize any
NGRU Intellectual Property nor, to the knowledge of NGRU, is there any
basis for any such claim under applicable law, nor has NGRU or any of
the NGRU Subsidiaries received any notice asserting that any NGRU
Intellectual Property or Utilization thereof conflicts or will conflict
with the rights of any other party. Section 5.18(d) of the NGRU
Disclosure Letter sets forth a list of all NGRU Products.
(e) NGRU and the NGRU Subsidiaries have timely and
satisfactorily fulfilled their respective obligations under all
material agreements pursuant to which NGRU or any of the NGRU
Subsidiaries, as the case may be, has agreed to program, design or
develop on behalf of a third party, whether for original use or for
porting or conversion (for use on a different hardware platform or in a
different language), any software products or any part thereof, except
where the failure to so comply would not reasonably be expected to have
a NGRU Material Adverse Effect.
(f) Except as set forth in Section 5.18(f) of the NGRU
Disclosure Letter, to the extent that any work, invention, or material
has been developed or created by a third party for NGRU or any of the
NGRU Subsidiaries, to NGRU's knowledge, NGRU and each of the NGRU
Subsidiaries has a written agreement with such third party with respect
thereto and NGRU and each of the NGRU Subsidiaries thereby has obtained
ownership of, and is the exclusive owner of, or has a valid license to
use, all NGRU Intellectual Property in such work, material or invention
by operation of law or by valid assignment or by agreement, as the case
may be.
(g) Section 5.18(g) of the NGRU Disclosure Letter lists all
material contracts, licenses and agreements to which NGRU or any of the
NGRU Subsidiaries is a party that are currently in effect (i) with
respect to NGRU Intellectual Property licensed or offered to any third
party; or (ii) pursuant to which a third party has licensed or
transferred any Intellectual Property to NGRU or any of the NGRU
Subsidiaries. Except as set forth in Section 5.18(g) of the NGRU
Disclosure Letter, neither NGRU nor any of the NGRU Subsidiaries has
transferred ownership of, or granted any exclusive license with respect
to, any NGRU Intellectual Property, to any third party.
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(h) Except as set forth in Section 5.18(h) of the NGRU
Disclosure Letter, the contracts, licenses and agreements listed in
Section 5.18(h) are in full force and effect to NGRU's knowledge. The
consummation of the transactions contemplated by this Agreement will
not violate or result in the breach, modification, cancellation,
termination, or suspension of such contracts, licenses and agreements
listed in Section 5.18(h) and will not cause the forfeiture or
termination or give rise to a right of forfeiture or termination of any
rights of NGRU to any NGRU Intellectual Property or impair the right of
NGRU or any of the NGRU Subsidiaries to Utilize any NGRU Intellectual
Property or portion thereof (other than that part of NGRU Intellectual
Property being sold or transferred as part of the NGRU Divestiture).
NGRU and each of the NGRU Subsidiaries is in material compliance with,
and has not materially breached any term any of such contracts,
licenses and agreements listed in Section 5.18(h) and, to the knowledge
of NGRU, all other parties to such contracts, licenses and agreements
listed in Section 5.18(h) are in compliance with, and have not breached
any term of, such contracts, licenses and agreements. Except as set
forth in Section 5.18(h) of the NGRU Disclosure Letter, following the
Effective Time NGRU and each of the NGRU Subsidiaries will be permitted
to exercise all of NGRU's and each of the NGRU Subsidiaries', if any,
respective rights under the contracts, licenses and agreements listed
in Section 5.18(h) to the same extent NGRU and such NGRU Subsidiary
would have been able to had the transactions contemplated by this
Agreement not occurred and without the payment of any additional funds
other than ongoing fees, royalties or payments which NGRU or such NGRU
Subsidiary would otherwise be required to pay.
(i) [Reserved]
(j) Except as set forth in Section 5.18(j) of the NGRU
Disclosure Letter, (a) NGRU and each of the NGRU Subsidiaries
(including each of their executive officers, directors and, to the
knowledge of NGRU, employees) has not received any notice or claim
(whether written, oral or otherwise) challenging NGRU's ownership or
rights in the NGRU Intellectual Property or claiming that any other
Person or entity has any legal or beneficial ownership with respect
thereto; (b) all the NGRU Intellectual Property rights owned by NGRU
and embodied in its products are, to NGRU's knowledge, legally valid
and enforceable without any material qualification, limitation or
restriction on their use, and NGRU has not received any notice or claim
(whether written or oral) challenging the validity or enforceability of
any of the NGRU Intellectual Property rights; and (c) to NGRU's
knowledge, no third party is infringing or misappropriating any part of
the NGRU Intellectual Property.
(k) NGRU and each of the NGRU Subsidiaries has taken
reasonable and practicable measures designed to protect their
respective rights in their respective confidential information and
trade secrets or any trade secrets or confidential information of third
parties provided to NGRU or any of the NGRU Subsidiaries. None of NGRU
or any of the NGRU Subsidiaries, or any employees or, to NGRU's
knowledge, consultants of NGRU or any of the NGRU Subsidiaries, has
permitted any such confidential information or trade secrets to be
used, divulged or appropriated for the benefit of Persons to the
material detriment of NGRU or any of the NGRU Subsidiaries.
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(l) Section 5.18(l) of the NGRU Disclosure Letter sets forth a
list of all Internet domain names used by NGRU in its business
(collectively, the "NGRU DOMAIN NAMES"). To NGRU's knowledge, NGRU has
a valid registration and all material rights (free of any material
restriction) in and to the NGRU Domain Names, including, without
limitation, all rights necessary to continue to conduct NGRU's business
as it is currently conducted.
(m) Neither NGRU nor any of the NGRU Subsidiaries is or has
been a party to any Government Contract relating to or affecting
ownership or Utilization of any NGRU Intellectual Property.
Section 5.19 ANTI-TAKEOVER MATTERS.
NGRU and Merger Sub have taken all action necessary to exempt the
merger and the other transactions contemplated by this Agreement from the
operation of any "fair price," "moratorium," "control share acquisition," or
other similar anti-takeover statute or regulation enacted under the state or
federal laws of the United States, including without limitation, Section 203 of
the DGCL. Neither NGRU nor any NGRU Subsidiary has in effect any plan, scheme,
device or arrangement commonly or colloquially known as a "poison pill" or an
"anti-takeover" plan or any similar plan, scheme, device or arrangement.
Section 5.20 VOTE REQUIRED.
The affirmative vote of the holders of a majority of the shares of NGRU
Common Stock entitled to vote at the NGRU Stockholders Meeting is the only vote
of the holders of any class or series of NGRU's capital stock necessary to
approve the (i) issuance of NGRU Common Stock in the Merger; (ii) the change of
control of NGRU for purposes of NASD Rule 4350(i)(B); (iii) the Charter
Amendment and the Reverse Split; and the NGRU Divestiture (collectively, the
"NGRU STOCKHOLDER VOTE").
Section 5.21 UNDISCLOSED LIABILITIES.
Except as set forth in Section 5.21 of the NGRU Disclosure Letter and
except as and to the extent reflected, reserved against or otherwise disclosed
in NGRU's consolidated balance sheet dated March 31, 2006 (including the notes
thereto), neither NGRU nor the NGRU Subsidiaries have any liabilities or
obligations of any kind, whether accrued, absolute, asserted or unasserted,
contingent or otherwise, whether or not such liabilities would have been
required to be reflected in a balance sheet prepared in accordance with GAAP
consistently applied, which would be reasonably expected to have, individually
or in the aggregate, a NGRU Material Adverse Effect.
Section 5.22 INSURANCE.
NGRU maintains, and has maintained or caused to be maintained, without
interruption, during its existence, policies or binders of insurance covering
such risk, and events, including personal injury, property damage, errors and
omissions and general liability in amounts NGRU reasonably believes adequate for
its business and operations, and its current insurance policies (other than
directors' and officers' insurance) will not terminate due to the consummation
of the Merger. Section 5.22 of the NGRU Disclosure Letter sets forth a summary
of all current insurance policies (including, without limitation, limits,
deductibles and terms) maintained by NGRU and the NGRU Subsidiaries.
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Section 5.23 RELATIONSHIPS WITH SUPPLIERS, LICENSORS AND
CUSTOMERS.
No current distributor, customer of NGRU or supplier to NGRU or any of
the NGRU Subsidiaries has notified NGRU or such NGRU Subsidiary of an intention
to terminate or substantially alter its existing business relationship with NGRU
or such NGRU Subsidiary, nor has any licensor under a license agreement with
NGRU or any of the NGRU Subsidiaries notified NGRU or such NGRU Subsidiary of an
intention to terminate or substantially alter NGRU's or such NGRU Subsidiary's
rights under such license, which termination or alteration would not be
reasonably expected to have a NGRU Material Adverse Effect.
Section 5.24 CONTINUITY OF BUSINESS ENTERPRISE.
It is the present intention of NGRU to continue at least one
significant historic business line of BPOMS, or to use at least a significant
portion of BPOMS's historic assets in a business, in each case within the
meaning of the United States Treasury Regulations Section 1.368-1(d).
Section 5.25 SEC FILINGS; FINANCIAL STATEMENTS.
(a) NGRU has delivered to BPOMS accurate and complete copies
of all registration statements, proxy statements, Certifications (as
defined below) and other statements, reports, schedules, forms and
other documents filed by NGRU with the SEC since March 31, 2003 (the
"NGRU SEC DOCUMENTS"), other than such documents that can be obtained
on the SEC's website at www.sec.gov. Except as set forth on Section
5.25(a) of the NGRU Disclosure Letter or as would not have a NGRU
Material Adverse Effect, all statements, reports, schedules, forms and
other documents required to have been filed by NGRU with the SEC have
been filed on a timely basis. None of the NGRU Subsidiaries is required
to file any documents with the SEC under the Exchange Act. As of the
time it was filed with the SEC (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such
filing): (i) each of the NGRU SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be); and (ii) none of the NGRU SEC
Documents 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 the light of the circumstances
under which they were made, not misleading. The certifications and
statements required by (A) Rule 13a-14 under the Exchange Act and (B)
18 U.S.C. ss.1350 (Section 906 of the Sarbanes-Oxley Act) relating to
the NGRU SEC Documents (collectively, the "CERTIFICATIONS") are
accurate and complete and comply as to form and content with all
applicable laws or rules of applicable governmental and regulatory
authorities.
(b) Except as described in the NGRU SEC Documents, (i) NGRU
maintains disclosure controls and procedures that satisfy the
requirements of Rule 13a-15 under the Exchange Act, and (ii) such
disclosure controls and procedures are designed to ensure that all
material information concerning NGRU is made known on a timely basis to
the individuals responsible for the preparation of NGRU's filings with
the SEC and other public disclosure documents. Except as set forth in
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Section 5.25(b) of the NGRU Disclosure Letter, NGRU is in compliance
with the applicable listing and other rules and regulations of the
Nasdaq Capital Market and has not received any notice from the Nasdaq
Capital Market asserting any present non-compliance with such rules and
regulations.
(c) The financial statements (including any related notes)
contained or incorporated by reference in the NGRU SEC Documents: (i)
complied as to form in all material respects with the published rules
and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with GAAP (except as may be indicated in the notes to such
financial statements or, in the case of unaudited financial statements,
as permitted by Form 10-QSB of the SEC, and except that the unaudited
financial statements may not contain footnotes and are subject to
normal and recurring year-end adjustments that are not reasonably
expected to be material in amount) applied on a consistent basis unless
otherwise noted therein throughout the periods indicated; and (iii)
fairly present the consolidated financial position of NGRU and the NGRU
Subsidiaries as of the respective dates thereof and the consolidated
results of operations and cash flows of NGRU and the NGRU Subsidiaries
for the periods covered thereby.
(d) NGRU's auditor has at all required times since the date of
enactment of the Sarbanes-Oxley Act been: (i) to the knowledge of NGRU,
a registered public accounting firm (as defined in Section 2(a)(12) of
the Sarbanes-Oxley Act); (ii) "independent" with respect to NGRU and
the NGRU Subsidiaries within the meaning of Regulation S-X under the
Exchange Act; and (iii) to the knowledge of NGRU, in compliance with
subsections (g) through (l) of Section 10A of the Exchange Act and the
rules and regulations promulgated by the SEC and the Public Company
Accounting Oversight Board thereunder. Section 5.25(d) of the NGRU
Disclosure Letter contains an accurate and complete description of all
non-audit services performed by NGRU's auditors for NGRU and the NGRU
Subsidiaries since March 31, 2003 and the fees paid for such services.
All such non-audit services were approved as required by Section 202 of
the Sarbanes-Oxley Act.
(e) Section 5.25(f) of the NGRU Disclosure Letter lists, and
NGRU has delivered to BPOMS accurate and complete copies of the
documentation creating or governing, all securitization transactions
and "off-balance sheet arrangements" (as defined in Item 303(c) of
Regulation S-K under the Exchange Act) effected by NGRU since March 31,
2003.
ARTICLE 6
COVENANTS AND OTHER AGREEMENTS
Section 6.1 CONDUCT OF BUSINESSES.
(a) During the period from the date of this Agreement until
the Effective Time, except as specifically permitted by this Agreement,
unless the other Party has consented in writing thereto:
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(i) BPOMS and NGRU shall use their reasonable best
efforts, and shall cause their respective Subsidiaries to use
their reasonable best efforts, to preserve intact their
business organizations and goodwill;
(ii) BPOMS and NGRU shall confer on a regular basis
with one or more representatives of the other to report on
material operational matters relating to the business of BPOMS
and the BPOMS Subsidiaries;
(iii) NGRU will cooperate with and, at the request of
BPOMS, provide reasonable assistance to BPOMS to seek to
reduce or avoid disruptions to BPOMS's business that may
result from or arise out of the announcement or pendency of
the transactions contemplated hereby;
(iv) BPOMS and NGRU shall promptly notify the other
of any material emergency or other material change in the
condition (financial or otherwise), business, properties,
assets, liabilities or the normal course of its businesses or
in the operation of their properties, any material
governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated);
(v) NGRU shall promptly deliver to BPOMS true and
correct copies of any report, statement or schedule filed with
the SEC subsequent to the date of this Agreement other than
those reports, statements or schedules that are available
through the SEC's website; and
(vi) In the event either Party becomes aware that any
of its respective representations or warranties set forth in
Sections 4 and 5 hereof will not be true and correct in all
material respects on the Closing Date as if made at and as of
the Closing Date, such Party shall give prompt written notice
thereof to the other Party, and shall give access to all
appropriate information related thereto that is in its
possession or control.
(b) Prior to the Closing Date, except as expressly provided in
this Agreement or unless BPOMS has first obtained written consent of
NGRU, BPOMS:
(i) Shall, and shall cause each BPOMS Subsidiary to,
conduct its operations according to their usual, regular and
ordinary course in substantially the same manner as heretofore
conducted, preserve and protect the BPOMS Intellectual
Property and keep available the services of its officers and
employees;
(ii) Shall not amend BPOMS's Certificate of
Incorporation or By-laws, and shall cause each BPOMS
Subsidiary not to amend its certificates of incorporation,
bylaws or equivalent organizational documents;
(iii) Shall not, and shall cause each BPOMS
Subsidiary not to, (A) issue or authorize for issue any BPOMS
Common Stock or any other capital stock or security
convertible into or exercisable for any of the foregoing
(except for (I) shares of BPOMS Common Stock issued upon the
exercise of options or warrants outstanding as of the date of
this Agreement, (II) options issued as permitted under the
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following clause (B), (III) up to 200,000 shares of BPOMS
Common Stock that may be issued if BPOMS enters into a
definitive agreement for or closes the proposed acquisition as
permitted by Section 6.9(a)(C), (IV) warrants to purchase up
to a maximum of 1,000,000 shares of BPOMS common stock as
permitted under the terms of the Bridge Loan Agreement as
entered into on August 18, 2006 among BPOMS, Patrick Dolan and
James Cortens ("BRIDGE LOAN AGREEMENT"), (V) the entry into an
agreement to authorize the issuance of securities in a
financing transaction permitted by Section 6.9(a)(B), (VI)
such number of shares, if any, of BPOMS Series C Preferred
Stock that may be issued in accordance with Section 6.11 and
the Bridge Loan Agreement), effect any share split, reverse
share split, share dividend, recapitalization or other similar
transaction or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for
BPOMS capital stock or capital stock of any BPOMS Subsidiary,
(B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to
acquire, redeem or repurchase any BPOMS capital stock except
for the grant to BPOMS employees who are not currently
officers, directors or stockholders of BPOMS of stock options
to purchase up to an aggregate of 400,000 shares of BPOMS
Common Stock under BPOMS' existing 2005 stock option plan on
terms consistent with past practice (including initial vesting
no earlier than six months after the date of grant), and the
grant of options to Bruce Nelson or Koushik Dutta in
connection with employment agreements contemplated to be
entered into prior to the Closing Date, (C) increase any
compensation or enter into or amend any employment agreement
with any of its present or future officers, directors or
employees, other than Bruce Nelson and Koushik Dutta, (D)
adopt any new Employee Plan or (except as contemplated in this
Agreement) amend any existing BPOMS Employee Plan or severance
or termination pay policies in any material respect, except
for changes which are less favorable to participants in such
plans; or (E) authorize, declare, set aside or pay any
dividends or make any other distribution or payments with
respect to any BPOMS capital stock, directly or indirectly
redeem, purchase or otherwise acquire any BPOMS capital stock
or capital stock of any of the BPOMS Subsidiaries, or make any
commitment for any such action;
(iv) Shall not, and shall not permit any of the BPOMS
Subsidiaries to, pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or
contemplated by, the BPOMS Financials (or the notes thereto)
or incurred after the date thereof in the ordinary course of
business consistent with past practice, and other than the
settlement of the two litigation matters named in Section 4.9
of the BPOMS Disclosure Letter if such litigation settlement
would not have a material effect on BPOMS' financial condition
or results of operations or BPOMS' ability to fulfill its
obligations under this Agreement;
(v) Shall not, and shall not permit any of the BPOMS
Subsidiaries to, enter into or amend, modify or terminate any
contract which may result in total fixed or guaranteed
payments or liability by or to it in excess of $100,000 other
than contracts for expenses of attorneys and accountants
incurred in connection with the Merger and office space leases
on commercially reasonable terms;
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(vi) Shall not, and shall not permit any of the BPOMS
Subsidiaries to, enter into or amend any contract with any
officer, trustee, director, consultant or affiliate of BPOMS
or any of the BPOMS Subsidiaries;
(vii) Shall, and shall cause each BPOMS Subsidiary
to, timely prepare, in a manner consistent with past practice,
and file all Tax Returns required to be filed the due date of
which (including reasonable extensions) occurs on or before
the Effective Time and pay all Taxes due with respect to any
such Tax Returns;
(viii) Shall not make or rescind any express or
deemed election relating to Taxes, settle or compromise any
claim, suit, litigation, proceeding, investigation, audit or
controversy relating to Taxes (unless required by law);
(ix) Shall not enter into, terminate or materially
amend or renew any contract other than with third parties in
the ordinary course of operating its business consistent with
past practice, except that BPOMS may enter into or terminate
office space leases on commercially reasonable terms; and
(x) Shall not incur any indebtedness or other
obligation for borrowed money other than trade payables and
other accruals made in the ordinary course of business
consistent with past practice.
(c) Prior to the Closing Date, except as expressly provided in
this Agreement or the NGRU Divestiture Agreement unless NGRU has first
obtained written consent of BPOMS, NGRU:
(i) Shall, and shall cause each NGRU Subsidiary to,
conduct its operations according to their usual, regular and
ordinary course in substantially the same manner as heretofore
conducted, preserve and protect the NGRU Intellectual
Property, except as such operations relate to the NGRU
Divestiture;
(ii) Except as otherwise expressly provided in this
Agreement or the NGRU Divestiture Agreement, shall not amend
NGRU's Certificate of Incorporation or By-laws, and shall
cause each NGRU Subsidiary not to amend its certificates of
incorporation, bylaws or equivalent organizational documents;
(iii) Shall not, and shall cause each NGRU Subsidiary
not to, (A) issue or authorize for issue any NGRU Common Stock
(except for shares issued upon the exercise of currently
outstanding share options or warrants therefor) or any other
capital stock or security convertible into or exercisable for
any of the foregoing, effect any share split, reverse share
split, share dividend, recapitalization or other similar
transaction or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for
NGRU capital stock or capital stock of any NGRU Subsidiary,
(B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to
acquire, redeem or repurchase any NGRU Common Stock, (C)
increase any compensation or enter into or amend any
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employment agreement with any of its present or future
officers, directors or employees, other than Bruce Nelson and
Koushik Dutta, (D) adopt any new employee benefit plan or
amend any existing NGRU Employee Plan or severance or
termination pay policies in any material respect, except for
changes which are less favorable to participants in such
plans; or (E) authorize, declare, set aside or pay any
dividends (except as expressly provided in this Agreement) or
make any other distribution or payments with respect to any
NGRU Common Stock, directly or indirectly redeem, purchase or
otherwise acquire any NGRU capital stock or capital stock of
any of the NGRU Subsidiaries, or make any commitment for any
such action;
(iv) Shall not, and shall not permit any of the NGRU
Subsidiaries to, pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or
contemplated by, the NGRU SEC Documents (or the notes thereto)
or incurred after the date thereof in the ordinary course of
business consistent with past practice;
(v) Shall not, and shall not permit any of the NGRU
Subsidiaries (other than the Divested Subsidiary) to, enter
into or amend, modify or terminate any contract which may
result in total fixed or guaranteed payments or liability by
or to it in excess of $100,000 other than contracts for
expenses of attorneys and accountants incurred in connection
with the Merger and the NGRU Divestiture;
(vi) Except as expressly contemplated by this
Agreement or the NGRU Divestiture Agreement, shall not, and
shall not permit any of the NGRU Subsidiaries to, enter into
any contract with any officer, trustee, director, consultant
or affiliate of NGRU or any of the NGRU Subsidiaries;
(vii) Shall, and shall cause each NGRU Subsidiary to,
timely prepare, in a manner consistent with past practice, and
file all Tax Returns required to be filed the due date of
which (including reasonable extensions) occurs on or before
the Effective Time and pay all Taxes due with respect to any
such Tax Returns;
(viii) Shall not make or rescind any express or
deemed election relating to Taxes, settle or compromise any
claim, suit, litigation, proceeding, investigation, audit or
controversy relating to Taxes (unless required by law);
(ix) Shall not enter into, terminate or materially
amend or renew any contract other than with third parties in
the ordinary course of operating its business consistent with
past practice; and
(x) Shall not incur any indebtedness or other
obligation for borrowed money other than trade payables and
other accruals made in the ordinary course of business
consistent with past practice.
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Section 6.2 MEETING OF STOCKHOLDERS.
(a) NGRU will take all action necessary in accordance with
applicable law and its respective Certificate of Incorporation, to
convene an annual or special meeting of its stockholders (the "NGRU
MEETING") as promptly as practicable to consider and vote upon the
approval of this Agreement and the transactions contemplated hereby
including the change of control of NGRU, the Charter Amendment, the
Reverse Split and the NGRU Divestiture. The Board of Directors of NGRU
shall recommend that its stockholders approve this Agreement and the
transactions contemplated hereby and NGRU shall use its reasonable best
efforts to obtain such approval; provided, however, that nothing
contained in this Section 6.2 shall prohibit the directors of NGRU from
failing to make or withdrawing such recommendation or using their
reasonable best efforts to obtain such approval if such directors have
determined in good faith, based upon the advice of their respective
outside legal counsel, that such action is necessary for such directors
to comply with their fiduciary duties to NGRU's stockholders under
applicable law.
(b) As promptly as practicable following the date hereof, but
in any event no later than the later of the fifth business day (or, if
such day is not a date on which the SEC is open to receive filings,
then the next such day thereafter) after NGRU has received all of the
information it reasonably requires from BPOMS in connection with the
preparation of the Proxy Statement (as defined below) and September 22,
2006, NGRU shall prepare and, following review and incorporation of
reasonable comments by BPOMS (which review period shall be no greater
than two business days), file with the SEC a preliminary proxy
statement and form of proxy, or preliminary information statement, as
permitted by Regulation 14A or 14C, as applicable, under the Securities
Exchange Act of 1934, as amended ("EXCHANGE ACT") relating to the NGRU
Meeting and the vote of the stockholders of NGRU with respect to this
Agreement, the Merger, the transactions contemplated by this Agreement,
the change of control of NGRU, the Charter Amendment, the Reverse Split
and the NGRU Divestiture. As soon as practicable and permitted under
applicable laws, NGRU shall prepare the related final proxy statement
or final information statement (such final proxy statement or final
information statement, the "PROXY STATEMENT"), mail such Proxy
Statement to its shareholders and file such Proxy Statement with the
SEC. BPOMS shall promptly furnish all information about itself and its
business and operations and all necessary financial information to NGRU
as it may reasonably request in connection with the preparation of the
Proxy Statement, it being understood that prior to execution of this
Agreement, NGRU has requested BPOMS to provide NGRU with all financial
and other information required by Regulation 14A under the Exchange Act
to be disclosed in the Proxy Statement with regard to BPOMS and its
business, operations and financial condition, and the acquisition and
financing transactions permitted by Sections 6.9(a)(B) and 6.9(a)(C).
BPOMS shall ensure that the financial statements to be included in the
Proxy Statement (i) are prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be
indicated in the footnotes thereto and that the interim financial
statements may not have notes thereto and other presentation items that
may be required by GAAP and are subject to normal and recurring
year-end adjustments that are not reasonably expected to be material in
amount), (ii) fairly present in all material respects the consolidated
financial position and operating results and cash flows of the issuer
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of the financial statements as of the dates and for the periods
indicated therein, (iii) comply as to form in all material respects
with the published rules and regulations of the SEC as would be
applicable thereto if the issuer of the financial statements were
subject to the reporting requirements of the Exchange Act, and (iv) in
the case of the interim financial statements, have been reviewed by the
auditor of BPOMS to the same extent as if the issuer of the financial
statements were subject to the reporting requirements of the Exchange
Act.
(c) As promptly as practicable following the date hereof, and
in any event on or before September 12, 2006 ("INFORMATION DEADLINE"),
NGRU shall deliver to BPOMS a draft of the preliminary proxy statement
containing all information required to be included therein, other than
such information as is to be provided by or is dependent upon
information provided by BPOMS pursuant to Section 6.2(b) above.
(d) For each day, if any, past the Information Deadline that
any information requested prior to the Information Deadline pursuant to
Section 6.2(b) above has not been delivered to NGRU, BPOMS shall pay to
NGRU in cash $5,000, with such payments to be made in arrears, through
and including the final date of delivery to NGRU of the information, on
a weekly basis every Friday, commencing September 15, 2006, with the
final payment to be made on the final date of delivery to NGRU of the
information. If, on or after the Information Deadline, NGRU reasonably
requests additional information or clarification from BPOMS in
connection with the preparation of the proxy statement, then BPOMS
shall have one (1) business day to provide the additional requested
information or clarification to NGRU. If such additional requested
information or clarification is not provided to NGRU within such
timeframe, then BPOMS shall pay to NGRU in cash $5,000 for each day
that delivery of such information is delayed, with payments to be made
on a weekly basis in the manner described above in this Section 6.2(c).
Section 6.3 APPROVALS; OTHER ACTION.
Subject to the terms and conditions herein provided, BPOMS and NGRU
shall: (i) use all reasonable best efforts to cooperate with one another in (x)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits or authorizations are required to
be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States, the several states and any third parties in
connection with the execution and delivery of this Agreement, the consummation
of the transactions contemplated by this Agreement and (y) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (ii) use all reasonable best efforts to obtain in writing any
consents required from third parties to effectuate the Merger, such consents to
be in form reasonably satisfactory to BPOMS and NGRU; and (iii) use all
reasonable best efforts to 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.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors NGRU and BPOMS shall take all such necessary action.
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Section 6.4 ACCESS TO INFORMATION; DUE DILIGENCE.
(a) Upon reasonable notice and subject to restrictions
contained in confidentiality agreements by which BPOMS and NGRU are
bound, BPOMS and NGRU shall (and shall cause their respective
Subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of the other reasonable access,
during normal business hours during the period prior to the Effective
Time, to all their properties, books, contracts, commitments and
records and permit such Persons to make such inspections as they may
reasonably require and, during such period, each of BPOMS and NGRU
shall (and shall cause their respective Subsidiaries to) furnish
promptly to the other all information concerning its business,
properties and Personnel as the other may reasonably request; provided
that if a Party is withholding information because it is obligated to
do so pursuant to a confidentiality agreement by which it is bound, the
Party shall give the other notice of such withholding.
(b) In the event of termination of this Agreement for any
reason each Party shall promptly return all such information obtained
from the other, and any copies made of, or reports or analyses based
on, such information, to the other and not use any such information for
any purpose that would be competitive with or cause material harm to
the other.
Section 6.5 PUBLICITY.
NGRU and BPOMS shall consult with each other before issuing any press
release or otherwise making any public statements with respect to this Agreement
or any transaction contemplated herein and shall not issue any such press
release or make any such public statement without the prior consent of the other
Party, which consent shall not be unreasonably withheld; provided, however, that
a Party may, without the prior consent of the other Party, issue such press
release or make such public statement as may be required by law or the rules of
the Nasdaq Stock Market if it has used its reasonable best efforts to consult
with the other Party and to obtain such Party's consent but has been unable to
do so in a timely manner.
Section 6.6 LISTING OF NGRU COMMON STOCK.
NGRU shall use its reasonable best efforts to maintain its listing on
the Nasdaq Capital Market and to cause the NGRU Shares to be listed, upon
official notice of issuance, on the Nasdaq Capital Market prior to the Effective
Time.
Section 6.7 FURTHER ACTION.
Each Party hereto shall, subject to Article 8 and subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may reasonably be required to effect the Merger.
Section 6.8 TAX TREATMENT.
No Party shall take any action either prior to or after the Effective
Time that could reasonably be expected to cause the Merger to fail to qualify as
a "reorganization" under Section 368(a) of the Code. BPOMS covenants that at the
time of the Merger, its assets will satisfy the "substantially all" test within
the meaning of Revenue Procedure 77-37, 1977-2 C.B. 568.
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Section 6.9 NO SOLICITATION.
(a) For purposes of this Agreement, "ACQUISITION PROPOSAL"
shall mean, with respect to a Party, any offer or proposal (other than
an offer or proposal made or submitted by BPOMS, on the one hand or
NGRU, on the other hand, to the other Party and other than the NGRU
Divestiture) contemplating or otherwise relating to any Acquisition
Transaction with such Party. "ACQUISITION TRANSACTION" shall mean any
transaction or series of transactions (other than (A) the NGRU
Divestiture, (B) a private placement of shares of NGRU Common Stock or
securities convertible into or exercisable for shares of NGRU Common
Stock, which private placement would be for the purpose of raising up
to $15,000,000 of working capital for NGRU, would close after the
Effective Time on terms consistent with the proxy statement information
provided by BPOMS to NGRU on or prior to the Information Deadline, and
would not require a stockholder vote, and (C) the proposed acquisition
described in Section 6.9 of the BPOMS Disclosure Letter, provided that
the terms of such acquisition and all required financial and other
information regarding the acquisition required to be disclosed in the
Proxy Statement pursuant to Regulation 14A under the Exchange Act are
fully disclosed in the proxy statement information provided by BPOMS to
NGRU on or prior to the Information Deadline) involving:
(i) any merger, consolidation, amalgamation, share
exchange, business combination, issuance of securities,
acquisition of securities, reorganization, recapitalization,
tender offer, exchange offer or other similar transaction: (i)
in which a Party is a constituent corporation; (ii) in which a
Person or "group" (as defined in the Exchange Act and the
rules promulgated thereunder) of Persons directly or
indirectly acquires beneficial or record ownership of
securities representing more than 15% of the outstanding
securities of any class of voting securities of a Party or any
of its Subsidiaries; (iii) in which a Party or any of its
Subsidiaries issues securities representing more than 15% of
the outstanding securities of any class of voting securities
of such Party or any of its Subsidiaries; or (iv) in which a
Party or any of its Subsidiaries would acquire a "significant
subsidiary" as defined in Rule 1-02(w) of Regulation S-X
promulgated under the Exchange Act.
(ii) any sale, lease, exchange, transfer, license,
acquisition or disposition of any business or businesses or
assets that constitute or account for: (i) 15% or more of the
consolidated net revenues of a Party and its Subsidiaries,
taken as a whole, consolidated net income of a Party and its
Subsidiaries, taken as a whole, or consolidated book value of
the assets of a Party and its Subsidiaries, taken as a whole;
or (ii) 15% or more of the fair market value of the assets of
a Party and its Subsidiaries, taken as a whole; or
(iii) any liquidation or dissolution of a Party.
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(b) For purposes of this Agreement, "SUPERIOR OFFER" shall
mean an unsolicited bona fide written offer made to NGRU or any of its
Subsidiaries by a third party to enter into (i) a merger,
consolidation, amalgamation, share exchange, business combination,
issuance of securities, acquisition of securities, reorganization,
recapitalization, tender offer, exchange offer or other similar
transaction as a result of which either (A) the Party's stockholders
prior to such transaction in the aggregate cease to own at least 50% of
the voting securities of the entity surviving or resulting from such
transaction (or the ultimate parent entity thereof) or (B) in which a
Person or "group" (as defined in the Exchange Act and the rules
promulgated thereunder) directly or indirectly acquires beneficial or
record ownership of securities representing 50% or more of the Party's
capital stock or (ii) a sale, lease, exchange transfer, license,
acquisition or disposition of any business or other disposition of at
least 50% of the assets of the Party or its Subsidiaries, taken as a
whole, in a single transaction or a series of related transactions
that: (a) was not obtained or made as a direct or indirect result of a
breach of (or in violation of) the Agreement; and (b) is on terms and
conditions that the board of directors of NGRU determines, in its
reasonable, good faith judgment, after obtaining and taking into
account such matters that its board of directors deems relevant
following consultation with its outside legal counsel and financial
advisor: (x) is reasonably likely to be more favorable, from a
financial point of view, to NGRU's stockholders, than the terms of the
transactions contemplated by the Merger Agreement; and (y) is
reasonably capable of being consummated; provided, however, that any
such offer shall not be deemed to be a "Superior Offer" if any
financing required to consummate the transaction contemplated by such
offer is not committed and is not reasonably capable of being obtained
by such third party.
(c) Each Party agrees that neither it nor any of its
Subsidiaries shall, nor shall it nor any of its Subsidiaries authorize
or permit any of the officers, directors, investment bankers, attorneys
or accountants retained by it or any of its Subsidiaries to, and that
it shall use commercially reasonable efforts to cause its and its
Subsidiaries' non-officer employees and other agents not to (and shall
not authorize any of them to) directly or indirectly: (i) solicit,
initiate, encourage, induce or knowingly facilitate the communication,
making, submission or announcement of any Acquisition Proposal; (ii)
furnish any information regarding such Party to any Person in
connection with or in response to an Acquisition Proposal; (iii) engage
in discussions or negotiations with any Person with respect to any
Acquisition Proposal; (iv) approve, endorse or recommend any
Acquisition Proposal; or (v) execute or enter into any letter of intent
or similar document or any agreement contemplating or otherwise
relating to any Acquisition Transaction; provided, however, that,
nothing contained in this Agreement shall prevent NGRU or its board of
directors from (1) complying with its disclosure obligations under
Sections 14d-9 and 14e-2 of the Exchange Act with regard to an
Acquisition Proposal; provided, further however, that, if such
disclosure has the substantive effect of withdrawing, modifying or
qualifying the directors' recommendation in a manner adverse to BPOMS
or the adoption of this Agreement by the NGRU Board of Directors, BPOMS
and NGRU each shall have the right to terminate this Agreement as set
forth in Section 8.1(e); and (2) at any time prior to the approval of
the transactions contemplated by this Agreement by NGRU's stockholders,
NGRU may furnish nonpublic information regarding NGRU or its
Subsidiaries to, and enter into discussions or negotiations with, any
Person in response to an Acquisition Proposal that is submitted to NGRU
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or any of its Subsidiaries by such Person (and not withdrawn) if: (A)
neither NGRU nor any Representative of NGRU shall have breached this
Section; (B) the Board of Directors of NGRU concludes in good faith
based on the advice of outside legal counsel, that such action is
reasonably necessary to comply with its fiduciary duties; (C) at least
two business days prior to furnishing any such nonpublic information
to, or entering into discussions with, such Person, NGRU gives BPOMS
written notice of the identity of such Person and of NGRU's intention
to furnish nonpublic information to, or enter into discussions with,
such Person; (D) NGRU receives from such Person an executed
confidentiality agreement containing provisions (including
nondisclosure provisions, use restrictions, non-solicitation
provisions, no hire provisions and "standstill" provisions) at least as
favorable to such Party as those contained in the Non-Disclosure
Agreement; and (E) concurrently with furnishing any such nonpublic
information to such Person, NGRU furnishes such nonpublic information
to BPOMS (to the extent such nonpublic information has not been
previously furnished by NGRU to BPOMS). Without limiting the generality
of the foregoing, each Party acknowledges and agrees that, in the event
any officer, director, employee, controlling stockholder, agent or
representative (including, without limitation, any investment banker,
attorney or accountant retained by it or any of its Subsidiaries) of
such Party (each, a "Representative") (whether or not such
Representative is purporting to act on behalf of such Party) takes any
action that, if taken by such Party, would constitute a breach of this
Section by such Party, the taking of such action by such Representative
shall be deemed to constitute a breach of this Section by such Party
for purposes of this Agreement.
(d) If any Party or any Representative of such Party receives
an Acquisition Proposal at any time prior to the Closing Date, then
such Party shall promptly (and in no event later than one (1) business
day after such Party becomes aware of such Acquisition Proposal) advise
the other Party orally and in writing of such Acquisition Proposal
(including the identity of the Person making or submitting such
Acquisition Proposal, and the terms thereof). Such Party shall keep the
other Party fully informed with respect to the status and terms of any
such Acquisition Proposal and any modification or proposed modification
thereto.
(e) Each Party shall immediately cease and cause to be
terminated any existing discussions with any Person that relate to any
Acquisition Proposal as of the date of this Agreement.
(f) Each Party shall not release or permit the release of any
Person from, or waive or permit the waiver of any provision of or right
under, any confidentiality, non-solicitation, no hire, "standstill" or
similar agreement (whether entered into prior to or after the date of
this Agreement) to which such Party is a party or under which such
Party has any rights, and shall enforce or cause to be enforced each
such agreement to the extent requested by the other Party. Each Party
shall promptly request each Person that has executed a confidentiality
or similar agreement in connection with its consideration of a possible
Acquisition Transaction or equity investment to return to such Party
all confidential information heretofore furnished to such Person by or
on behalf of such Party.
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Section 6.10 NOTICE OF CERTAIN EVENTS.
Each of BPOMS and NGRU shall as promptly as reasonably practicable
notify the other of: (i) any notice or other communication from any Person
alleging that the consent of such Person (or another Person) is or may be
required in connection with the transactions contemplated by this Agreement
and/or that such consent will or may be withheld or unobtainable on a timely
basis or without unreasonable effort or expense; (ii) any notice or other
communication from any governmental or regulatory agency or authority in
connection with the transactions contemplated by this Agreement; (iii) any
actions, suits, claims, investigations or proceedings commenced or threatened
against, relating to or involving or otherwise affecting such Party or any of
its Subsidiaries that, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 4.9 or 5.8, as applicable,
or which relate to the consummation of the transactions contemplated by this
Agreement; and (iv) of any fact or occurrence between the date of this Agreement
and the Effective Time of which it becomes aware which makes any of its
representations and warranties contained in this Agreement untrue in any
material respect (without regard to any materiality qualification contained in
such representation or warranty) or causes any breach of its obligations under
this Agreement in any material respect (without regard to any materiality
qualification contained in such obligation).
Section 6.11 CAPITAL SURPLUS AND CASH.
(a) BPOMS shall take all necessary and appropriate actions,
including if necessary the issuance of shares of BPOMS Series C
Preferred Stock or the causing to be purchased shares of NGRU Series C
Preferred Stock in accordance with the Bridge Loan Agreement to ensure
that as of the second (2nd) business day immediately preceding the
Dividend Payable Date and through the Dividend Payable Date, the
capital surplus (as that term is used in the DGCL) carried from BPOMS
to NGRU as a result of the Merger is at least $1,500,000 and BPOMS's
unrestricted cash that shall remain unrestricted and available for
payment of the NGRU Dividend ("BPOMS AVAILABLE CASH") is at least
$1,500,000. This Section 6.11 shall survive consummation of the Merger
at the Effective Time, is intended to benefit NGRU and each of its
directors, officers, managers, partners, employees and each person, if
any, who controls NGRU within the meaning of the Securities Act, and
shall be binding on all successors and assigns of BPOMS.
(b) NGRU shall take all necessary and appropriate actions to
ensure that the Divestiture Proceeds shall be reserved for payment of
the NGRU Dividend.
Section 6.12 DIRECTORS AND OFFICERS.
At or prior to the Effective Time, NGRU shall obtain the resignation of
each of the directors of NGRU and of Amrit Das, Chairman and Chief Executive
Officer, to be effective as of the Effective Time. At the Effective Time, NGRU
shall accept the resignations of each of the directors of NGRU and Mr. Das (as
to all of his officer and director positions), and shall cause such Persons to
be elected to the NGRU Board of Directors as BPOMS shall designate in writing
prior to the filing of the preliminary Proxy Statement. The Board of Directors
of NGRU shall appoint each of the individuals to serve as officers of NGRU,
effective as of the Effective Time, as BPOMS shall designate in writing prior to
the filing of the preliminary Proxy Statement.
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Section 6.13 INDEMNIFICATION AND INSURANCE.
(a) The By-Laws and Certificate of Incorporation of NGRU and
the Surviving Corporation shall contain the provisions with respect to
indemnification set forth in the By-Laws and Certificate of
Incorporation of NGRU and BPOMS respectively which provisions shall not
be amended, repealed or otherwise modified for a period of six (6)
years from the Effective Time in any manner that would adversely affect
the rights thereunder as of the Effective Time of individuals who at
the Effective Time were directors, officers, employees or agents of
NGRU or BPOMS, respectively, unless such modification is required after
the Effective Time by law.
(b) Notwithstanding the foregoing, NGRU and the Surviving
Corporation shall, to the fullest extent permitted under applicable law
or under NGRU's or the Surviving Corporation's Certificate of
Incorporation or By-Laws, indemnify and hold harmless, each present and
former director, officer or employee of NGRU or BPOMS, as applicable,
or any of their respective Subsidiaries (collectively, the "INDEMNIFIED
PARTIES") against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or
investigative, (x) arising out of or pertaining to the transactions
contemplated by this Agreement or (y) otherwise with respect to any
acts or omissions occurring at or prior to the Effective Time, to the
same extent as provided in NGRU's or BPOMS's Certificate of
Incorporation or By-Laws, as applicable, or any applicable contract or
agreement as in effect on the date hereof, in each case for a period of
six (6) years after the Effective Time. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (i) the Indemnified Parties may retain any
counsel reasonably satisfactory to NGRU, (ii) after the Effective Time,
NGRU shall advance to the Indemnified Party the reasonable fees and
expenses of such counsel, and other reasonable costs incurred in the
defense of such matter, and (iii) NGRU and the Surviving Corporation
will cooperate in the defense of any such matter; provided, however,
that NGRU and/or the Surviving Corporation shall not be liable for any
settlement effected without its written consent (which consent shall
not be unreasonably withheld); and provided, further, that, in the
event that any claim or claims for indemnification are asserted or made
within such six (6) year period, all rights to indemnification in
respect of any such claim or claims shall continue until the
disposition of any and all such claims. The Indemnified Parties as a
group may retain only one law firm to represent them in each applicable
jurisdiction with respect to any single action unless there is, under
applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified
Parties, in which case each Indemnified Person with respect to whom
such a conflict exists (or group of such Indemnified Persons who among
them have no such conflict) may retain one separate law firm in each
applicable jurisdiction.
(c) This Section 6.13 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit NGRU, BPOMS, the
Surviving Corporation and the Indemnified Parties, shall be binding on
all successors and assigns of the Surviving Corporation and NGRU and
shall be enforceable by the Indemnified Parties.
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(d) NGRU shall, until the sixth (6th) anniversary of the
Effective Time, cause to be maintained in effect, to the extent
available, the policies of directors' and officers' liability insurance
maintained by NGRU and the NGRU Subsidiaries as of the date hereof (or
policies of at least the same coverage and amounts containing terms
that are not less advantageous to the insured parties) with respect to
claims arising from facts that occurred on or prior to the Effective
Time, including without limitation all claims based upon, arising out
of, directly or indirectly resulting from, in consequence of, or in any
way involving the Merger and any and all related events. In lieu of the
purchase of such insurance by NGRU, NGRU may purchase a six (6)-year
extended reporting period endorsement ("Reporting Tail Coverage") under
NGRU's existing directors' and officers' liability insurance coverage,
providing that such Reporting Tail Coverage shall extend the directors'
and officers' liability coverage in force as of the date hereof for a
period of at least six (6) years from the Effective Time for any claim
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or any way involving acts or omissions occurring or
prior to the Effective Time, including without limitation all claims
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or any way involving the Merger or any and all related
events. BPOMS shall cooperate with NGRU in obtaining such insurance
coverage.
Section 6.14 SHELF REGISTRATION.
(a) Within 120 days following the Closing Date, NGRU shall
prepare and file with the SEC a shelf registration statement (the
"RESALE REGISTRATION STATEMENT") on Form S-3 (or, if Form S-3 is not
available, Form SB-2) covering (i) all of the NGRU Shares issued
hereunder, (ii) all of the shares of NGRU Common Stock that are
issuable upon exercise of the BPOMS Options and BPOMS Warrants assumed
pursuant to Section 2.4(a) hereof that are not eligible for inclusion
on Form S-8 under applicable securities laws, and (iii) all of the
shares of NGRU Common Stock that are issuable upon exercise of the NGRU
Series A Preferred Stock, NGRU Series B Preferred Stock and NGRU Series
C Preferred Stock issued pursuant to Section 2.3 hereof (collectively,
the "REGISTRABLE SECURITIES"); provided that no holder of Registrable
Securities shall be entitled to be named as a selling security holder
in the Resale Registration Statement or to use the prospectus contained
therein for offers or resales of Registrable Securities at any time,
unless such holder first timely supplies NGRU with all information
reasonably requested by NGRU in connection with the preparation of the
Resale Registration Statement or such prospectus. NGRU shall use its
commercially reasonable efforts to cause the Resale Registration
Statement to be declared effective under the Securities Act within 180
days following the Closing Date and to keep such Resale Registration
Statement continuously effective under the Securities Act until the
earlier of the date which is two years following the Effective Time or
the date on which all of the Registrable Securities covered thereby
have been sold or may be sold without restriction pursuant to Rule 144
under the Securities Act.
(b) NGRU shall use its commercially reasonable efforts to
register or qualify (or meet an exemption from such registration or
qualification) of such Registrable Securities for offer and sale under
the securities or "blue sky" laws of such jurisdictions within the
United States as any holder reasonably requests in writing, to keep
each such registration or qualification (or exemption therefrom)
effective for a reasonable time and to do any and all other acts or
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things reasonably necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the Resale
Registration Statement; provided, however, that in no event shall NGRU
be obligated to (i) qualify as a foreign corporation or as a dealer in
securities in any jurisdiction where it would not otherwise be required
to so qualify but for this Section, or (B) file any general consent to
service of process in any jurisdiction where it is not then so subject.
(c) All fees and expenses incident to the filing of the Resale
Registration Statement and keeping it effective shall be borne by NGRU.
(d) NGRU covenants that, for so long as it is required to file
reports with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act, it will take such action as any holder of Registrable Securities
may reasonably request, all to the extent required from time to time to
enable such Person to sell the Registrable Securities without
registration under the Securities Act pursuant to Rule 144 under the
Securities Act, including providing any legal opinions relating to such
sale pursuant to Rule 144.
(e) To the extent permitted by law, NGRU shall indemnify and
hold harmless each holder of Registrable Securities (and, if such
holder is not an individual, each of its directors, officers, managers,
partners, employees and each person, if any, who controls such holder
within the meaning of the Securities Act), against any losses, claims,
damages, or liabilities, joint or several, to which they may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based on any untrue or alleged untrue statement of any
material fact contained in the Resale Registration Statement, including
any preliminary prospectus or final prospectus, or any amendments or
supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
arise out of any violation by NGRU of any federal, state or common law,
rule or regulation applicable to NGRU in connection with any
registration; and shall promptly reimburse each of the foregoing
persons for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that NGRU shall not be
liable in any such case for any such loss, claim, damage, liability,
expenses, or action to the extent that it arises out of or is based
upon an untrue statement or alleged untrue statement or omission or
alleged omission made in connection with such Resale Registration
Statement, preliminary prospectus, final prospectus, or amendments or
supplements thereto, in reliance upon and in conformity with written
information furnished for use in connection with such registration by a
holder. If for any reason the indemnification provided for in the
preceding sentence is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by the preceding
sentence, then the indemnifying party will contribute to the amount
paid or payable by the indemnified party as a result of the loss,
claim, damage, liability or expense in the proportion as is appropriate
to reflect (i) the relative benefits received by the indemnified party
and the indemnifying party, (ii) the relative failure of the
indemnified party and the indemnifying party, and (iii) any other
relevant equitable considerations.
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(f) This Section 6.14 shall survive consummation of the Merger
at the Effective Time, is intended to benefit the holders of
Registrable Securities (and, if such holder is not an individual, each
of its directors, officers, managers, partners, employees and each
person, if any, who controls such holder within the meaning of the
Securities Act), shall be binding on all successors and assigns of NGRU
and shall be enforceable by the holders of Registrable Securities.
ARTICLE 7
CONDITIONS
Section 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT
THE MERGER.
The respective obligation of each Party to effect the Merger and the
other transactions contemplated herein shall be subject to the fulfillment at or
prior to the Closing Date of the following conditions, any or all of which may
be waived, in whole or in part by the parties hereto, to the extent permitted by
applicable law:
(a) This Agreement and the transactions contemplated hereby
shall have been approved by the requisite vote of stockholders of NGRU.
(b) The NGRU Divestiture shall be effective at the Effective
Time.
(c) The Reverse Split shall have been consummated.
Section 7.2 CONDITIONS TO OBLIGATIONS OF BPOMS TO EFFECT THE
MERGER.
The obligation of BPOMS to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by BPOMS:
(a) Each of the representations and warranties of NGRU
contained in this Agreement shall be true and correct as of the date of
this Agreement and as of the Closing Date as though made on and as of
the Closing Date, except to the extent that any changes, circumstances
or events making such representations and warranties not true or
correct would not, individually or in the aggregate, constitute a NGRU
Material Adverse Effect (without regard to any materiality
qualification contained in such representation or warranty), and BPOMS
shall have received a certificate, dated the Closing Date, signed on
behalf of NGRU by the Chairman, Chief Executive Officer or Chief
Financial Officer of NGRU to the foregoing effect.
(b) NGRU shall have performed or complied in all material
respects (without regard to any materiality qualification contained in
such representation or warranty) with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing Date, and BPOMS shall have received a certificate,
dated the Closing Date, signed on behalf of NGRU by the Chairman, Chief
Executive Officer or Chief Financial Officer of NGRU to the foregoing
effect.
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(c) From the date of this Agreement through the Effective
Time, there shall not have occurred any change, circumstance or event
concerning NGRU and the NGRU Subsidiaries, taken as a whole, that has
had or could be reasonably likely to have a NGRU Material Adverse
Effect, and BPOMS shall have received a certificate, dated the Closing
Date, signed on behalf of NGRU by the Chairman, Chief Financial
Officer, or Chief Financial Officer of NGRU to the foregoing effect to
such officer's knowledge.
(d) Immediately prior to the Effective Time, total combined
cash and cash equivalents of NGRU and its Subsidiaries shall be at
least equal to the U.S. Reserved Cash as defined in Section 1.2(b)(i).
(e) NGRU shall have received, in form satisfactory to BPOMS,
written resignations dated and effective as of the Closing Date,
executed by the directors and officers of NGRU who are not to continue
as directors and officers of NGRU pursuant to Section 6.12, and each of
the individuals who are to be officers of NGRU pursuant to that Section
shall have been appointed officers of NGRU in such capacity as of the
Effective Time.
(f) Neither the principal executive officer nor the principal
financial officer of NGRU shall have failed to provide, with respect to
any NGRU SEC Document filed (or required to be filed) with the SEC on
or after the date of this Agreement, any necessary certification in the
form required under Rule 13a-14 under the Exchange Act and 18 U.S.C.
ss.1350.
Section 7.3 CONDITIONS TO OBLIGATIONS OF NGRU AND MERGER SUB
TO EFFECT THE MERGER.
The obligations of NGRU and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions, unless waived by NGRU:
(a) Each of the representations and warranties of BPOMS
contained in this Agreement shall be true and correct as of the date of
this Agreement and as of the Closing Date as though made on and as of
the Closing Date, except to the extent that any changes, circumstances
or events making such representations and warranties not true or
correct would not, individually or in the aggregate, constitute a BPOMS
Material Adverse Effect (without regard to any materiality
qualification contained in such representation or warranty), and NGRU
shall have received a certificate, dated the Closing Date, signed on
behalf of BPOMS by the Chief Executive Officer or the President of
BPOMS to the foregoing effect.
(b) BPOMS shall have performed or complied in all material
respects (without regard to any materiality qualification contained in
such representation or warranty) 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 NGRU shall have received a
certificate, dated the Closing Date, signed on behalf of BPOMS by the
Chief Executive Officer or the Chief Financial Officer of BPOMS to the
foregoing effect.
(c) From the date of this Agreement through the Effective
Time, there shall not have occurred any change, circumstance or event,
concerning BPOMS and the BPOMS Subsidiaries, taken as a whole, that has
had or could be reasonably likely to have a BPOMS Material Adverse
Effect and NGRU shall have received a certificate, dated the Closing
Date, signed on behalf of BPOMS by the Chief Executive Officer or the
Chief Financial Officer of BPOMS to the foregoing effect.
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(d) NGRU shall have received from each holder of shares of
BPOMS capital stock or securities convertible or exchangeable or
exercisable for BPOMS Common Stock, an investor suitability
questionnaire in form and substance satisfactory to NGRU, containing
customary investment representations and certifying that such holder
qualifies as an "accredited investor" as defined in Regulation D, or if
such holder does not qualify as an "accredited investor," that such
holder is not a "U.S. person" as defined in Regulation S and is not
acquiring NGRU securities for the account or benefit of any U.S.
person.
(e) Immediately prior to the Effective Time, BPOMS's
unrestricted cash that shall remain unrestricted and available for
payment of the NGRU Dividend through the Dividend Payable Date shall be
at least $1,500,000, and its capital surplus (as that term is used in
the DGCL) shall be at least $1,500,000, and NGRU shall have received a
certificate to such effect signed by the Chief Financial Officer of
BPOMS.
(f) Holders of not more than zero percent (0%) of the
outstanding shares of BPOMS Common Stock and holders of not more than
zero percent (0%) of the outstanding shares of BPOMS Series A Preferred
Shares, BPOMS Series B Preferred Shares and BPOMS Series C Preferred
Shares shall have not voted in favor of the Merger or not consented
thereto in writing and shall have delivered prior to the Effective Time
written notice of such holders' intent to demand payment as dissenting
stockholders for such shares in accordance with the DGCL.
(g) BPOMS stockholders holding a majority of the disinterested
shares of BPOMS Common Stock, BPOMS Series A Preferred Shares, BPOMS
Series B Preferred Sharesand BPOMS Series C Preferred Shares, voting as
separate classes, shall have approved any amendment to the terms of any
certificate of designation of BPOMS and all other required approval by
BPOMS stockholders shall have been obtained, and NGRU shall have
received a certificate to such effect signed by the Secretary of BPOMS.
ARTICLE 8
TERMINATION
Section 8.1 TERMINATION.
This Agreement may be terminated and abandoned at any time prior to the
Effective Time (whether before or after approval and adoption of this Agreement
and/or approval of the issuance of the NGRU Shares by the stockholders of NGRU):
(a) by mutual written consent authorized by the Board of
Directors of NGRU and BPOMS;
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(b) by either NGRU or BPOMS if any United States federal or
state court of competent jurisdiction or other governmental entity shall have
issued a final order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non appealable, provided that the Party seeking to terminate shall
have used its commercially reasonable efforts to appeal such order, decree,
ruling or other action;
(c) by NGRU upon a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of BPOMS and as a
result of such breach the conditions set forth in Section 7.3(a) or Section
7.3(b), as the case may be, would not then be satisfied; provided, that if such
breach is capable of being cured by the Termination Date and BPOMS diligently
proceeds to cure the breach, then NGRU shall not have the right to terminate
this Agreement under this Section 8.1(c) unless such breach has not been so
cured by the Termination Date;
(d) by BPOMS upon a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of NGRU or Merger
Sub and as a result of such breach the conditions set forth in Section 7.2(a) or
Section 7.2(b), as the case may be, would not then be satisfied; provided, that
if such breach is capable of being cured by the Termination Date and NGRU
diligently proceeds to cure the breach, then BPOMS shall not have the right to
terminate this Agreement under this Section 8.1(d) unless such breach has not
been so cured by the Termination Date;
(e) by BPOMS or NGRU if (i) the Board of Directors of NGRU
pursuant to Section 6.9 withdraws or modifies adversely to BPOMS its approval or
recommendation of this Agreement or (ii) NGRU enters into a definitive agreement
providing for the implementation of any Acquisition Proposal in accordance with
the provisions of Section 6.9;
(f) by NGRU if (i) the Board of Directors of BPOMS pursuant to
Section 6.9 withdraws or modifies adversely to NGRU its approval or
recommendation of this Agreement or (ii) BPOMS enters into or engages in
negotiations regarding an Acquisition Proposal or otherwise violates the
provisions of Section 6.9;
(g) by either NGRU or BPOMS, if the Merger shall not have been
consummated on or before December 22, 2006 ("TERMINATION DATE") (other than due
to the failure of the Party seeking to terminate this Agreement to perform its
obligations under this Agreement required to be performed by it at or prior to
the Effective Time or a breach by such Party of this Agreement);
(h) by NGRU or BPOMS if this Agreement and the transactions
contemplated hereby shall have failed to receive the requisite vote for approval
and adoption by the stockholders of NGRU upon the holding of a duly convened
stockholders meeting and any adjournments thereof;
(i) by NGRU if BPOMS suffers a BPOMS Material Adverse Effect,
or by BPOMS if NGRU suffers a NGRU Material Adverse Effect;
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(j) by NGRU if immediately prior to the Effective Time BPOMS's
capital surplus (as that term is used in the DGCL) is less than $1,500,000 or
BPOMS's unrestricted cash that shall remain unrestricted and available for
payment of the NGRU Dividend through the Dividend Payable Date is less than
$1,500,000; or
(k) by either Party, if the other Party becomes unable to pay
its liabilities as they come due or seeks protection under any bankruptcy,
receivership, trust deed, creditors arrangement, composition or comparable
proceeding, or if any such proceeding is instituted against such other Party
(and not dismissed within sixty (60) days).
The right of any Party hereto to terminate this Agreement pursuant to
this Section 8.1 shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Party hereto, any Person
controlling any such Party or any of their respective employees, officers,
directors, agents, representatives or advisors, whether prior to or after the
execution of this Agreement.
Section 8.2 EFFECT OF TERMINATION.
In the event of the termination and abandonment of this Agreement
pursuant to Section 8.1 hereof, this Agreement shall forthwith become void and
have no effect, without any liability on the part of any Party hereto or its
affiliates, directors, officers or stockholders and all rights and obligations
of any Party hereto shall cease except for the agreements contained in this
Section 8.2 (Effect of Termination), Section 8.3 (Expenses and Termination
Fees), Section 8.4 (Extension; Waiver) and Section 9.5 (Confidentiality);
provided, however, that nothing contained in this Section 8.2 shall relieve any
Party from liability for any breach of this Agreement.
Section 8.3 EXPENSES AND TERMINATION FEES.
(a) Except as set forth in this Section 8.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such expenses, whether
or not the Merger is consummated and irrespective of the failure of any closing
condition set forth in Article 7 hereof to be met.
(b) BPOMS shall pay as and when requested all fees and
expenses incurred by NGRU in listing the NGRU Shares on the Nasdaq Capital
Market in connection with the Merger and in connection with the substitute
listing for the Reverse Split.
(c) Except as otherwise provided in Section 8.3(e), NGRU shall
pay BPOMS a termination fee of $200,000 upon the termination of this Agreement
(i) by BPOMS pursuant to Section 8.1(d), (ii) by BPOMS or NGRU pursuant to
Section 8.1(e), or (iii) by NGRU other than as expressly permitted by Section
8.1.
(d) BPOMS shall pay NGRU a termination fee of $400,000 upon
the termination of this Agreement (i) by NGRU pursuant to Section 8.1(c),
Section 8.1(f) or Section 8.1(j), or (iii) by BPOMS other than as expressly
permitted by Section 8.1.
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(e) NGRU shall pay BPOMS a termination fee of $200,000 upon
the termination of this Agreement by NGRU or BPOMS in the event that the NGRU
Divestiture Agreement is terminated and Das Family Holdings pays a termination
fee to NGRU in connection therewith; provided, however, that to the extent that
Das Family Holdings pays NGRU less than $400,000 upon termination of the NGRU
Divestiture Agreement (other than upon mutual agreement of the parties thereto),
NGRU shall pay BPOMS 50% of such lesser amount.
(f) If either Party fails to pay when due any amount payable
by such Party under Section 8.3, then (i) such Party shall reimburse the other
Party for reasonable costs and expenses (including reasonable fees and
disbursements of counsel) incurred in connection with the collection of such
overdue amount and the enforcement by the other Party of its rights under this
Section 8.3, and (ii) such Party shall pay to the other Party interest on such
overdue amount (for the period commencing as of the date such overdue amount was
originally required to be paid and ending on the date such overdue amount is
actually paid to the other Party in full) at a rate per annum equal to the
"PRIME RATE" (as announced by Bank of America or any successor thereto) in
effect on the date such overdue amount was originally required to be paid.
Section 8.4 EXTENSION; WAIVER.
At any time prior to the Effective Time, any Party hereto, by action
taken by its Board of Directors, may, to the extent legally allowed, (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties made to such Party contained herein or in any document delivered
pursuant hereto and (c) 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.
ARTICLE 9
GENERAL PROVISIONS
Section 9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.
The representations and warranties of NGRU, Merger Sub, and BPOMS
contained in this Agreement or any certificate or instrument delivered pursuant
to this Agreement shall terminate at the Effective Time, and only the covenants
that by their terms survive the Effective Time and this Article 9 shall survive
the Effective Time.
Section 9.2 NOTICES.
Any notice required to be given hereunder shall be in writing and shall
be sent by facsimile transmission (confirmed by any of the methods that follow),
courier service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first class postage prepaid) and
addressed as follows:
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If to BPOMS: BPO Management Services, Inc.
19800 MacArthur Blvd., Suite 820
Irvine, CA 92612
Attn: Jack T. Cornman, Esq.
Tel.: (949) 224-1500
Fax: (949) 224-1505
With a copy to (which shall not constitute notice):
Cornman & Swartz
19800 MacArthur Blvd., Suite 820
Irvine, CA 92612
Attn: Jack T. Cornman, Esq.
Tel.: (949) 224-1500
Fax: (949) 224-1505
and
Bryan Cave LLP
1900 Main Street, Suite 700
Irvine, CA 92614
Attn: Randolf W. Katz, Esq.
Tel.: (949) 223-7103
Fax: (949) 223-7100
If to NGRU: netGuru, Inc.
22700 Savi Ranch Parkway
Yorba Linda, CA 92887
Attn: Chief Financial Officer
Tel.: (714) 974-2500
Fax: (714) 974-4771
With a copy to (which shall not constitute notice):
Rutan & Tucker, LLP
611 Anton Boulevard, Suite 1400
Costa Mesa, CA 92626
Attn: Cristy Parker, Esq.
Tel: (714) 641-5100
Fax: (714) 546-9035
or to such other address as any Party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date received.
Section 9.3 ASSIGNMENT; BINDING EFFECT; BENEFIT.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties;
provided, however, NGRU and Merger Sub may each assign their respective rights,
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interests or obligations hereunder to any affiliate provided that NGRU remains
obligated hereunder and such assignment does not alter the rights, interests or
obligations of BPOMS hereunder. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any Person other than the parties
hereto or their respective heirs, surviving corporations, executors,
administrators and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
Section 9.4 ENTIRE AGREEMENT.
This Agreement, the BPOMS Disclosure Letter, the NGRU Disclosure Letter
and any documents delivered by the parties in connection herewith constitute the
entire agreement among the Parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with respect
thereto, except that the Non-Disclosure Agreement (as hereinafter defined) shall
remain in effect and shall be binding upon NGRU and BPOMS in accordance with its
terms. No addition to or modification of any provision of this Agreement shall
be binding upon any Party hereto unless made in writing and signed by all
parties hereto.
Section 9.5 CONFIDENTIALITY.
NGRU and BPOMS understand and agree that they are and shall remain
bound by and subject to the terms of the non-disclosure agreement, dated as of
May 3, 2006, by and between NGRU and BPOMS (the "NON-DISCLOSURE AGREEMENT").
Section 9.6 AMENDMENT.
This Agreement may be amended by the parties hereto, by action taken by
their respective authorized Person, Persons or governing bodies, at any time
before or after approval of matters presented in connection with the Merger by
the stockholders of BPOMS and NGRU, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 9.7 GOVERNING LAW; ATTORNEYS' FEES.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its
rules of conflict of laws. Each of NGRU and BPOMS hereby irrevocably
and unconditionally consent to submit to the exclusive jurisdiction of
the courts of the State of Delaware and the United States of America
located in the State of Delaware (the "DELAWARE COURTS") for any
litigation arising out of or relating to this Agreement and the
transactions contemplated hereby (and agree not to commence any
litigation relating thereto except in such courts), consent to the
service of process in such Delaware Courts, waive any objection to the
laying of venue of any such litigation in the Delaware Courts and agree
not to plead or claim in any Delaware Court that such litigation
brought therein has been brought in any inconvenient forum.
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(b) In any action at law or suit in equity to enforce this
Agreement or the rights of any Parties under this Agreement, the
prevailing Party in such action or suit shall be entitled to receive a
reasonable sum for its attorney's fees and all other reasonable costs
and expenses incurred in such action or suit.
Section 9.8 COUNTERPARTS.
This Agreement may be executed by the parties hereto in separate
counterparts, each of which so executed and delivered shall be an original, but
all such counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a number of copies hereof each signed by less
than all, but together signed by all of the parties hereto. In the event that
any signature is delivered by facsimile transmission, such signature shall
create a valid and binding obligation of the Party executing (or on whose behalf
such signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.
Section 9.9 HEADINGS.
Headings of the Articles and Sections of this Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
Section 9.10 WAIVERS.
Except as provided in this Agreement, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any Party, shall be deemed to constitute a waiver by the Party taking such
action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any Party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
Section 9.11 INCORPORATION.
The BPOMS Disclosure Letter and the NGRU Disclosure Letter and all
Schedules and Exhibits attached hereto and thereto and referred to herein and
therein are hereby incorporated herein and made a part hereof for all purposes
as if fully set forth herein.
Section 9.12 SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
Section 9.13 INTERPRETATION AND CERTAIN DEFINITIONS.
(a) In this Agreement, unless the context otherwise requires,
words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders.
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(b) As used in this Agreement, the word "SUBSIDIARY" or
"SUBSIDIARIES" when used with respect to any Party means any corporation,
partnership, joint venture, business trust or other entity, of which such Party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization.
(c) As used in this Agreement, the word "PERSON" means an
individual, a corporation, a partnership, an association, a joint stock company,
a trust, a limited liability company, any unincorporated organization or any
other entity.
(d) As used in this Agreement unless otherwise indicated, the
word "AFFILIATE" shall have the meaning set forth in Rule 12b-2 of the Exchange
Act.
Section 9.14 SPECIFIC PERFORMANCE.
The parties hereto agree that if any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached, irreparable damage would occur, no adequate remedy at law
would exist, and damages would be difficult to determine, and that the parties
shall be entitled to specific performance of the terms hereof, without the
posting of any bond whatsoever in addition to any other remedy at law or equity.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
BPO MANAGEMENT SERVICES, INC.
By /S/ PATRICK A. DOLAN
---------------------------------
Name: Patrick A. Dolan
Title: Chairman & CEO
NETGURU, INC.
By /S/ BRUCE K. NELSON
---------------------------------
Name: Bruce K. Nelson
Title: Chief Financial Officer
BPO ACQUISITION CORP.
By /S/ BRUCE K. NELSON
---------------------------------
Name: Bruce K. Nelson
Title: President
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
A-70
APPENDIX B
EXECUTION COPY
________________________________________________________________________________
PURCHASE AGREEMENT
DATED AS OF AUGUST 29, 2006
BETWEEN
DAS FAMILY HOLDINGS
AND
NETGURU, INC.
________________________________________________________________________________
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Table of Contents
-----------------
Page
----
ARTICLE 1 DEFINED TERMS........................................................1
Section 1.1. Definitions.................................................1
Section 1.2. Dollar Amounts..............................................1
ARTICLE 2 THE TRANSACTION......................................................1
Section 2.1. Stock and Asset Purchase....................................1
Section 2.2. Additional Seller Assets....................................2
Section 2.3. Assumed Seller Obligations..................................3
Section 2.4. Purchase Price..............................................4
Section 2.5. Closing.....................................................5
Section 2.6. Transfer Taxes..............................................5
Section 2.7. Allocation of Purchase Price................................5
Section 2.8. Section 338 Election........................................5
Section 2.9. Vital Communications Escrow.................................5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.............................5
Section 3.1. Organization and Qualification; Investments.................6
Section 3.2. Capitalization of the Company...............................6
Section 3.3. Authority Relative to this Agreement........................6
Section 3.4. Proxy Statement.............................................7
Section 3.5. Consents and Approvals; No Violations.......................7
Section 3.6. Brokerage...................................................7
Section 3.7. Stockholder Vote Required...................................7
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER..........................7
Section 4.1. Organization................................................7
Section 4.2. Authority Relative to this Agreement........................8
Section 4.3. Consents and Approvals; No Violations.......................8
Section 4.4. Information Supplied........................................8
B-ii
Table of Contents
-----------------
(continued)
Page
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ARTICLE 5 COVENANTS............................................................9
Section 5.1. Conduct of the Business.....................................9
Section 5.2. No Solicitation or Negotiation.............................10
Section 5.3. Proxy Statement............................................13
Section 5.4. Meeting of Stockholders of Seller..........................13
Section 5.5. Access to Information......................................14
Section 5.6. Certain Filings; Reasonable Efforts........................14
Section 5.7. Public Announcements.......................................14
Section 5.8. Notification of Certain Matters............................14
Section 5.9. Additions to and Modification of the
Seller Disclosure Schedule.................................15
Section 5.10. Access to Company Employees................................15
Section 5.11. Non-Solicitation of Employees and Customers................15
Section 5.12. Change of Corporate Name and Trading Symbol;
Transition Agreement.......................................16
Section 5.13. Discussions Regarding Structure............................16
Section 5.14. Termination of Retention Agreement.........................16
Section 5.15. Termination of Split Dollar Arrangement....................16
ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE TRANSACTION.......................16
Section 6.1. Conditions to Each Party's Obligations to
Effect the Transaction.....................................16
Section 6.2. Conditions to the Obligations of Seller....................17
Section 6.3. Conditions to the Obligations of Purchaser.................18
Section 6.4. Proceedings and Documents..................................19
Section 6.5. Frustration of Closing Conditions..........................19
ARTICLE 7 TERMINATION; AMENDMENT; WAIVER......................................19
Section 7.1. Termination................................................19
Section 7.2. Effect of Termination......................................20
Section 7.3. Fees and Expenses..........................................20
Section 7.4. Amendment..................................................21
Section 7.5. Extension; Waiver..........................................21
ARTICLE 8 INDEMNIFICATION.....................................................22
Section 8.1. Survival...................................................22
Section 8.2. Indemnification............................................22
B-iii
Table of Contents
-----------------
(continued)
Page
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ARTICLE 9 MISCELLANEOUS.......................................................25
Section 9.1. Entire Agreement; Assignment...............................25
Section 9.2. Validity...................................................25
Section 9.3. Actions by Parties.........................................25
Section 9.4. Notices....................................................25
Section 9.5. Governing Law and Venue; Waiver of Jury Trial..............26
Section 9.6. Descriptive Headings.......................................27
Section 9.7. Parties in Interest........................................27
Section 9.8. Participation in Drafting..................................27
Section 9.9. Specific Performance.......................................27
Section 9.10. Incorporation of Exhibits and Schedules....................28
Section 9.11. Counterparts...............................................28
B-iv
PURCHASE AGREEMENT
This PURCHASE AGREEMENT (this "AGREEMENT"), dated as of August 29,
2006, is by and between Das Family Holdings, a California corporation (the
"PURCHASER"), and netGuru, Inc., a Delaware corporation ("SELLER").
RECITALS
--------
WHEREAS, Seller owns beneficially and of record 100,000 of the
outstanding shares (collectively, the "SHARES") of Capital Stock of Research
Engineers Ltd., an Indian company ("COMPANY");
WHEREAS, Purchaser is an Affiliate of Amrit K. Das, who is the Chairman
of the Board and Chief Executive Officer of Seller;
WHEREAS, subject to the terms and conditions of this Agreement,
Purchaser desires to acquire and assume from Seller, and Seller desires to sell
and transfer to Purchaser, all of the Shares, the Additional Seller Assets owned
by Seller, and the Assumed Seller Obligations;
WHEREAS, concurrently with the Closing, Seller shall consummate the
Merger contemplated by the Merger Agreement; and
WHEREAS, each of the Das Stockholders has entered into a Voting
Agreement and Irrevocable Proxy with Seller and BPO Management Services, Inc., a
Delaware corporation ("BPOMS"), in the form attached as an exhibit to the Merger
Agreement (collectively, the "VOTING AGREEMENTS"), providing among other things,
that each such stockholder shall vote all shares of common stock of Seller
controlled by such stockholder in favor of or otherwise consent to the
transactions contemplated by this Agreement and the Merger Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, Seller and Purchaser hereby agree as
follows:
ARTICLE 1
DEFINED TERMS
Section 1.1. DEFINITIONS. For the purposes of this Agreement,
capitalized terms used herein shall have the meanings set forth on EXHIBIT A
hereto.
Section 1.2. DOLLAR AMOUNTS. All references in this Agreement to
dollars or $ shall mean U.S. dollars.
ARTICLE 2
THE TRANSACTION
Section 2.1. STOCK AND ASSET PURCHASE.
B-1
(a) SALE AND PURCHASE. On the basis of the representations,
warranties, covenants, and agreements herein, and subject to the satisfaction or
waiver of the conditions set forth herein and the terms hereof, at the Closing,
Purchaser shall purchase from Seller, and Seller shall sell and transfer to
Purchaser, all of the Shares and Additional Seller Assets, free and clear of any
Liens, and Purchaser shall assume all of the Assumed Seller Obligations.
(b) PAYMENT AND WITHHOLDING BY PURCHASER. At the Closing,
Purchaser shall pay to Seller the Purchase Price, less the Withheld Taxes, by
wire transfer of immediately available funds. At the Closing, Purchaser shall
pay the full amount of Withheld Taxes to the relevant taxation authority in
accordance with Applicable Law and shall promptly furnish Seller with copies of
all documentation relating to such payment when and as it becomes available.
(c) DELIVERIES BY SELLER. At the Closing, Seller shall deliver
to Purchaser, free and clear of any Liens, (i) certificates representing the
Shares being sold by Seller hereunder, accompanied by duly executed share
transfer deeds and (ii) the Additional Seller Assets (except as otherwise
contemplated by the Transition Agreement). In addition, at the Closing,
Purchaser shall accept and assume the Assumed Seller Obligations.
(d) RECORDATION OF SHARE TRANSFER. Immediately following the
Closing on the Closing Date, Purchaser shall cause the Company's board of
directors to approve the transfer of the Shares from Seller to Purchaser in
accordance with Applicable Law. Purchaser shall promptly make all filings and
take all other steps necessary to formally record the share transfer in
accordance with Applicable Law and shall promptly furnish Seller with copies of
all documentation relating to such filings and other steps when and as it
becomes available.
Section 2.2. ADDITIONAL SELLER ASSETS. For purposes of this Agreement,
the term "ADDITIONAL SELLER ASSETS" shall mean all of Seller's rights and
interests in the following:
(a) SELLER MARKS. All of Seller's worldwide right, title and
interest in and to the marks and Internet domain names listed on SCHEDULE 2.2(A)
(the "SELLER MARKS"), including all registrations and applications for
registration therefor and any common law rights therein in the United States,
Canada, and throughout the world, all as listed and described on SCHEDULE
2.2(A), together with the goodwill related thereto, along with the right to
pursue all claims and recover all damages and profits for past infringements
thereof and all other related causes of action in connection therewith.
(b) WEBWORKS(TM) SOURCE CODE. One copy of the source code for
Seller's WEBWORKSTM software (the "SOFTWARE") documented in a manner that will
enable a software engineer of reasonable experience and skill to understand,
interpret and modify such source code. The Software is provided to Purchaser
without any representations or warranties from Seller. Purchaser and its
Affiliates shall be entitled to, on a nonexclusive basis, install, transfer,
sell, use, execute, copy, edit, format, modify, translate and create derivative
works of the Software perpetually and without additional payment; PROVIDED,
HOWEVER, that the foregoing rights shall exclude the right of Purchaser to use
the WEBWORKSTM name; PROVIDED FURTHER, HOWEVER, that in the event that any
portion of the Software is bundled together with Seller's eReview product and
sold by Purchaser, Purchaser shall make such sale in accordance with the terms
and conditions of that certain Value-Added Reseller Agreement, including the
payment to Seller of any stated royalty and maintenance fees specified therein;
PROVIDED FURTHER, HOWEVER, that Purchaser shall not sell or attempt to sell the
re-branded Software to any existing customer of Seller who is listed on SCHEDULE
2.2(B) attached hereto. The foregoing includes the rights of Purchaser's and its
Affiliates' customers to install, use, execute and copy the Software. All right,
title and interest in and to the Software and all related documentation, and all
copyrights, patents, trademarks, service marks or other intellectual property or
proprietary rights thereto, are and shall remain solely with Seller. All right,
B-2
title and interest in and to any enhancements, modifications, improvements,
updates or derivative works made by Purchaser or its Affiliates to the Software
and all related documentation shall remain with Purchaser and its Affiliates.
Seller acknowledges that no such title to any such enhancements, modifications,
improvements, updates or derivative works made by Purchaser or its Affiliates to
the Software, and related documentation, is granted to Seller and that no such
assertion shall be made by Seller; provided, however, that Purchaser is not
being granted any rights in or to enhancements, modifications, improvements,
updates or derivative works made by Seller or its Affiliates to the Software
(collectively and individually, "SELLER CHANGES"), and any related documentation
whether or not such Seller Changes are the same or similar to any changes or
improvements to the Software made by Purchaser. Purchaser and its Affiliates
shall not be entitled to any future updates of the Software or any other Seller
Changes unless otherwise agreed to in writing with Seller or its successors or
assigns.
(c) ACCOUNTS RECEIVABLE. All accounts receivable outstanding
from SMI Joist and Guava Tech.
(d) SELLER CONTRACTS. All of the rights and benefits existing
under the contracts set forth on SCHEDULE 2.2(D) hereto.
(e) STAAD.SUITE CROSS LICENSE. All of the rights and benefits
of Seller to the seventy-five (75) perpetual, paid-up, named user licenses of
STAAD.Pro 2005 (with all international design codes) and the related STAAD.suite
of products (including updates) described in detail on SCHEDULE B2 to that
certain Transition Services Agreement between Seller and Bentley Systems,
Incorporated dated on or about November 18, 2005.
(f) MISCELLANEOUS SELLER ASSETS. All of Seller's right, title
and interest in and to the additional assets set forth on SCHEDULE 2.2(F)
hereto.
Section 2.3. ASSUMED SELLER OBLIGATIONS. At the Closing, Purchaser
shall assume the executory obligations of Seller with respect to the Business,
the Additional Seller Assets, and the following specified liabilities
(collectively, the "ASSUMED SELLER OBLIGATIONS"):
(a) All obligations and liabilities of Seller, the Company and
their respective Affiliates associated with payments demanded by or due or to
become due to Indian customs authorities relating to the Company or the Business
("CUSTOMS OBLIGATIONS");
(b) All obligations and liabilities of Seller, the Company and
their respective Affiliates associated with the existing dispute with Vital
Communications;
(c) All obligations and liabilities, if any, of Seller and its
Affiliates associated with that certain Change in Control and Executive
Retention Agreement between Seller and Amrit K. Das made effective June 1, 2005
("RETENTION AGREEMENT") and the Split Dollar Agreement and related Collateral
Assignment, both dated February 14, 1992, by and among Research Engineers, Inc.,
a California corporation, Amrit K. Das, and Santanu K. Das, acting solely in his
capacity as Trustee of the Das Insurance Trust (together, the "SPLIT DOLLAR
ARRANGEMENT"); and
(d) All obligations and liabilities of Seller, the Company and
their respective Affiliates associated with the remaining balance payable in
connection with Seller's acquisition of Apex Techno Consultants Private Limited.
B-3
Notwithstanding the foregoing, with respect to SECTION 2.2(B) above,
the Assumed Seller Obligations shall only include any liabilities and
obligations that arise from actions or inactions of Purchaser and its Affiliates
subsequent to the Closing. Additionally, to the extent that certain of the
Seller Marks are transferred to Purchaser after the Closing pursuant to the
Transition Agreement, Purchaser shall not assume any liabilities or obligations
with respect to such Seller Marks until the date of transfer and such assumption
shall exclude liabilities or obligations arising from actions or inactions of
Seller and its Affiliates occurring between the Closing and the date of
transfer.
Section 2.4. PURCHASE PRICE. The Purchase Price shall be $2,000,000
(the "PURCHASE PRICE").
(a) Prior to the Closing, Seller shall declare a special
dividend in respect of the Seller's common stock to holders of record of
Seller's common stock immediately prior to the Effective Time in an aggregate
amount of $3,500,000 (the "SELLER DIVIDEND"). Prior to the Effective Time,
Seller's board of directors shall take all actions necessary to approve the
declaration and payment of the Seller Dividend out of the proceeds received by
Seller from the Purchase Price and the BPOMS Available Cash in accordance with
applicable provisions of the DGCL. Seller shall use commercially reasonable
efforts to pay the Seller Dividend on the tenth (10th) Business Day after the
Closing Date and shall pay the Seller Dividend in no event later than ten (10)
Business Days after the Closing Date.
(b) On the calendar day preceding the Closing Date ("BALANCE
SHEET DATE"), the parties shall complete preparation of: (1) a pro forma
consolidated balance sheet of Seller and its Subsidiaries ("PRE-CLOSING SELLER
BALANCE SHEET"), and (2) a pro forma consolidated balance sheet of Seller and
its Subsidiaries other than the Company ("U.S. BALANCE SHEET"). Each of the two
balance sheets shall be based upon financial information as of the close of
business on the fifth (5th) Business Day preceding the Balance Sheet Date and
shall be prepared in accordance with U.S. GAAP. The parties shall cooperate with
one another in the timely preparation of the balance sheets and shall make
available to the other such personnel, work papers and other documents and
financial information relating to the balance sheets as the other may request.
Simultaneous with completion of the preparation of the balance sheets, the
parties shall make the following calculations:
(i) "U.S. RESERVED CASH" shall be calculated by
subtracting (x) the deferred gain on sale-leaseback, all
liabilities that are included in the calculation of U.S.
Working Capital and 80% of deferred maintenance revenues from
(y) the sum of the total amount of liabilities on the U.S.
Balance Sheet plus any Withheld Taxes to be withheld by
Purchaser in accordance with Section 2.7, and then adding (z)
the U.S. Working Capital Shortfall, if any.
(ii) "U.S. WORKING CAPITAL" shall be calculated from
the U.S. Balance Sheet by subtracting (x) the sum of accounts
payable, accrued expenses, 20% of deferred maintenance
revenues, and income taxes payable from (y) the sum of
accounts receivable, prepaid expenses, deposits and deferred
income taxes.
(iii) "U.S. WORKING CAPITAL SHORTFALL" shall be the
amount by which U.S. Working Capital is less than $0,
reflected as a positive number.
(c) Any cash and cash equivalents on the Pre-Closing Seller
Balance Sheet in excess of the amount calculated as U.S. Reserved Cash shall be
distributed at the Closing to the Company via an adjusting wire transfer from
Seller to the Company, it being understood that the Purchase Price shall not be
distributed at the Closing to the Company but rather shall be held by Seller to
be applied to the payment of the Seller Dividend.
B-4
Section 2.5. CLOSING. Subject to the satisfaction or waiver of all
conditions to the obligations of the parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions the
respective parties shall take at the Closing itself), the closing of the
transactions contemplated by this Agreement (the "CLOSING") shall take place at
the offices of Rutan & Tucker, LLP, 611 Anton Boulevard, Suite 1400, Costa Mesa,
California 92626, simultaneous with the consummation of the merger transaction
contemplated by the Merger Agreement, or at such other place or on such other
date as may be mutually agreeable to Purchaser and Seller. The date and time of
the Closing are herein referred to as the "CLOSING DATE."
Section 2.6. TRANSFER TAXES. Each of Seller and Purchaser shall pay
one-half of any sales, use, value-added, gross receipts, excise, registration,
stamp, duty, transfer and other similar taxes and governmental fees imposed or
levied by reason of, in connection with or attributable to, the transfer of the
Shares (including, without limitation, any facilities occupied by the Company)
or any other transfer contemplated by Article 2 of this Agreement (other than
the Withheld Taxes, which shall be paid entirely by Purchaser pursuant to
SECTION 2.1(B)) ("TRANSFER TAXES"). This amount shall not include any Transfer
Taxes that will be rebated or refunded to, or otherwise recovered by Seller,
Purchaser, or any of their respective Affiliates. Seller and Purchaser shall
cooperate with each other to the extent reasonably requested and legally
permitted to minimize any such Transfer Taxes.
Section 2.7. ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated among the Shares, the Additional Seller Assets and the
non-solicitation covenants in accordance with EXHIBIT B to be completed by the
parties in good faith on or prior to the Balance Sheet Date. Purchaser and
Seller agree to use such allocation for purposes of all federal and state Tax
reports and returns with respect to the sale and purchase of the Shares and the
Additional Seller Assets. EXHIBIT B also shall include the amount, if any,
determined by Seller that, as a result of the transfer of any capital assets
pursuant to this Agreement, must be withheld by Purchaser pursuant to the
provisions of the Indian Income Tax Act that require the transferee of capital
assets situated in India to withhold an amount equal to the capital gains taxes
(plus applicable surcharges) on the capital assets being transferred to
Purchaser pursuant to this Agreement (the "WITHHELD TAXES").
Section 2.8. SECTION 338 ELECTION. The parties hereby acknowledge and
agree that Purchaser shall be entitled, at Purchaser's sole discretion, to make
an election under Section 338 of the Internal Revenue Code of 1986, as amended
(the "CODE"), in connection with the purchase of the Company contemplated by
this Agreement. Immediately following any such election, Purchaser shall pay to
Seller any additional Taxes imposed upon Seller as a result of such election.
Section 2.9. VITAL COMMUNICATIONS ESCROW. At the Closing, Purchaser
shall deposit $125,000 cash (which amount shall be separate from and in addition
to the Purchase Price) in an escrow account upon terms mutually agreed upon by
the parties, which cash shall remain in such account to satisfy Purchaser's
indemnification obligations to Seller with regard to the Assumed Seller
Obligations referenced in SECTION 2.3(B), until the final resolution of the
Assumed Seller Obligations described in SECTION 2.3(B) above, at which point the
balance of such amount, if any, shall be released to Purchaser to the extent not
previously disbursed (with Purchaser's prior written consent) in satisfaction of
such Assumed Seller Obligations.
B-5
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser, subject to the
exceptions set forth in the Disclosure Schedule (the "SELLER DISCLOSURE
SCHEDULE") delivered by Seller to Purchaser in accordance with SECTION 5.9 and
attached hereto as EXHIBIT C, that the statements contained in this Article 3
are true and correct. Any qualification of a representation or warranty must be
specifically identified as a qualification or exception. The qualifications or
exceptions shall be deemed to qualify only specifically identified Sections,
Subsections or clauses of a single Section or Subsection hereof, as applicable,
to which such qualification or exception relates, except to the extent that it
is reasonably clear that the qualification or exception applies to additional
Sections, Subsections or clauses.
Section 3.1. ORGANIZATION AND QUALIFICATION; INVESTMENTS.
(a) Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(b) Except as set forth in SECTION 3.1(B) of the Seller
Disclosure Schedule, the Company does not own, or have the right to acquire, the
shares of Capital Stock of any other Person.
Section 3.2. CAPITALIZATION OF THE COMPANY.
(a) The authorized and issued and outstanding shares of
Capital Stock of the Company is as set forth on SECTION 3.2(A) of the Seller
Disclosure Schedule. All of the issued and outstanding shares of Capital Stock
of the Company have been duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights. Seller owns beneficially, and
of record, all of the Shares, free and clear of all Liens.
(b) Except as set forth on SECTION 3.2(B) of the Seller
Disclosure Schedule, as of the date hereof there are outstanding: (i) no shares
of Capital Stock or other voting securities of the Company; (ii) no securities
of the Company convertible into or exchangeable or exercisable for shares of
Capital Stock or other securities of the Company; (iii) no options, warrants,
phantom stock, preemptive or other rights to acquire from the Company, and no
obligations of the Company to issue any Capital Stock, voting securities or
securities convertible into or exchangeable or exercisable for shares of Capital
Stock or other securities of the Company; and (iv) no equity equivalent
interests in the ownership or earnings of the Company or other similar rights
(collectively, "COMPANY SECURITIES"). Except as set forth in SECTION 3.2(B) of
the Seller Disclosure Schedule, there are no (x) outstanding rights or
obligations of the Company to repurchase, redeem or otherwise acquire any
Company Securities or (y) stockholder agreements, voting trusts or other
agreements or understandings to which the Company is a party or by which it is
bound relating to the voting or registration of any shares of Capital Stock of
the Company. All of the issued and outstanding shares of Capital Stock of the
Company were issued in compliance with Applicable Laws.
Section 3.3. AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) Seller has all necessary corporate power and authority to
execute and deliver this Agreement, to perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement, and the consummation of the transactions
contemplated hereby, have been duly and validly authorized by the board of
directors of Seller. This Agreement has been duly and validly executed and
delivered by Seller and, assuming the due authorization, execution and delivery
B-6
hereof by Purchaser, constitutes the valid, legal and binding agreement of
Seller, enforceable against Seller in accordance with its terms, subject to any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect relating to creditors' rights generally or to general
principles of equity.
(b) The board of directors of Seller has approved this
Agreement and the transactions contemplated hereby and determined to make the
Board Recommendation.
Section 3.4. PROXY STATEMENT. The Proxy Statement will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder. Except for information supplied by Purchaser
in writing for inclusion in the Proxy Statement, none of the information
included or incorporated by reference in the Proxy Statement shall, on the date
the Proxy Statement is first mailed to Seller's stockholders or at the time of
the Stockholders' Meeting, 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 were made, not false or misleading. If at any time before the Closing, any
event relating to Seller or any of its Affiliates, officers or directors should
be discovered by Seller which should be set forth in a supplement to the Proxy
Statement, Seller shall promptly inform Purchaser. Notwithstanding the
foregoing, Seller makes no representation or warranty with respect to any
information supplied or to be supplied by Purchaser in writing for inclusion in
the Proxy Statement, that is, will be, or is required to be contained in the
Proxy Statement.
Section 3.5. CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth
in SECTION 3.5 of the Seller Disclosure Schedule and except for filings,
notices, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of the Securities Act, the Exchange
Act, state securities or blue sky laws, and any filings under similar
notification laws or regulations of other foreign Governmental Entities, no
filing with or notice to, and no permit, authorization, consent or approval of
any Person or Governmental Entity is necessary for the execution and delivery by
Seller of this Agreement or the consummation by Seller of the transactions
contemplated hereby. Except as set forth in SECTION 3.5 of the Seller Disclosure
Schedule, neither the execution, delivery and performance of this Agreement by
Seller nor the consummation by Seller of the transactions contemplated hereby
will (with or without the passage of time or the giving of notice or both),
directly or indirectly: (i) conflict with or result in any breach of any
provision of the certificate of incorporation or bylaws (or similar governing
documents) of Seller; (ii) result in a violation or breach of or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation, acceleration or Lien) under
any of the terms, conditions or provisions of any material note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which Seller is a party or by which Seller or any of its properties or assets
are bound; or (iii) violate any order, writ, injunction, decree, law, statute,
rule or regulation applicable to Seller or any of its properties or assets.
Section 3.6. BROKERAGE. Except as set forth in SECTION 3.6 of the
Seller Disclosure Schedule, there are no claims for brokerage commissions,
finders' fees, or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of Seller.
Section 3.7. STOCKHOLDER VOTE REQUIRED. The only vote of the holders of
any class or shares of Capital Stock of Seller necessary to approve the
transactions contemplated by this Agreement is the affirmative vote of the
holders of a majority of the outstanding shares of Seller's common stock
entitled to vote at a stockholders' meeting held for such purpose.
B-7
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
Section 4.1. ORGANIZATION.
(a) Purchaser is duly organized, validly existing and in good
standing under the laws of the State of California, and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. Purchaser has heretofore made
available to Seller accurate and complete copies of its organizational documents
and bylaws, as currently in full force and effect.
(b) Purchaser is duly qualified or licensed to do business in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed would not have a Material Adverse Effect on Purchaser or
the transactions contemplated by this Agreement.
Section 4.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Purchaser has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
have been duly and validly authorized, and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the board of
directors of Purchaser, and no other corporate proceedings on the part of
Purchaser are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Purchaser, and constitutes, assuming the due
authorization, execution and delivery hereof by Seller, a valid, legal and
binding agreement of Purchaser, enforceable against Purchaser in accordance with
its terms, subject to any applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws now or hereafter in effect relating to creditors'
rights generally or to general principles of equity.
Section 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings,
notices, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of the Securities Act, the Exchange
Act, state securities or blue sky laws, and any filings under similar
notification laws or regulations of other foreign Governmental Entities, no
filing with or notice to, and no permit, authorization, consent or approval of
any Person or Governmental Entity is necessary for the execution and delivery by
Purchaser of this Agreement or the consummation by Purchaser of the transactions
contemplated hereby. Neither the execution, delivery and performance of this
Agreement by Purchaser nor the consummation by Purchaser of the transactions
contemplated hereby will (with or without the passage of time or the giving of
notice or both), directly or indirectly: (i) conflict with or result in any
breach of any provision of the organizational documents or Bylaws of Purchaser,
(ii) result in a violation or breach of or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation, acceleration or Lien) under any of the
terms, conditions or provisions of any material note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
Purchaser is a party or by which its properties or assets are bound or (iii)
violate any material order, writ, injunction, decree, law, statute, rule or
regulation applicable to Purchaser or its properties or assets.
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Section 4.4. INFORMATION SUPPLIED. None of the information supplied or
to be supplied by Purchaser for inclusion or incorporation by reference in the
Proxy Statement will result in the Proxy Statement, at the time it is mailed,
containing any untrue statement of a material fact or omitting to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, provided, however, that Purchaser makes no
representation, warranty or covenant with respect to any information supplied or
required to be supplied by Seller that is contained in or omitted from the Proxy
Statement.
ARTICLE 5
COVENANTS
Section 5.1. CONDUCT OF THE BUSINESS. Except as contemplated by this
Agreement or as described in SECTION 5.1 of the Seller Disclosure Schedule,
during the period from the date hereof to the Closing, Seller shall cause the
Company to conduct its operations in the ordinary course of business consistent
with past practice and, to the extent consistent therewith, with no less
diligence and effort than would be applied in the absence of this Agreement, use
commercially reasonable efforts to preserve intact its current business
organization, keep available the service of its current officers and employees
and preserve its relationships with customers, suppliers, distributors, lessors,
creditors, employees, contractors and others having business dealings with them
with the intention that its goodwill and ongoing business shall be unimpaired at
the Closing. Except as otherwise expressly provided in this Agreement and except
as described in SECTION 5.1 of the Seller Disclosure Schedule, prior to the
Closing, the Company shall not, without the prior written consent of Purchaser:
(a) amend its memorandum of association or articles of
association (or other similar governing instrument);
(b) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
any stock of any class or any other debt or equity securities or equity
equivalents (including any stock options or stock appreciation rights);
(c) split, combine or reclassify any shares of its Capital
Stock, declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its Capital
Stock, make any other actual, constructive or deemed distribution in respect of
its Capital Stock or otherwise make any payments to stockholders in their
capacity as such, or redeem or otherwise acquire any of its securities;
(d) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company;
(e) (i) incur or assume any long-term or short-term debt
(including obligations under capital leases) or issue any debt securities,
except for borrowings under existing lines of credit in the ordinary course of
business, or modify or agree to any amendment of the terms of any of the
foregoing, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other Person; (iii) make any loans, advances or capital contributions to or
investments in any other Person (other than customary loans or advances to
employees in each case in the ordinary course of business consistent with past
practice); (iv) pledge or otherwise encumber shares of Capital Stock of the
Company or (v) mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any material Lien (other than any
existing Lien) thereupon;
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(f) except as may be required by Applicable Law, increase in
any manner the compensation of any director, officer or employee or pay any
benefit not required by an employment agreement as in effect as of the date
hereof (including the granting of stock appreciation rights or performance
units);
(g) grant any severance or termination pay to any director,
officer, employee or consultant, except payments made pursuant to employment
agreements outstanding on the date hereof, or as required by Applicable Law;
(h) (A) acquire, sell, lease, license, transfer or otherwise
dispose of any material assets in any single transaction or series of related
transactions that have a fair market value of more than $25,000 in the
aggregate, (B) grant or enter into any exclusive license, distribution,
marketing, sales or other agreement, or (C) sell, transfer or otherwise dispose
of any material Intellectual Property Assets;
(i) except as may be required as a result of a change in law
or in generally accepted accounting principles, materially change any of the
accounting principles, practices or methods used by it;
(j) revalue in any material respect any of its assets,
including writing down the value of inventory or writing-off notes or accounts
receivable, other than in the ordinary course of business;
(k) (i) acquire (by merger, consolidation or acquisition of
stock or assets) any corporation, partnership or other entity or division
thereof or any equity interest therein; (ii) enter into any contract or
agreement that is not consistent with the ordinary course of business and
involves in excess of $25,000 individually or $100,000 in the aggregate; (iii)
amend, modify or waive any right under any contract in any material manner that
is, or would reasonably likely to be, adverse to the Business; (iv) modify its
standard warranty terms for its products or amend or modify any product
warranties in effect as of the date hereof in any material manner that is
adverse to the Business; (v) authorize any additional or new capital expenditure
or expenditures in excess of $25,000 in the aggregate; or (vi) except in the
ordinary course of business, authorize any new or additional manufacturing
capacity expenditure or expenditures for any manufacturing capacity contracts or
arrangements;
(l) make any material Tax election or settle or compromise any
Tax liability or permit any material insurance policy naming it as a beneficiary
or loss-payable to expire or to be canceled or terminated, unless a comparable
insurance policy reasonably acceptable to Purchaser is obtained and in effect;
(m) fail to file any Tax Returns when due (or, alternatively,
fail to file for available extensions) or fail to cause such Tax Returns when
filed to be complete and accurate in all respects to the Knowledge of Seller;
(n) fail to pay any Taxes or other material debts when due;
(o) settle or compromise any pending or threatened suit,
action or claim that (i) relates to the transactions contemplated hereby or (ii)
the settlement or compromise of which would involve more than $25,000 or that
would otherwise be material to the Company or that relates to any material
Intellectual Property Right; or
(p) take or agree in writing or otherwise to take any of the
actions described in SECTIONS 5.1(A) through 5.1(O) or take any action that
would make any of the representations or warranties of Seller contained in this
Agreement (including the exhibits hereto) untrue or incorrect.
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Section 5.2. NO SOLICITATION OR NEGOTIATION.
(a) For purposes of this Agreement, "ACQUISITION PROPOSAL"
shall mean any offer or proposal (other than an offer or proposal made or
submitted by Purchaser to Seller and other than the Merger) contemplating or
otherwise relating to any Acquisition Transaction. "ACQUISITION TRANSACTION"
shall mean any transaction or series of transactions (other than the
transactions contemplated by the Merger Agreement) involving:
(i) any merger, consolidation, amalgamation, share
exchange, business combination, issuance of securities, acquisition of
securities, reorganization, recapitalization, tender offer, exchange offer or
other similar transaction: (i) in which Seller or the Company is a constituent
corporation; (ii) in which a Person or "group" (as defined in the Securities
Exchange Act of 1934, as amended, and the rules promulgated thereunder) of
Persons directly or indirectly acquires beneficial or record ownership of
securities representing more than 15% of the outstanding securities of any class
of voting securities of Seller or the Company; (iii) in which Seller or the
Company issues securities representing more than 15% of the outstanding
securities of any class of voting securities of Seller or the Company; or (iv)
in which Seller or the Company would acquire a "significant subsidiary" as
defined in Rule 1-02(w) of Regulation S-X promulgated under the Exchange Act;
(ii) any sale, lease, exchange, transfer, license,
acquisition or disposition of any business or businesses or assets that
constitute or account for: (i) 15% or more of the consolidated net revenues of
Seller and its Subsidiaries, taken as a whole, consolidated net income of Seller
and its Subsidiaries, taken as a whole, or consolidated book value of the assets
of Seller and its Subsidiaries, taken as a whole; or (ii) 15% or more of the
fair market value of the assets of Seller and its Subsidiaries, taken as a
whole;
(iii) any sale, lease, exchange, transfer, license,
acquisition or disposition of any of the Additional Seller Assets or 5% or more
of the assets of the Business (other than the sale of its products in the
ordinary course of business consistent with past practices); or
(iv) any liquidation or dissolution of Seller or the
Company.
(b) For purposes of this Agreement, "SUPERIOR OFFER" shall
mean an unsolicited bona fide written offer made to Seller or any of its
Subsidiaries by a third party to enter into (i) a merger, consolidation,
amalgamation, share exchange, business combination, issuance of securities,
acquisition of securities, reorganization, recapitalization, tender offer,
exchange offer or other similar transaction as a result of which either (A)
Seller's stockholders prior to such transaction in the aggregate cease to own at
least 50% of the voting securities of the entity surviving or resulting from
such transaction (or the ultimate parent entity thereof) or (B) in which a
Person or "group" (as defined in the Securities Exchange Act of 1934, as
amended, and the rules promulgated thereunder) directly or indirectly acquires
beneficial or record ownership of securities representing 50% or more of
Seller's capital stock or (ii) a sale, lease, exchange transfer, license,
acquisition or disposition of any business or other disposition of at least 50%
of the assets of Seller or its Subsidiaries, taken as a whole, in a single
transaction or a series of related transactions that: (a) was not obtained or
made as a direct or indirect result of a breach of (or in violation of) the
Agreement; and (b) is on terms and conditions that the board of directors of
Seller determines, in its reasonable, good faith judgment, after obtaining and
taking into account such matters that its board of directors deems relevant
following consultation with its outside legal counsel and financial advisor: (x)
is reasonably likely to be more favorable, from a financial point of view, to
Seller's stockholders than the terms of the transactions contemplated by the
Merger Agreement; and (y) is reasonably capable of being consummated; provided,
however, that any such offer shall not be deemed to be a "Superior Offer" if any
financing required to consummate the transaction contemplated by such offer is
not committed and is not reasonably capable of being obtained by such third
party.
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(c) Seller agrees that neither it nor any of its Subsidiaries
shall, nor shall it nor any of its Subsidiaries authorize or permit any of the
officers, directors, investment bankers, attorneys or accountants retained by it
or any of its Subsidiaries to, and that it shall use commercially reasonable
efforts to cause its and its Subsidiaries' non-officer employees and other
agents not to (and shall not authorize any of them to) directly or indirectly:
(i) solicit, initiate, encourage, induce or knowingly facilitate the
communication, making, submission or announcement of any Acquisition Proposal;
(ii) furnish any information regarding Seller or the Company to any Person in
connection with or in response to an Acquisition Proposal; (iii) engage in
discussions or negotiations with any Person with respect to any Acquisition
Proposal; (iv) approve, endorse or recommend any Acquisition Proposal; or (v)
execute or enter into any letter of intent or similar document or any agreement
contemplating or otherwise relating to any Acquisition Transaction; PROVIDED,
HOWEVER, that nothing contained in this Agreement shall prevent Seller or its
board of directors from (1) complying with its disclosure obligations under
Sections 14d-9 and 14e-2 of the Securities Exchange Act of 1934, as amended,
with regard to an Acquisition Proposal; PROVIDED FURTHER, HOWEVER, that, if such
disclosure has the substantive effect of withdrawing, modifying or qualifying
the directors' recommendation in a manner adverse to Purchaser or the adoption
of this Agreement by Seller's board of directors, Seller and Purchaser each
shall have the right to terminate this Agreement as set forth in SECTION
7.1(C)(II) and SECTION 7.1(D)(II); and (2) at any time prior to the approval of
the transactions contemplated by this Agreement by Seller's stockholders, Seller
may furnish nonpublic information regarding Seller or its Subsidiaries to, and
enter into discussions or negotiations with, any Person in response to an
Acquisition Proposal that is submitted to Seller or any of its Subsidiaries by
such Person (and not withdrawn) if: (A) neither Seller nor any Representative of
Seller shall have breached this Section; (B) the Board of Directors of Seller
concludes in good faith based on the advice of outside legal counsel, that such
action is reasonably necessary to comply with its fiduciary duties; (C) at least
two (2) Business Days prior to furnishing any such nonpublic information to, or
entering into discussions with, such Person, Seller gives Purchaser written
notice of the identity of such Person and of Seller's intention to furnish
nonpublic information to, or enter into discussions with, such Person; (D)
Seller receives from such Person an executed confidentiality agreement
containing provisions (including nondisclosure provisions, use restrictions,
non-solicitation provisions, no hire provisions and "standstill" provisions) at
least as favorable to Seller as those contained in the non-disclosure agreement
entered into by Seller in connection with the Merger; and (E) concurrently with
furnishing any such nonpublic information to such Person, Seller furnishes such
nonpublic information to Purchaser (to the extent such nonpublic information has
not been previously furnished by Seller to Purchaser). Without limiting the
generality of the foregoing, Seller acknowledges and agrees that, in the event
any officer, director, employee, controlling stockholder, agent or
representative (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) of Seller (each, a
"REPRESENTATIVE") (whether or not such Representative is purporting to act on
behalf of Seller) takes any action that, if taken by Seller, would constitute a
breach of this Section by Seller, the taking of such action by such
Representative shall be deemed to constitute a breach of this Section by Seller
for purposes of this Agreement.
(d) If Seller or any Representative of Seller receives an
Acquisition Proposal at any time prior to the Closing Date, then Seller shall
promptly (and in any event within one (1) Business Day after Seller becomes
aware of such Acquisition Proposal) advise Purchaser orally and in writing of
such Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal, and the terms thereof). Seller shall keep
Purchaser fully informed with respect to the status and terms of any such
Acquisition Proposal and any modification or proposed modification hereto.
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(e) Seller shall immediately cease and cause to be terminated
any existing discussions with any Person that relate to any Acquisition Proposal
as of the date of this Agreement.
(f) Seller shall not release or permit the release of any
Person from, or waive or permit the waiver of any provision of or right under,
any confidentiality, non-solicitation, no hire, "standstill" or similar
agreement (whether entered into prior to or after the date of this Agreement) to
which Seller is a party or under which Seller has any rights, and shall enforce
or cause to be enforced each such agreement to the extent requested by
Purchaser. Seller shall promptly request each Person that has executed a
confidentiality or similar agreement in connection with its consideration of a
possible Acquisition Transaction or equity investment to return to Seller all
confidential information heretofore furnished to such Person by or on behalf of
Seller.
Section 5.3. PROXY STATEMENT. Seller will prepare and file with the SEC
the Proxy Statement as promptly as practicable following the date of the Merger
Agreement, but in any event no later than the later of the fifth (5th) Business
Day (or, if such day is not a date on which the SEC is open to receive filings,
then the next such day thereafter) after Seller has received all of the
information it reasonably requires from BPOMS in connection with the preparation
of the Proxy Statement (as described in the Merger Agreement) and September 22,
2006. Purchaser will promptly provide Seller with any information with respect
to it which may be required or appropriate for inclusion in the Proxy Statement,
or in any amendments or supplements thereto, and cause its counsel and auditors
to cooperate with Seller's counsel and auditors in the preparation and filing of
the Proxy Statement pursuant to this SECTION 5.3. Whenever any event occurs
which is required to be set forth in an amendment or supplement to the Proxy
Statement, or any information in the Proxy Statement shall have become
incomplete, false or misleading, Purchaser or Seller, as the case may be, will
promptly inform the other party thereof, and will cooperate in filing with the
SEC or its staff, and/or mailing to stockholders of Seller such amendment or
supplement. Seller shall use its commercially reasonable efforts to have the
Proxy Statement cleared by the SEC as promptly as practicable after its filing,
and promptly thereafter mail the Proxy Statement to its stockholders.
Section 5.4. MEETING OF STOCKHOLDERS OF SELLER
(a) Seller shall take all action reasonably necessary or
advisable in accordance with the DGCL and its Certificate of Incorporation and
Bylaws and Applicable Laws to call, convene and hold the Stockholders' Meeting
pursuant to the Merger Agreement. Seller will use its commercially reasonable
efforts to solicit from its stockholders proxies in favor of the approval of the
transactions as contemplated hereunder, and will take all other action necessary
or advisable to secure the vote or consent of its stockholders required by the
rules of the Nasdaq Capital Market or the DGCL to obtain such approval.
Notwithstanding anything to the contrary contained in this Agreement, Seller may
adjourn or postpone the Stockholders' Meeting to the extent reasonably necessary
to facilitate the provision of any necessary supplement or amendment to the
Proxy Statement to its stockholders in advance of the vote to be taken at such
meeting or, if as of the time for which the Stockholders' Meeting is originally
scheduled (as set forth in the Proxy Statement) there are insufficient shares of
Seller common stock represented (either in person or by proxy) to constitute a
quorum necessary to conduct the business of the Stockholders' Meeting. Seller
shall ensure that the Stockholders' Meeting is called, noticed, convened, held
and conducted, and that all proxies solicited by it in connection with the
Stockholders' Meeting are solicited in compliance with the DGCL, its Certificate
of Incorporation and Bylaws, and the rules of the Nasdaq Capital Market.
(b) (i) The board of directors of Seller shall make the
recommendation that the stockholders of Seller approve the transactions as
contemplated hereunder (the "BOARD RECOMMENDATION"), (ii) the Proxy Statement
shall include a statement to the effect that the board of directors of Seller
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has made the Board Recommendation and (iii) except as expressly permitted in
this Agreement, neither the board of directors of Seller nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify in a manner adverse to the other parties, the Board
Recommendation.
(c) Notwithstanding anything to the contrary contained in this
Agreement, Seller's board of directors shall not be prohibited from failing to
make or withdrawing the Board Recommendation or failing to take any prescribed
actions with regard to the Proxy Statement and/or related stockholders' meeting
if such directors have determined in good faith, based upon the advice of their
outside legal counsel, that such action is reasonably necessary for such
directors to comply with their fiduciary duties to Seller's stockholders under
Applicable Law in accordance with SECTION 5.2 hereof.
Section 5.5. ACCESS TO INFORMATION. Between the date hereof and the
Closing Date, Seller will give Purchaser and its authorized representatives
reasonable access during normal business hours to all employees, plants,
offices, warehouses and other facilities, to all books and records and all
personnel files of current or former employees of the Company as Purchaser may
reasonably require.
Section 5.6. CERTAIN FILINGS; REASONABLE EFFORTS. Subject to the terms
and conditions herein provided, each of the parties hereto will use all
reasonable efforts and due diligence to take or cause to be taken all action and
to do or cause to be done all things reasonably necessary, proper or advisable
under Applicable Law to consummate and make effective the transactions
contemplated by this Agreement, including using all reasonable efforts and due
diligence to do the following: (i) cooperate in the preparation and filing of
the Proxy Statement and any amendments thereto, and any filings under similar
notification laws or regulations of foreign Governmental Entities; (ii) obtain
consents of all third parties and Governmental Entities necessary, proper,
advisable or reasonably requested by Purchaser or Seller, for the consummation
of the transactions contemplated by this Agreement; (iii) contest any legal
proceeding relating to the transactions contemplated hereunder; and (iv) execute
any additional instruments necessary to consummate the transactions contemplated
hereby. Subject to the terms and conditions of this Agreement, Purchaser agrees
to use all reasonable efforts to cause the Closing Date to occur as soon as
reasonably practicable after the conditions set forth in Article 6 have been
satisfied or waived. Seller agrees to use all reasonable efforts to encourage
employees of the Company to continue their employment with the Company after the
Closing. If at any time after the Closing Date any further action is reasonably
necessary to carry out the purposes of this Agreement, the proper officers and
directors of each party hereto shall take all such reasonably necessary action.
Section 5.7. PUBLIC ANNOUNCEMENTS. Neither party shall issue any press
release or otherwise make any public statements (including any written statement
circulated to employees, customers or other third parties) with respect to the
transactions contemplated by this Agreement, without the prior written consent
of the other party, which consent will not be unreasonably withheld, except as
may be required by Applicable Law or any listing agreement with the Nasdaq
Capital Market or any other applicable securities exchange (in which case the
party will first consult with the other party to the extent reasonably
practicable).
Section 5.8. NOTIFICATION OF CERTAIN MATTERS. Seller shall give prompt
notice to Purchaser, and Purchaser shall give prompt notice to Seller, of (i)
any notice or other communication from any Person alleging that the consent of
such Person (or another Person) is or may be required in connection with the
transactions contemplated by this Agreement and/or that such consent will or may
be withheld or unobtainable on a timely basis or without unreasonable effort or
expense (other than a communication from a shareholder of Seller with respect to
the voting of shares held by such shareholder); (ii) any notice or other
communication from any governmental or regulatory agency or authority in
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connection with the transactions contemplated by this Agreement; (iii) any
actions, suits, claims, investigations or proceedings commenced or threatened
against, relating to or involving or otherwise affecting such party or any of
its Subsidiaries or which relate to the consummation of the transactions
contemplated by this Agreement; and (iv) of any fact or occurrence between the
date of this Agreement and the Closing of which it becomes aware which makes any
of its representations and warranties contained in this Agreement untrue in any
material respect (without regard to any materiality qualification contained in
such representation or warranty) or causes any breach of its obligations under
this Agreement in any material respect (without regard to any materiality
qualification contained in such obligation); PROVIDED, HOWEVER, that the
delivery of any notice pursuant to this Section 5.8 shall not cure such breach
or non-compliance or limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
Section 5.9. ADDITIONS TO AND MODIFICATION OF THE SELLER DISCLOSURE
SCHEDULE. Concurrently with the execution and delivery of this Agreement, Seller
has delivered the Seller Disclosure Schedule that includes all of the
information required by the relevant provisions of this Agreement. In addition,
Seller shall deliver to Purchaser such additions to or modifications of any
Sections of the Seller Disclosure Schedule necessary to make the information set
forth therein true, accurate and complete in all material respects as soon as
practicable after such information is available to Seller after the date of
execution and delivery of this Agreement and prior to the Closing; PROVIDED,
HOWEVER, that (i) such disclosure shall not limit the rights and remedies of
Purchaser under this Agreement for any breach by Seller of such representation
and warranties and (ii) failure to comply with the disclosure obligations
required hereunder shall not be deemed to constitute a failure of the conditions
set forth in SECTION 6.2(C) or 6.3(C) unless the information to be disclosed
would constitute a breach of representations or warranties that would cause a
failure of the conditions set forth in SECTION 6.2(B) or 6.3(B) as the case may
be.
Section 5.10. ACCESS TO COMPANY EMPLOYEES. Seller shall provide
Purchaser with reasonable access to employees of the Company during normal
working hours following Seller's public announcement of this Agreement to
provide information to such employees about Purchaser and their continued
employment. All communications by Purchaser with employees of the Company shall
be conducted in a manner that does not disrupt or interfere with the efficient
and orderly operation of the Business.
Section 5.11. NON-SOLICITATION OF EMPLOYEES AND CUSTOMERS.
(a) For a period of eighteen (18) months following the Closing
Date, neither party nor any of its Subsidiaries shall, directly or indirectly,
without the prior written consent of the other party, solicit any employee of
the other party or any of the other party's Subsidiaries to terminate his or her
employment with the other party or any of the other party's Subsidiaries for
employment by such party or any of its Subsidiaries; PROVIDED, HOWEVER, that
such prohibition shall not apply if such employee (i) independently seeks
employment with a party or (ii) has been terminated or otherwise released from
employment with a party.
(b) For a period of eighteen (18) months following the Closing
Date, neither Seller nor any of its Subsidiaries shall, directly or indirectly,
without the prior written consent of Purchaser, solicit or attempt to influence
any of Purchaser's customers set forth on SCHEDULE 5.11(B) to purchase goods or
services from Seller or any of its Subsidiaries.
(c) For a period of eighteen (18) months following the Closing
Date, neither Purchaser nor any of its Subsidiaries shall, directly or
indirectly, without the prior written consent of Seller, solicit or attempt to
influence any of Seller's customers set forth on SCHEDULE 5.11(C) to purchase
goods or services from Purchaser or any of its Subsidiaries.
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(d) Each party hereto agrees that it would be impossible or
inadequate to measure and calculate damages from any breach of the covenants set
forth in this SECTION 5.11. Accordingly, each party agrees that if it breaches
any provision of this SECTION 5.11, the other party shall have available, in
addition to any other right or remedy otherwise available, the right to seek an
injunction from a court of competent jurisdiction restraining such breach or
threatened breach and to specific performance of any such provision of this
Agreement.
Section 5.12. CHANGE OF CORPORATE NAME AND TRADING SYMBOL; TRANSITION
AGREEMENT. Within six (6) months following the Closing of the Merger Agreement,
(i) Seller shall file with the Secretary of State of the State of Delaware an
amendment to its Certificate of Incorporation deleting the word "netGuru" from
its corporate name and (ii) Seller shall take all actions reasonably necessary
to change its trading symbol from "NGRU". Seller covenants and agrees that,
except as otherwise provided in a transition agreement negotiated in good faith
between the parties and executed prior to the Closing (the "TRANSITION
AGREEMENT"), which Transition Agreement shall relate solely to the continued
exclusive temporary use by Seller of "netguru.com" and "netGuru, Inc." for a
period of up to twelve (12) months and six (6) months, respectively, following
the Closing, in accordance with past practices, and which Transition Agreement
shall provide for reasonably satisfactory hosting of the "netguru.com" website
by Seller at its sole cost and expense during such period including a link to
Purchaser's designated website, neither it nor any of its Affiliates shall use
the Seller Marks after the Closing of the Merger Agreement. Seller further
covenants and agrees that, if requested, it shall consent to the Company's use
of corporate name "netGuru Services, Inc." following the Closing.
Section 5.13. DISCUSSIONS REGARDING STRUCTURE. Purchaser and Seller
shall work together in good faith to structure the transactions contemplated
hereby in such a manner as to make them as advantageous for each party as is
reasonably possible with respect to Taxes and accounting treatment resulting
therefrom, and each party shall agree to consider, in good faith, taking such
actions as are reasonably necessary in furtherance of the foregoing.
Section 5.14. TERMINATION OF RETENTION AGREEMENT. The Retention
Agreement shall terminate immediately prior to the Closing, with Purchaser
assuming any and all obligations and liabilities of Seller thereunder.
Section 5.15. TERMINATION OF SPLIT DOLLAR ARRANGEMENT. The Split Dollar
Agreement shall be terminated at the Closing, and the parties thereto shall have
forgiven all debts and obligations owed to one another thereunder and shall have
released the other parties thereto from any such claims.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE TRANSACTION
Section 6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE
TRANSACTION. The respective obligations of each party hereto to consummate the
transactions contemplated by the Agreement are subject to the satisfaction of
the following conditions as of the Closing Date:
(a) Any governmental or regulatory notices, approvals or other
requirements necessary to consummate the transactions contemplated hereby and to
conduct the Business after the Closing Date in all material respects as it was
conducted prior thereto shall have been given, obtained or complied with, as
applicable;
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(b) No court of competent jurisdiction or other governmental
entity shall have issued a final and non-appealable order, decree or ruling or
taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement; and
(c) The Merger shall close simultaneous with the Closing of
the transactions contemplated by this Agreement.
Section 6.2. CONDITIONS TO THE OBLIGATIONS OF SELLER. The obligation of
Seller to consummate the transactions contemplated by this Agreement is subject
to the satisfaction of the following conditions as of the Closing Date:
(a) The transactions contemplated by this Agreement shall have
been approved and adopted by the requisite vote of the stockholders of Seller.
(b) The representations and warranties of Purchaser contained
in this Agreement (i) that are qualified by the phrase "Material Adverse Effect"
shall each be true and correct in all respects and (ii) that are not so
qualified shall be true and correct in all respects, in the case of clauses (i)
and (ii) as of the date of this Agreement and as of the Closing Date with the
same force and effect as if made as of such date, except (A) with respect to
clause (ii), any such representations and warranties in each case, or in the
aggregate, as would not reasonably be expected to constitute a Material Adverse
Effect on Purchaser or the transactions contemplated by this Agreement; and (B)
for those representations and warranties which address matters only as of a
particular date (which representations shall have been true and correct
(subject, if applicable, to the Material Adverse Effect limitations set forth in
the preceding clause (B)) as of such particular date) (it being understood that,
for purposes of determining the accuracy of the representations and warranties
described in clause (ii), all materiality qualifications and other
qualifications based on the word "material" contained in such representations
and warranties shall be disregarded). Seller shall have received, at the
Closing, a certificate to such effect signed on behalf of Purchaser by an
authorized senior executive officer of Purchaser.
(c) Each of the covenants and obligations of Purchaser to be
performed at or before the Closing pursuant to the terms of this Agreement shall
have been duly performed at or before the Closing and, at the Closing, Purchaser
shall have delivered to Seller a certificate to that effect, executed by an
executive officer of Purchaser.
(d) Purchaser shall have received in writing and in form and
substance reasonably acceptable to Seller all necessary consents, approvals and
waivers with respect to the consummation of the transactions contemplated by
this Agreement as required by any other third party or governmental agency with
respect to the consummation of the transactions contemplated by this Agreement.
(e) From the date of this Agreement through the Closing Date,
there shall not have occurred any change, circumstance or event concerning
Purchaser that has had or would be reasonably likely to have a Material Adverse
Effect on the Purchaser's ability to fulfill its obligations under the
transactions contemplated by this Agreement, and Seller shall have received a
certificate, dated the Closing Date, signed on behalf of Purchaser by an
executive officer of Purchaser to the foregoing effect to such officer's
knowledge.
(f) Seller shall have received a Bill of Sale and Assumption
Agreement in substantially the form of EXHIBIT D hereto, duly executed by
Purchaser.
(g) Seller shall have received an Outsourcing Services
Agreement in substantially the form of EXHIBIT E hereto, duly executed by
Purchaser.
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(h) Seller shall have received a Value-Added Reseller
Agreement in substantially the form of EXHIBIT F hereto, duly executed by
Purchaser.
(i) Seller shall have received a Transition Agreement
contemplated by SECTION 5.12 of this Agreement duly executed by Purchaser.
Section 6.3. CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligation
of Purchaser to consummate the transactions contemplated by this Agreement is
subject to the satisfaction of the following conditions as of the Closing Date:
(a) The transactions contemplated by this Agreement shall have
been approved and adopted by the requisite vote of the stockholders of Seller.
(b) The representations and warranties of Seller contained in
this Agreement (i) that are qualified by the phrase "Material Adverse Effect"
shall each be true and correct in all respects and (ii) that are not so
qualified shall be true and correct in all respects, in the case of clauses (i)
and (ii) as of the date of this Agreement and as of the Closing Date with the
same force and effect as if made as of such date, except (A) with respect to
clause (ii), any such representations and warranties in each case, or in the
aggregate, as would not reasonably be expected to constitute a Material Adverse
Effect on Seller, the Business or the transactions contemplated by this
Agreement; and (B) for those representations and warranties which address
matters only as of a particular date (which representations shall have been true
and correct (subject, if applicable, to the Material Adverse Effect limitations
set forth in the preceding clause (B)) as of such particular date) (it being
understood that, for purposes of determining the accuracy of the representations
and warranties described in clause (ii), all materiality qualifications and
other qualifications based on the word "material" contained in such
representations and warranties shall be disregarded). Purchaser shall have
received, at the Closing, a certificate to such effect signed on behalf of
Seller by an authorized senior executive officer of Seller.
(c) Each of the covenants and obligations of Seller to be
performed at or before the Closing pursuant to the terms of this Agreement shall
have been duly performed at or before the Closing and, at the Closing, the
Company shall have delivered to Purchaser a certificate to that effect, executed
by an executive officer of Seller.
(d) Seller shall have received, in writing and in form and
substance reasonably acceptable to Purchaser (i) the material consents,
approvals and waivers with respect to the consummation of the transactions
contemplated by this Agreement indicated or required to be indicated on the
Seller Disclosure Schedules and (ii) all necessary consents, approvals and
waivers as required by any other third party or governmental agency with respect
to the consummation of the transactions contemplated by this Agreement.
(e) From the date of this Agreement through the Closing Date,
there shall not have occurred any change, circumstance or event concerning the
Company that has had or would be reasonably likely to have a Material Adverse
Effect on the Company or the Business, and Purchaser shall have received a
certificate, dated the Closing Date, signed on behalf of Seller by an executive
officer of Seller to the foregoing effect to such officer's knowledge.
(f) Purchaser shall have received a Bill of Sale and
Assumption Agreement in substantially the form of EXHIBIT D hereto, duly
executed by Seller.
(g) Purchaser shall have received an Outsourcing Services
Agreement in substantially the form of EXHIBIT E hereto, duly executed by
Seller.
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(h) Purchaser shall have received a Value-Added Reseller
Agreement in substantially the form of EXHIBIT F hereto, duly executed by
Seller.
(i) Purchaser shall have received a Transition Agreement
contemplated by SECTION 5.12 of this Agreement duly executed by Seller.
(j) Seller shall have paid, or shall agree to pay, all Tax
incurred to Seller's Knowledge, in connection with the Company's (including any
predecessor entities such as netGuru Systems, Ltd.) operation of the Business
with respect to all periods prior to the Closing.
Section 6.4. PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto will be reasonably satisfactory in form and
substance to Purchaser and Purchaser's legal counsel on the one hand and Seller
and Seller's legal counsel on the other hand, and Purchaser and Seller shall
have received all such counterpart originals and certified or other copies of
such documents as they may reasonably request, including certified copies of
charter documents, corporate resolutions, and good standing advice.
Section 6.5. FRUSTRATION OF CLOSING CONDITIONS. Neither Purchaser nor
Seller may rely on the failure of any condition set forth in SECTIONS 6.1, 6.2
or 6.3, as the case may be, if such failure was caused by such party's failure
to comply with any provision of this Agreement.
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER
Section 7.1. TERMINATION. This Agreement may be terminated and
abandoned at any time prior to the Closing whether before or after approval of
the transactions contemplated by this Agreement by the stockholders of Seller:
(a) by mutual written consent of Purchaser and Seller;
(b) by Purchaser or Seller if:
(i) any court of competent jurisdiction or other
governmental entity shall have issued a final order, decree or ruling, or taken
any other final action, restraining, enjoining or otherwise prohibiting the
transactions contemplated hereunder and such order, decree, ruling or other
action is or shall have become final and nonappealable, provided that the party
seeking to terminate shall have used its commercially reasonable efforts to
appeal such order, decree, ruling or other action;
(ii) the transactions contemplated hereunder have not
been consummated on or before December 22, 2006 ("TERMINATION DATE") other than
due to the failure of the party seeking to terminate this Agreement to perform
its obligations under this Agreement required to be performed by it at or prior
to the Closing or a breach by such party of this Agreement;
(iii) this Agreement and the transactions
contemplated hereby shall have failed to receive the requisite vote for approval
and adoption by the stockholders of Seller upon the holding of a duly convened
stockholders' meeting and any adjournments thereof; or
(iv) the other party becomes unable to pay its
liabilities as they come due or seeks protection under any bankruptcy,
receivership, trust deed, creditors arrangement, composition or comparable
proceeding, or if any such proceeding is instituted against such other party and
not dismissed within sixty (60) days.
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(c) by Seller if:
(i) there shall have been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Purchaser and as a result of such breach the conditions set forth in
SECTIONS 6.2(B) or 6.2(C) would not then be satisfied; provided that if such
breach is capable of being cured by the Termination Date and Purchaser
diligently proceeds to cure the breach, then Seller shall not have the right to
terminate this Agreement under this SECTION 7.1(C)(I) unless such breach has not
been so cured by the Termination Date;
(ii) (A) the board of directors of Seller pursuant to
SECTION 5.2 withdraws or modifies the Board Recommendation, or (B) Seller enters
into a definitive agreement providing for the implementation of any Acquisition
Proposal in accordance with the provisions of SECTION 5.2; or
(iii) there shall have been a Material Adverse Effect
on Purchaser's ability to fulfill its obligations under the transactions
contemplated by this Agreement in accordance with Section 6.2(e).
(d) by Purchaser if:
(i) there shall have been a breach of any
representation, warranty or covenant contained in this Agreement on the part of
Seller and as a result of such breach the conditions set forth in SECTIONS
6.3(B) or 6.3(C) would not then be satisfied; provided that if such breach is
capable of being cured by the Termination Date and Seller diligently proceeds to
cure the breach, then Purchaser shall not have the right to terminate this
Agreement under this SECTION 7.1(D)(I) unless such breach has not been so cured
by the Termination Date;
(ii) (A) the board of directors of Seller pursuant to
SECTION 5.2 withdraws or modifies the Board Recommendation, or (B) Seller enters
into a definitive agreement providing for the implementation of any Acquisition
Proposal in accordance with the provisions of SECTION 5.2; or
(iii) there shall have been a Material Adverse Effect
on the Company or the Business in accordance with Section 6.3(e).
The right of either party hereto to terminate this Agreement pursuant
to this SECTION 7.1 shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of either party hereto, any
Person controlling either such party or any of their respective employees,
officers, directors, agents, representatives or advisors, whether prior to or
after the execution of this Agreement except, in the case of Purchaser's right
to terminate, to the extent any of the Das Stockholders or their Affiliates that
serve or have served as a director or employee of Seller or the Company had
actual knowledge of, prior to the execution of this Agreement, or engaged in the
acts or omissions that caused, the particular fact, circumstance, event or other
matter giving rise to Purchaser's right of termination.
Section 7.2. EFFECT OF TERMINATION. Subject to the immediately
succeeding sentence, in the event of the termination and abandonment of this
Agreement pursuant to SECTION 7.1 (Termination), this Agreement shall forthwith
become void and have no effect without any liability on the part of any party
hereto or its Affiliates, directors, officers or stockholders except for SECTION
7.3 (Fees and Expenses), SECTION 9.4 (Notices), and SECTION 9.5 (Governing Law
and Venue; Waiver of Jury Trial). Nothing contained in this SECTION 7.2 shall
relieve any party from liability for any breach of this Agreement prior to such
termination.
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Section 7.3. FEES AND EXPENSES.
(a) Except as set forth in this SECTION 7.3, the parties shall
pay all of their own fees, costs, and expenses (including, without limitation,
fees, costs and expenses of legal counsel, investment bankers, brokers, or other
representatives and consultants and appraisal fees, costs, and expenses)
incurred in connection with the negotiation of this Agreement and the other
agreements contemplated hereby, the performance of its obligations hereunder and
thereunder, and the consummation of the transactions contemplated hereby and
thereby.
(b) Except as otherwise provided in Section 7.3(c), Seller
shall pay Purchaser a termination fee of $200,000 upon the termination of this
Agreement (A) by Seller pursuant to SECTION 7.1(C)(II), (B) by Purchaser
pursuant to SECTION 7.1(D)(I) or SECTION 7.1(D)(II), or (C) by Seller other than
in accordance with SECTIONS 7.1(A) through (C).
(c) Seller shall pay Purchaser a termination fee of $200,000
upon the termination of this Agreement by Purchaser or Seller in the event that
the Merger Agreement is terminated and BPOMS or any of its affiliates pays a
termination fee to Seller in connection therewith; PROVIDED, HOWEVER, that to
the extent that BPOMS or any of its affiliates pays Seller less than $400,000
upon termination of the Merger Agreement (other than upon mutual agreement of
the parties thereto), Seller shall pay Purchaser 50% of such lesser amount.
(d) Purchaser shall pay Seller a termination fee of $400,000
upon the termination of this Agreement (A) by Seller pursuant to Section
7.1(c)(i), or (B) by Purchaser other than in accordance with SECTIONS 7.1(A),
(B) or (D).
(e) If either party fails to pay when due any amount payable
by such party under SECTIONS 7.3(B), (C) or (D), then (i) such party shall
reimburse the other party for reasonable costs and expenses (including
reasonable fees and disbursements of counsel) incurred in connection with the
collection of such overdue amount and the enforcement by the other party of its
rights under this SECTION 7.3, and (ii) such party shall pay to the other party
interest on such overdue amount (for the period commencing as of the date such
overdue amount was originally required to be paid and ending on the date such
overdue amount is actually paid to the other party in full) at a rate per annum
equal to the "prime rate" (as announced by Bank of America or any successor
thereto) in effect on the date such overdue amount was originally required to be
paid.
Section 7.4. AMENDMENT. This Agreement may be amended by action taken
by Seller and Purchaser at any time before or after approval of the transactions
contemplated by this Agreement by the stockholders of the Seller, but after any
such approval no amendment shall be made that requires the approval of such
stockholders under Applicable Law without such approval. This Agreement may be
amended only by an instrument in writing signed on behalf of the parties hereto.
Section 7.5. EXTENSION; WAIVER. At any time prior to the Closing, each
party hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any 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. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights. Waiver of any
term or condition of this Agreement by any party shall not be construed as a
waiver of any subsequent breach or failure of the same term or condition, or a
waiver of any other term or condition of this Agreement.
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ARTICLE 8
INDEMNIFICATION
Section 8.1. SURVIVAL. All representations, warranties, covenants, and
agreements set forth in this Agreement or in any writing or certificate
delivered in connection with this Agreement shall survive the Closing Date and
the consummation of the transactions contemplated hereby. Notwithstanding the
foregoing, no party shall be entitled to recover for any Loss pursuant to
SECTION 8.2(A)(I) and 8.2(C)(I) unless written notice of a claim thereof is
delivered to the other party before the Applicable Limitation Date. For purposes
of this Agreement, the term "APPLICABLE LIMITATION DATE" shall mean the date
which is twelve (12) months after the Closing Date; provided that with respect
to any Loss arising from or related to a breach of the representations and
warranties of Seller set forth in SECTION 3.1 (Organization and Qualification;
Investments), SECTION 3.2 (Capitalization of the Company), and SECTION 3.3
(Authority Relative to this Agreement) and with respect to any Loss arising from
or related to a breach of the representations and warranties of Purchaser set
forth in SECTION 4.1 (Organization) and SECTION 4.2 (Authority Relative to this
Agreement), the Applicable Limitation Date shall be the applicable statute of
limitations.
Section 8.2. INDEMNIFICATION.
(a) INDEMNIFICATION BY SELLER. Seller shall indemnify
Purchaser and each of Purchaser's respective officers, directors, stockholders,
employees, agents, representatives, affiliates, successors, and assigns
(collectively, the "PURCHASER PARTIES") and hold each of them harmless from and
against and pay on behalf of or reimburse such Purchaser Parties in respect of
any Loss which any such Purchaser Party may suffer, sustain, or become subject
to, as a result of or relating to:
(i) the breach of any representation or warranty made
by Seller contained in this Agreement or in any certificate delivered by Seller
with respect thereto in connection with the Closing; and
(ii) the breach of any covenant or agreement made by
Seller contained in this Agreement.
Seller hereby acknowledges that it and its Affiliates shall
have no claims or rights to contribution or indemnity from the Company with
respect to any amounts paid by Seller pursuant to this SECTION 8.2(A).
(b) LIMITATIONS ON INDEMNIFICATION BY SELLER. The
indemnification provided for in SECTION 8.2(A) above is subject to the following
limitations:
(i) Seller shall be liable to the Purchaser Parties
with respect to claims referred to in Section 8.2(A) only if a Purchaser Party
gives Seller written notice thereof within the Applicable Limitation Date.
(ii) The aggregate amount of all payments made by
Seller in satisfaction of claims for indemnification pursuant to SECTION 8.2(A)
shall not exceed the Purchase Price (the "CAP").
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(iii) Seller shall not be liable to indemnify any
Purchaser Parties pursuant to SECTION 8.2(A) unless and until the Purchaser
Parties have collectively suffered a Loss by such breaches or pursuant to such
Section in excess of $25,000 in the aggregate (the "DEDUCTIBLE"), and then only
for the amount in excess of the Deductible.
(iv) In addition to the indemnification rights
provided hereunder, the Purchaser Parties shall be entitled to all other rights
and remedies available in law or equity, except that a claim for indemnification
hereunder shall be the sole and exclusive remedy for any breach referred to in
SECTION 8.2(A).
Notwithstanding any implication to the contrary contained in
this Agreement, so long as Purchaser delivers written notice of a claim to
Seller no later than the Applicable Limitation Date, Seller shall be required to
indemnify the Purchaser Parties for all Losses (subject to the Deductible and
Cap limitations) which the Purchaser Parties may incur in respect of the matters
which are the subject of such claim, regardless of when incurred.
Notwithstanding any implication to the contrary contained in this Agreement, the
limits on indemnification set forth in this Agreement shall not apply to claims
for damages arising from fraud. Further, notwithstanding anything explicit or
implicit to the contrary in this Agreement, Seller shall not be liable to
indemnify any Purchaser Party pursuant to SECTION 8.2 to the extent that any of
the Das Stockholders or their Affiliates that serve or have served as a director
or employee of Seller or the Company had actual knowledge at the date of this
Agreement and/or at the Closing Date of a particular fact, circumstance, event
or other matter giving rise to the Loss for which indemnification is sought.
(c) INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify
Seller and hold Seller and its respective officers, directors, stockholders,
employees, agents, representatives, affiliates, successors, and assigns
(collectively, the "SELLER PARTIES") harmless from and against and pay on behalf
of or reimburse such Seller Parties in respect of any Loss which such Seller
Party may suffer, sustain, or become subject to, as a result of or relating to:
(i) The breach of any representation or warranty made
by Purchaser contained in this Agreement or in any certificate delivered by
Purchaser with respect thereto in connection with the Closing;
(ii) The breach of any covenant or agreement made by
Purchaser contained in this Agreement;
(iii) The failure by Purchaser to timely pay in full
or fulfill all Assumed Seller Obligations;
(iv) The operations of the Business and the Company;
(v) The use and ownership of the Additional Seller
Assets after the Closing;
and
(vi) Additional Taxes imposed upon Seller as a result
of any Section 338 election made by Purchaser pursuant to SECTION 2.8 of this
Agreement.
(d) LIMITATIONS ON INDEMNIFICATION BY PURCHASER. The
indemnification provided for in SECTION 8.2(C) above is subject to the following
limitations:
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(i) Purchaser shall be liable to Seller Parties with
respect to claims referred to in SECTION 8.2(C) only if Seller gives Purchaser
written notice thereof within the Applicable Limitation Date.
(ii) The aggregate amount of all payments made by
Purchaser in satisfaction of claims for indemnification pursuant to SECTION
8.2(C) shall not exceed the Cap.
(iii) Purchaser shall not be liable to indemnify any
Seller Parties pursuant to SECTION 8.2(C) unless and until the Seller Parties
have collectively suffered a Loss by such breaches or pursuant to such Section
in excess of the Deductible, and then only for the amount in excess of the
Deductible.
(iv) In addition to the indemnification rights
provided hereunder, the Seller Parties shall be entitled to all other rights and
remedies available in law or equity, except that a claim for indemnification
hereunder shall be the sole and exclusive remedy for any breach referred to in
SECTION 8.2(C).
Notwithstanding any implication to the contrary contained in
this Agreement, so long as Seller delivers written notice of a claim to
Purchaser no later than the Applicable Limitation Date, Purchaser shall be
required to indemnify Seller Parties for all Losses which Seller Parties may
incur in respect of the matters which are the subject of such claim, regardless
of when incurred. Notwithstanding any implication to the contrary contained in
this Agreement, the limits on indemnification set forth in this Agreement shall
not apply to claims for damages arising from fraud.
(e) PROCEDURES. If a party hereto seeks indemnification under
this Article 8, such party (the "INDEMNIFIED PARTY") shall promptly give written
notice to the other party (the "INDEMNIFYING Party") after receiving written
notice of any action, lawsuit, proceeding, investigation, or other claim against
it (if by a third party) or discovering the liability, obligation, or facts
giving rise to such claim for indemnification, describing the claim, the amount
thereof (if known and quantifiable), and the basis thereof; provided that the
failure to so notify the Indemnifying Party shall not relieve the Indemnifying
Party of its obligations hereunder except to the extent such failure shall have
prejudiced the Indemnifying Party. In that regard, if any action, lawsuit,
proceeding, investigation, or other claim shall be brought or asserted by any
third party which, if adversely determined, would entitle the Indemnified Party
to indemnity pursuant to this Article 8, the Indemnified Party shall promptly
notify the Indemnifying Party of the same in writing, specifying in detail the
basis of such claim and the facts pertaining thereto and the Indemnifying Party
shall be entitled to participate in the defense of such action, lawsuit,
proceeding, investigation, or other claim giving rise to the Indemnified Party's
claim for indemnification at the Indemnifying Party's expense and option
(subject to the limitations set forth below) shall be entitled to control and
appoint lead counsel of such defense with reputable counsel reasonably
acceptable to the Indemnified Party; provided that, as a condition precedent to
the Indemnifying Party's right to assume control of such defense, it must first
agree in writing to be fully responsible for all Losses relating to such claims
and to provide full indemnification to the Indemnified Party for all Losses
relating to such claim; and provided further that the Indemnifying Party shall
not have the right to assume control of such defense and shall pay the fees and
expenses of counsel retained by the Indemnified Party, if the claim which the
Indemnifying Party seeks to assume control (each, an "INDEMNIFIED PARTY
CONTROLLED PROCEEDING") (i) involves a claim to which the Indemnified Party
reasonably believes could be detrimental to or injure the Indemnified Party's
reputation, customer or supplier relations or future business prospects, (ii)
seeks non-monetary relief (except where non-monetary relief is merely incidental
to a primary claim or claims for monetary damages), (iii) involves criminal
allegations, (iv) is one in which the Indemnifying Party is also a party and
joint representation would be inappropriate or there may be legal defenses
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available to the Indemnified Party which are different from or additional to
those available to the Indemnifying Party, or (v) involves a claim which, upon
petition by the Indemnified Party, the appropriate court rules that the
Indemnifying Party failed or is failing to vigorously prosecute or defend. With
respect to actions, lawsuits, proceedings and investigations or other claims
asserted by a third party against the Company which are outstanding as of the
Closing Date, if Seller is currently defending such action, lawsuit, proceeding,
investigation or other claim, Seller shall have the right to control such
defense subject to the right of the Purchaser Parties to divest Seller of such
right if such action, lawsuit, proceeding, investigation or other claim would be
an Indemnified Party Controlled Proceeding hereunder.
If the Indemnifying Party is permitted to assume and control the
defense and elects to do so, the Indemnified Party shall have the right to
employ counsel separate from counsel employed by the Indemnifying Party in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel employed by the Indemnified Party shall be at the expense of the
Indemnified Party unless the employment thereof has been specifically authorized
by the Indemnifying Party in writing.
If the Indemnifying Party shall control the defense of any such claim,
the Indemnifying Party shall obtain the prior written consent of the Indemnified
Party (which shall not be unreasonably withheld) before entering into any
settlement of a claim or ceasing to defend such claim unless (i) there is no
finding or admission of any violation of Applicable Law or any violation of the
rights of any Person and no effect on any other claims that may be made against
the Indemnified Party and (ii) the sole relief provided is monetary damages that
are paid in full by the Indemnifying Party.
ARTICLE 9
MISCELLANEOUS
Section 9.1. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including
the Seller Disclosure Schedule and all other agreements entered into in
connection herewith) (i) constitute the entire agreement between the parties
hereto with respect to the subject matter hereof and supersede all other prior
and contemporaneous agreements and understandings both written and oral between
the parties with respect to the subject matter hereof and (ii) shall not be
assigned by operation of law or otherwise; provided, however, that either party
may assign any or all of its rights and obligations under this Agreement to any
wholly-owned Subsidiary of such party, but no such assignment shall relieve such
party of its obligations hereunder if such assignee does not perform such
obligations.
Section 9.2. VALIDITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
Section 9.3. ACTIONS BY PARTIES. Any action permitted or required to be
taken under this Agreement by either party, including without limitation, any
termination of this Agreement pursuant to SECTION 7.1, any amendment of this
Agreement pursuant to SECTION 7.4, or any waiver pursuant to SECTION 7.5, and
any consent, approval or determination permitted or required to be made or given
B-25
by either party pursuant to this Agreement, shall be made, taken or given, as
the case may be, only with the concurrence, or at the direction, of the board of
directors of such party or committee thereof, as the board of directors may
determine, from time to time, in its sole discretion.
Section 9.4. NOTICES. All notices and other communications pursuant to
this Agreement shall be in writing and shall be deemed given if delivered
personally, telecopied, sent by nationally-recognized overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the addresses set forth below or to such other
address as the party to whom notice is to be given may have furnished to the
other parties hereto in writing in accordance herewith. Any such notice or
communication shall be deemed to have been delivered and received (i) in the
case of personal delivery, on the date of such delivery, (ii) in the case of
telecopier, on the date sent if confirmation of receipt is received and such
notice is also promptly mailed by registered or certified mail (return receipt
requested), (iii) in the case of a nationally-recognized overnight courier in
circumstances under which such courier guarantees next Business Day delivery, on
the next Business Day after the date when sent and (iv) in the case of mailing,
on the third Business Day following that on which the piece of mail containing
such communication is posted:
if to Seller to: netGuru, Inc.
22700 Savi Ranch Parkway
Yorba Linda, California 92887
Telephone: (714) 974-2500
Telecopier: (714) 974-4771
Attention: Chief Executive Officer
with a copy to: Rutan & Tucker, LLP
611 Anton Boulevard, Suite 1400
Costa Mesa, California 92626
Telephone: (714) 641-5100
Telecopier: (714) 546-9035
Attention: Cristy Parker, Esq.
if to Purchaser to: Das Family Holdings
6837 E. Horizon Drive
Orange, California 92867
Telephone: (714) 270-2201
Telecopier: (714) 464-5352
Attention: Chief Executive Officer
with a copy to: Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Telephone: (949) 725-4000
Telecopier: (949) 725-4100
Attention: Shivbir Grewal, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
Section 9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
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(a) This Agreement shall be deemed to be made in and in all
respects shall be interpreted, construed and governed by and in accordance with
the laws of the State of Delaware without regard to the conflict of law
principles thereof. The parties hereby irrevocably submit to the jurisdiction of
the courts of the State of Delaware and the federal courts of the United States
of America located in the State of Delaware solely in respect of the
interpretation and enforcement of the provisions of this Agreement and of the
documents referred to in this Agreement, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware state or federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in SECTION 9.4 or in such other manner as may
be permitted by Applicable Law, shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii)
EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.5.
(c) Notwithstanding anything to the contrary contained in this
SECTION 9.5, the parties acknowledge that jurisdiction of the Indian courts
cannot be waived by agreement between the parties on any matter on which the
Indian courts have jurisdiction. Accordingly, the agreements made in this
SECTION 9.5 are subject to any mandatory jurisdiction required by the Indian
courts.
Section 9.6. DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 9.7. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and its successors and
permitted assigns and, except as expressly provided herein, nothing in this
Agreement 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 nor shall any such Person be entitled to assert any claim hereunder.
In no event shall this Agreement constitute a third party beneficiary contract.
Section 9.8. PARTICIPATION IN DRAFTING. The parties to this Agreement
and their counsel have mutually contributed to its drafting. Consequently, no
provision of this Agreement shall be construed against any party on the ground
that that party drafted the provision or caused it to be drafted.
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Section 9.9. SPECIFIC PERFORMANCE. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the transactions contemplated hereby, will cause
irreparable injury to the other parties, for which damages, even if available,
will not be an adequate remedy. Accordingly, each party shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement, this being in addition
to any other remedy to which they are entitled at law or in equity.
Section 9.10. INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
Section 9.11. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which shall constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
NETGURU, INC.,
A DELAWARE CORPORATION
By: /S/ BRUCE K. NELSON
----------------------------------
Name: Bruce K. Nelson
Title: Chief Financial Officer
DAS FAMILY HOLDINGS
A CALIFORNIA CORPORATION
By: /S/ AMRIT K. DAS
----------------------------------
Name: Amrit K. Das
Title: President
Acknowledged and agreed for purposes of SECTION 5.14 (Termination of Retention
Agreement) and SECTION 5.15 (Termination of Split Dollar Arrangement):
AMRIT K. DAS
/S/ AMRIT K. DAS
- --------------------------------
Amrit K. Das
Acknowledged and agreed for purposes of SECTION 5.15 (Termination of Split
Dollar Arrangement):
DAS INSURANCE TRUST
By: /S/ SANTANU K. DAS
----------------------------
Santanu K. Das, Trustee
[SIGNATURE PAGE TO PURCHASE AGREEMENT]
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TABLE OF EXHIBITS AND SCHEDULES
EXHIBITS
- --------
EXHIBIT A..................Definitions
EXHIBIT B..................Purchase Price Allocation
EXHIBIT C..................Seller Disclosure Schedule
EXHIBIT D..................Bill of Sale and Assumption Agreement
EXHIBIT E..................Outsourcing Services Agreement
EXHIBIT F..................Value-Added Reseller Agreement
SCHEDULES
- ---------
SCHEDULE 2.2(A)............Seller Marks
SCHEDULE 2.2(B)............Seller WEBWORKSTM Customers
SCHEDULE 2.2(D)............Seller Contracts
SCHEDULE 2.2(F)............Miscellaneous Seller Assets
SCHEDULE 5.11(B)...........Purchaser's Non-Solicitation Customer List
SCHEDULE 5.11(C)...........Seller's Non-Solicitation Customer List
(EXHIBITS AND SCHEDULES OTHER THAN EXHIBIT A WILL BE PROVIDED TO THE SECURITIES
AND EXCHANGE COMMISSION UPON REQUEST IN ACCORDANCE WITH APPLICABLE RULES AND
REGULATIONS)
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EXHIBIT A
---------
DEFINITIONS
"ACQUISITION PROPOSAL" has the meaning set forth in Section 5.2(a) of
this Agreement.
"ACQUISITION TRANSACTION" has the meaning set forth in Section 5.2(a)
of this Agreement.
"ADDITIONAL SELLER ASSETS" has the meaning set forth in Section 2.2 of
this Agreement.
"AFFILIATE" means a Person that, directly or indirectly, through one or
more intermediaries controls, is controlled by, or is under common control with,
the first-mentioned Person. Control means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
"AGREEMENT" means this Purchase Agreement.
"APPLICABLE LAW" means, with respect to any Person, any domestic or
foreign, federal, state or local statute, law, ordinance, rule, regulation,
order, writ, injunction, judgment, decree or other requirement of any
Governmental Entity existing as of the date hereof or as of the Closing Date
applicable to such Person or any of its respective properties, assets, officers,
directors, employees, consultants or agents.
"APPLICABLE LIMITATION DATE" has the meaning set forth in Section 8.1
of this Agreement.
"ASSUMED SELLER OBLIGATIONS" has the meaning set forth in Section 2.3
of this Agreement.
"BALANCE SHEET DATE" has the meaning set forth in Section 2.4(b) of
this Agreement.
"BOARD RECOMMENDATION" has the meaning set forth in Section 5.4(b) of
this Agreement.
"BPOMS" has the meaning set forth in the fifth Recital to this
Agreement.
"BPOMS AVAILABLE CASH" has the meaning set forth in Section 6.11(a) of
the Merger Agreement.
"BUSINESS" means the provision of engineering services, information
technology services and digital media services to businesses as currently
engaged in by the Company worldwide.
"BUSINESS DAY" means any day other than a day on which the Nasdaq
Capital Market is closed.
"CAP" has the meaning set forth in Section 8.2(b)(ii) of this
Agreement.
"CAPITAL STOCK" means common stock, preferred stock, partnership
interests, limited liability company interests or other ownership interests
entitling the holder thereof to vote with respect to matters involving the
issuer thereof.
"CODE" has the meaning set forth in Section 2.8 of this Agreement.
"CLOSING" has the meaning set forth in Section 2.5 of this Agreement.
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"CLOSING DATE" has the meaning set forth in Section 2.5 of this
Agreement.
"COMPANY" has the meaning set forth in the first Recital to this
Agreement.
"COMPANY SECURITIES" has the meaning set forth in Section 3.2(b) of
this Agreement.
"CUSTOMS OBLIGATIONS" has the meaning set forth in Section 2.3(a) of
this Agreement.
"DAS STOCKHOLDERS" means, collectively, Sormistha Das, Santanu Das, The
Purabi Das Foundation, The Purabi Das Marital Trust, The A&P Living Trust, Amrit
and/or Tamisra Das and the Amrit Das IRA.
"DEDUCTIBLE" has the meaning set forth in Section 8.2(b)(iii) of this
Agreement.
"DGCL" means the Delaware General Corporation Law.
"EFFECTIVE TIME" means the effective time of the Merger, as defined in
Section 1.6 of the Merger Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"GOVERNMENTAL ENTITY" shall mean any United States or foreign court,
administrative or regulatory agency or commission or other United States or
foreign, federal, state, county or local governmental authority,
instrumentality, agency or commission.
"INDEMNIFIED PARTY" has the meaning set forth in Section 8.2(e) of this
Agreement.
"INDEMNIFIED PARTY CONTROLLED PROCEEDING" has the meaning set forth in
Section 8.2(e) of this Agreement.
"INDEMNIFYING PARTY" has the meaning set forth in Section 8.2(e) of
this Agreement.
"INTELLECTUAL PROPERTY ASSETS" means all Intellectual Property Rights
owned or licensed by the Company or owned or licensed by Seller and used or
exercised by the Company or Seller in the conduct of the Business.
"INTELLECTUAL PROPERTY RIGHTS" means all intellectual property rights
arising from or associated with the following, whether protected, created or
arising under the laws of the United States or any other jurisdiction:
(i) trade names, registered and unregistered trademarks and
service marks, Internet domain names, and trade dress rights, and all
applications (including intent to use applications) to register any of the
foregoing;
(ii) patents or models, industrial designs and all
applications and applications to register any of the foregoing, including any
and all continuation, divisional, continuation-in-part, reexamination and
reissue patent applications, and any patents issuing therefrom;
(iii) copyrights and all registrations and applications
therefor;
(iv) know-how, inventions, discoveries, improvements,
concepts, ideas, methods, processes, designs, plans, schematics, drawings,
formulae, technical data, specifications, research and development information,
B-32
data bases and other proprietary or confidential information, including customer
lists, technology and product roadmaps, business and marketing plans and
information, financial information; and
(v) mask work rights, moral rights, publicity rights and any
other proprietary, intellectual or industrial property or similar intangible
rights of any kind or nature that do not comprise or are not protected by Marks,
Patents, Copyrights or Trade Secrets.
"KNOWLEDGE" or "KNOWN" means, with respect to any fact, circumstance,
event or other matter in question, the actual present knowledge of such fact,
circumstance, event or other matter of any director or officer of Seller other
than any of the Das Stockholders or their Affiliates.
"LIEN" means, with respect to any asset (including any security), any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind in
respect of such asset; PROVIDED, HOWEVER, that the term "Lien" shall not
include: (i) statutory liens for Taxes that are not yet due and payable or are
being contested in good faith by appropriate proceedings; (ii) statutory or
common law liens to secure obligations to landlords, lessors or renters under
leases or rental agreements confined to the premises rented; (iii) deposits or
pledges made in connection with, or to secure payment of, workers' compensation,
unemployment insurance, old age pension or other social security programs
mandated under Applicable Laws; (iv) statutory or common law liens in favor of
carriers, warehousemen, mechanics and material men, to secure claims for labor,
materials or supplies and other like liens; and (v) restrictions on transfer of
securities imposed by Applicable Laws.
"LOSS" means, with respect to any Person, any damage, liability,
diminution in value, demand, claim, action, cause of action, cost, damage,
deficiency, Tax, penalty, fine or other loss or expense, including all interest,
penalties, reasonable attorneys' fees and expenses and all amounts paid or
incurred in connection with any action, demand, proceeding, investigation or
claim by any third party (including any Governmental Entity or any department,
agency or political subdivision thereof) against or affecting such Person or
which, if determined adversely to such Person, would give rise to, evidence the
existence of, or relate to, any other Loss and the investigation, defense or
settlement of any of the foregoing.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, assets (including intangible assets), financial condition or results
of operations of the party and its Subsidiaries, taken as a whole.
"MERGER" means the merger transaction contemplated by the Merger
Agreement.
"MERGER AGREEMENT" means that certain Agreement and Plan of Merger
dated the date hereof, between BPOMS, Seller and BPO Acquisition Corp., a
Delaware corporation and wholly-owned Subsidiary of Seller.
"PERSON" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
legal entity including any Governmental Entity.
"PRE-CLOSING SELLER BALANCE SHEET" has the meaning set forth in Section
2.4(b) of this Agreement.
"PROXY STATEMENT" means the proxy statement to be mailed to the
stockholders of Seller seeking the approval of the transactions contemplated by
this Agreement.
"PURCHASE PRICE" has the meaning set forth in Section 2.4 of this
Agreement.
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"PURCHASER" has the meaning set forth in the introductory paragraph of
this Agreement.
"PURCHASER PARTIES" has the meaning set forth in Section 8.2(a) of this
Agreement.
"REPRESENTATIVE" has the meaning set forth in Section 5.2(c) of this
Agreement.
"RETENTION AGREEMENT" has the meaning set forth in Section 2.3(c) of
this Agreement.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SELLER" has the meaning set forth in the introductory paragraph of
this Agreement.
"SELLER CHANGES" has the meaning set forth in Section 2.2(b) of this
Agreement.
"SELLER DISCLOSURE SCHEDULES" has the meaning set forth in the preamble
to Article 3 of this Agreement.
"SELLER DIVIDEND" has the meaning set forth in Section 2.4(a) of this
Agreement.
"SELLER MARKS" has the meaning set forth in Section 2.2(a) of this
Agreement.
"SELLER PARTIES" has the meaning set forth in Section 8.2(c) of this
Agreement.
"SHARES" has the meaning set forth in the Recitals of this Agreement.
"SOFTWARE" has the meaning set forth in Section 2.2(b) of this
Agreement.
"SPLIT-DOLLAR ARRANGEMENT" has the meaning set forth in Section 2.3(c)
of this Agreement.
"SUBSIDIARY" or "SUBSIDIARIES" means any corporation, partnership,
joint venture, business trust or other entity, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization.
"SUPERIOR OFFER" has the meaning set forth in Section 5.2(b) of this
Agreement.
"TAX" or "TAXES" means (i) all federal, state, local, foreign and other
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property, windfall
profits, customs duties or other taxes, fees, assessments or charges of any
kind, together with any interest and any penalties, additions to tax or
additional amounts with respect thereto; (ii) any liability for payment of
amounts described in clause (i) whether as a result of transferee liability, of
being a member of an affiliated, consolidated, combined or unitary group for any
period, or otherwise through operation of law; and (iii) any liability for the
payment of amounts described in clause (i) or (ii) as a result of any tax
sharing, tax indemnity or tax allocation agreement or any other express or
implied agreement to indemnify any other Person; PROVIDED, HOWEVER, that "Tax"
or "Taxes" shall not include the Customs Obligations.
"TAX RETURN" means any return, declaration, report, statement,
information statement and other document filed or required to be filed with
respect to Taxes.
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"TERMINATION DATE" has the meaning set forth in Section 7.1(b)(ii) of
this Agreement.
"THIRD PARTY" means any Person (which includes a "person" as such term
is defined in Section 13(d)(3) of the Exchange Act) other than Purchaser or any
Affiliate thereof.
"TRANSFER TAXES" has the meaning set forth in Section 2.6 of this
Agreement.
"TRANSITION AGREEMENT" has the meaning set forth in Section 5.12 of
this Agreement.
"U.S. BALANCE SHEET" has the meaning set forth in Section 2.4(b) of
this Agreement.
"U.S. GAAP" means accounting principles generally accepted in the
United States.
"U.S. RESERVED CASH" has the meaning set forth in Section 2.4(b)(iv) of
this Agreement.
"U.S. WORKING CAPITAL" has the meaning set forth in Section 2.4(b)(v)
of this Agreement.
"U.S. WORKING CAPITAL SHORTFALL" has the meaning set forth in Section
2.4(c)(ii)(H) of this Agreement.
"VALUE-ADDED RESELLER AGREEMENT" has the meaning set forth in Section
6.3(k) of this Agreement.
"VOTING AGREEMENTS" has the meaning set forth in the Recitals to this
Agreement.
"WITHHELD TAXES" has the meaning set forth in Section 2.7 of this
Agreement.
B-35
APPENDIX C
B RILEY
Research Trading
Investment Banking
4675 MacArthur Court, Suite 1500
Newport Beach, CA 92660
Tel: 949.852.9911
Fax: 949.852.0430
August 29, 2006
The Board of Directors of netGuru, Inc.
22700 Savi Ranch Parkway
Yorba Linda, CA 92887
Dear Board Members:
We understand that netGuru, Inc. ("netGuru" or the "Company"), BPO Acquisition
Corp. ("Merger Sub"), a 100% owned subsidiary of netGuru, and BPO Management
Services, Inc. ("BPOMS") intend to effect a merger of Merger Sub into BPOMS (the
"Merger"), as a result of which Merger Sub will cease to exist and BPOMS will
become a 100% owned subsidiary of netGuru. Under the terms of the Agreement,
netGuru will distribute a cash dividend to existing netGuru shareholders of
$3,500,000 or approximately $0.18 per share. netGuru shareholders will also
retain approximately 10.0% of the equity interests of the Company post merger on
a fully diluted basis (excluding new equity or equity-based securities issued by
netGuru or BPOMS after August 29, 2006). Simultaneous to the merger, Research
Engineers Ltd. will be divested to Das Family Holdings, an entity affiliated
with Mr. Amrit Das (currently Chairman, CEO and a netGuru shareholder) for cash
consideration of $2.0 million payable at closing. The merger and divestiture as
summarized above is hereinafter referred to as the "Transaction."
You have requested our opinion (the "Opinion") with respect to the fairness,
from a financial point of view to netGuru's shareholders, of the aggregate
consideration to be received by netGuru. In connection with this Opinion, we
have made such reviews, analyses and inquiries, as we have deemed necessary and
appropriate under the circumstances. Among other things, we have:
1. Reviewed netGuru's internal financial information and other data
prepared by the management of netGuru, relating to the business and
financial prospects of netGuru, as well as their audited income
statement and balance sheet for the year ended March 31, 2006, their
estimated cash reserves as of July 12, 2006, and their cash balance as
of July 27, 2006;
2. Discussed with members of the senior management of netGuru, the
business, operations, financial condition, future prospects and
projected operations and performance of the Company;
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3. Reviewed the execution copy of the Agreement and Plan of Merger as of
August 29, 2006 between netGuru, Merger Sub and BPOMS ("Merger
Agreement");
4. Reviewed the execution copy of the Purchase Agreement as of August 29,
2006 between Das Family Holdings and netGuru ("Purchase Agreement");
5. Reviewed the PWC report on India and assumed the information within it
was accurate;
6. Reviewed senior management's estimated cash flow projections for netGuru
from April 1, 2006 through December 31, 2006;
7. Reviewed publicly available financial and stock market data with respect
to certain other companies engaged in businesses we believe to be
generally comparable to that of netGuru (the "Comparables") as of July
26, 2006;
8. Prepared various other financial analyses to assess the value of
netGuru; and
9. Conducted such other financial studies, analyses, investigations and
considered such other information, as we deemed appropriate.
Our engagement and the Opinion expressed herein are for the benefit of the Board
of Directors of netGuru (the "Board") on their behalf as representatives of
netGuru's shareholders, and our Opinion is rendered in connection with the
Board's consideration of the Transaction. It is further understood that this
Opinion may not be used for any other purpose, nor may it be reproduced,
disseminated, quoted or referred to at any time, in whole or in part, in any
manner or for any purpose, without our prior written consent; provided, however,
that this Opinion and any description thereof may be included in its entirety in
any proxy statement or consent solicitation statement distributed to the
Company's shareholders in connection with the Transaction provided that any such
inclusion or description shall be subject to our prior review and approval,
which will not be unreasonably withheld. Notwithstanding the foregoing, this
Opinion is not intended and does not constitute a recommendation to any such
shareholder as to whether such shareholder should vote to approve the
Transaction.
In arriving at our Opinion, we have not performed any appraisals or valuations
of specific assets or liabilities of the Company and have not been furnished
with any such appraisals or valuations, and express no opinion regarding the
liquidation value of the Company. Without limiting the generality of the
foregoing, we have undertaken no independent analysis of any pending or
threatened litigation, possible unasserted claims or other contingent
liabilities to which either the Company is a party or may be subject and our
Opinion makes no assumption concerning, and therefore does not consider, the
possible assertion of claims, outcomes or damages arising out of any such
matters. We also have not appraised the India assets nor done complete due
diligence on those assets, either on a company or individual basis.
We have relied upon information delivered to us by management, its affiliates
and representatives. We have also relied upon and assumed, without independent
verification, that the financial information provided to us has been reasonably
prepared and reflects the best currently available estimates of the financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
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Without limiting the generality of the foregoing, for the purpose of this
Opinion, we have assumed that the Company is not a party to any pending
transactions, including external financing, recapitalizations, acquisitions, or
merger discussions, other than the Transaction described herein. We have also
assumed that the Transaction will be consummated in accordance with the Merger
Agreement and Purchase Agreement referred to above.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this Opinion, however, we do not have any obligation to
update, revise or reaffirm this Opinion. We were not requested to opine as to,
and this Opinion does not in any manner address, the Company's underlying
decision to proceed with or effect the Transaction or structure thereof.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they currently exist and can be evaluated by us at the date of this letter.
For our services in rendering this Opinion, the Company has paid us a fee and
has agreed to indemnify us against certain liabilities associated with the
issuance of this opinion.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the aggregate consideration proposed to be received by netGuru in
connection with the Transaction is fair, from a financial point of view, to
netGuru's shareholders.
Very truly yours,
B. Riley & Co., Inc.
/s/ B. Riley & Co., Inc.
C-3
APPENDIX D
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements included
in this APPENDIX D are based upon the unaudited interim financial statements of
netGuru, Inc. ("NGRU") and BPO Management Services, Inc. ("BPOMS"), and the
audited financial statements of BPOMS, combined and adjusted to give effect to
the merger transaction with BPOMS and the sale transaction with Das Family
Holdings ("DFH") pursuant to the merger agreement and the sale agreement that
are included as APPENDIX A and APPENDIX B, respectively, to this proxy
statement.
Upon consummation of the merger and sale transactions, the combined
company intends to adopt the year end of the accounting acquirer, BPOMS, which
is December 31. The unaudited pro forma condensed combined financial statements
included in APPENDIX D were prepared using December 31 as the year end, which is
different from the accounting acquiree's fiscal year end of March 31.
The unaudited pro forma condensed combined balance sheet as of June 30,
2006 gives effect to the merger and sale transactions as if each had occurred on
that date, and was prepared based upon the unaudited balance sheets of NGRU and
BPOMS as of June 30, 2006.
The unaudited pro forma condensed combined statements of operations for
the six months ended June 30, 2006 and the period from July 26, 2005 ended
December 31, 2005 assume that the merger and sale transactions occurred on the
first day of the periods then ended. The unaudited pro forma condensed combined
statement of operations for the six months ended June 30, 2006 was prepared
based on the unaudited statements of operations of BPOMS and NGRU for the six
months ended June 30, 2006. The unaudited pro forma condensed combined statement
of operations for the period ended December 31, 2005 was prepared based on the
unaudited statements of operations of BPOMS for the period from July 26, 2005
(inception) to December 31, 2005, and of NGRU for the six months ended December
31, 2005. The unaudited statements of operations of BPOMS include the results of
operations of Novus Imaging Solutions, Inc. as of the beginning of the
respective periods presented.
The unaudited pro forma condensed combined financial statements include
specific assumptions and adjustments related to the merger and sale
transactions. These pro forma adjustments have been made to illustrate the
anticipated financial effects of the merger and sale transactions. The
adjustments are based upon available information and assumptions that BPOMS and
NGRU believe are reasonable as of the date of this proxy statement. However,
actual adjustments may differ materially from the information presented.
Assumptions underlying the pro forma adjustments are described in the
notes accompanying the pro forma financial statements and should be read in
conjunction with NGRU's historical financial statements and related notes
contained in NGRU's quarterly report on Form 10-QSB for the period ended June
30, 2006 and annual report on Form 10-KSB for the fiscal year ended March 31,
2006, including any notes thereto, which financial statements are incorporated
by reference into and accompany this proxy statement, NGRU's unaudited financial
statements for three month periods ended September 30, 2005 and December 31,
2005, which financial statements are set forth in APPENDIX E to this proxy
statement, and BPOMS' audited financial statements and unaudited interim
financial statements, including any notes thereto, which are set forth in
APPENDIX F to this proxy statement.
D-1
Because the sale and merger transactions contemplate that NGRU would
dispose of Research Engineers Ltd. ("REL") and certain additional assets and
liabilities and BPOMS would be the controlling entity following the sale and
merger transactions, the pro forma adjustments eliminate the operations of REL
and the assets and liabilities to be sold. The pro forma adjustments were
applied to the respective historical financial statements to reflect and account
for the merger using the purchase method of accounting, with BPOMS being treated
as the acquirer for accounting purposes. Accordingly, the total purchase cost
will be allocated to the tangible and intangible assets acquired and liabilities
assumed of NGRU based on their respective fair values in accordance with SEC
interpretations for accounting for reverse acquisitions. Fair value for pro
forma purposes was determined by the fair value of outstanding shares of NGRU.
Fair value was determined by computing the average closing price on the Nasdaq
Capital Market for the three days preceding and following the public
announcement of the terms of the transaction on August 30, 2006. Following
consummation of the merger, the financial statements issued will reflect the
historical operating results of BPOMS with the equity section of the balance
sheet retroactively restated to reflect the effect of the exchange ratio
established in the merger agreement.
The allocation of the aggregate purchase price is preliminary. The
actual purchase accounting to reflect the fair values of the assets to be
acquired and liabilities to be assumed of NGRU will be based upon valuation
studies that are not yet complete and management's evaluation of such assets and
liabilities. Accordingly, the pro forma condensed combined financial information
presented herein is subject to change pending the final purchase price
determination and allocations. Management does not expect the differences
between the preliminary and final purchase price allocations will have a
material impact on the combined company's pro forma financial position or
results of operations. However, there can be no assurance until completion of
the valuation studies.
The unaudited pro forma condensed combined financial information
presented in APPENDIX D is for information purposes only. The information is not
representative of future results of operations or financial position.
D-2
CONDENSED COMBINED PRO FORMA BALANCE SHEET
(Unaudited)
(In thousands)
As of June 30, 2006
COMBINED
NGRU REL BPOMS PRO FORMA COMPANY
HISTORICAL DISPOSITION MERGER ADJUSTMENTS PRO FORMA
-------------- ------------- ---------- ------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,197 $ $ 516 1,759 (C) $ 4,472
1,500 (D) 1,500
Accounts receivable 368 575 - 943
Notes and related party loans receivable 38 - 38
Prepaid expenses and other current assets 134 67 - 201
Assets held for sale 1,995 (1,995)(A) -
-------------- ------------- ---------- ------------- -----------
Total current assets 4,732 (1,995) 1,158 3,259 7,154
Property and equipment, net 151 728 - 879
Goodwill, net 826 - 826
Intangible assets, net 631 - 631
Other assets 105 33 - 138
Purchase price to be allocated 3,369 (E) 3,369
-------------- ------------- ---------- ------------- -----------
Total assets $ 4,988 $ (1,995) $ 3,376 6,628 $ 12,997
-------------- ------------- ---------- ------------- -----------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $ 158 $ $ 546 - $ 704
Accrued expenses 244 204 135 (F) 583
Current portion of long-term debt, net - 29 29
Current portion of capital lease
obligations 118 - - 118
Dividend payable - - 3,500 (G) 3,500
Accrued severance obligations - 981 981
Income taxes payable 32 - - 32
Deferred revenues 87 187 - 274
Other liabilities 34 - - 34
Current liabilities held for sale 451 (451)(A) - - -
-------------- ------------- ---------- ------------- -----------
Total current liabilities 1,124 (451) 1,947 3,635 6,255
Long-term debt, net of current portion - 226 226
Notes payable to Novus shareholders - 700 700
Capital lease obligations, net of current
portion 106 - - 106
Deferred gain on sale-leaseback 591 - - 591
-------------- ------------- ---------- ------------- -----------
Total liabilities 1,821 (451) 2,873 3,635 7,878
-------------- ------------- ---------- ------------- -----------
Stockholders' equity:
Preferred stock - - 4 (2)(H) 2
Common stock (NGRU) 192 - - (192)(H) -
Common stock (BPOMS) 10 (6)(H) 4
Additional paid-in capital (NGRU) 20,685 - - (20,685)(H) -
Additional paid-in-capital (BPOMS) 2,349 4,624 (H) 6,973
Accumulated deficit (17,014) (1,544)(B) (1,840) 1,544 (B) (1,840)
17,014 (H)
Accumulated other comprehensive loss: -
Cumulative foreign currency translation
adjustments (696) - (20) 696 (H) (20)
-------------- ------------- ---------- ------------- -----------
Total stockholders' equity 3,167 (1,544) 503 2,993 5,119
-------------- ------------- ---------- ------------- -----------
Total liabilities and stockholders' equity $ 4,988 $ (1,995) $ 3,376 6,628 $ 12,997
============== ============= ========== ============= ===========
See accompanying notes to unaudited pro forma condensed balance sheet.
D-3
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
(A) Reflects the elimination of all assets and liabilities of REL.
(B) Reflects the net carrying value of assets and liabilities of REL that
was disposed
(C) Reflects the proceeds received of $2.0 million in connection with the
REL disposition, net of $241,000 of transaction costs.
(D) Reflects the $1.5 million to be provided by BPOMS.
(E) In accordance with SFAS No. 141 "Business Combinations", the merger will
be treated as a reverse acquisition whereby BPOMS is treated as the
accounting acquirer and NGRU is treated as the accounting acquiree.
Accordingly, the shareholders' equity of NGRU will be recapitalized, and
the historical financial statements of the combined company will be
those of the combined entities of BPOMS. The value of the common stock
was determined by computing the average closing price on The Nasdaq
Capital Market for the three days preceding and following the public
announcement of the terms of the transactions on August 30, 2006, which
resulted in an average share price of $0.24 per share. Adjustments of
assets based on purchase valuation are as follows:
Fair market value (NGRU, 19,235,041 shares at $0.24 per share) $ 4,616
Estimated acquisition costs 376
Net carrying value of assets and liabilities (1,623)
-------
Purchase price to be allocated $ 3,369
-------
The pro forma adjustments were applied to the respective historical
financial statements to reflect and account for the merger using the
purchase method of accounting, with BPOMS being treated as the acquirer
for accounting purposes. Accordingly, the total purchase cost will be
allocated to the tangible and intangible assets acquired and liabilities
assumed of NGRU based on their respective fair values in accordance with
SEC interpretations for accounting for reverse acquisitions. Fair value
for pro forma purposes was determined by the fair value of outstanding
shares of NGRU. Fair value was determined by computing the average
closing price on The Nasdaq Capital Market for the three days preceding
and following the public announcement of the terms of the transaction on
August 30, 2006.
The allocation of the aggregate purchase price is preliminary. The
actual purchase accounting to reflect the fair values of the assets to
be acquired and liabilities to be assumed of NGRU will be based upon
valuation studies that are not yet complete and management's evaluation
of such assets and liabilities. Accordingly, the pro forma condensed
combined financial information presented herein is subject to change
pending the final purchase price determination and allocations.
Management does not expect the differences between the preliminary and
final purchase price allocations will have a material impact on the
combined company's pro forma financial position or results of
operations. However, there can be no assurance until completion of the
valuation studies.
(F) Reflects liabilities retained by NGRU related to the REL disposition.
(G) Reflects the $3.5 million dividend payable to NGRU shareholders after
the merger is effective.
(H) Reflects the recapitalization of BPOMS and NGRU equity.
D-4
CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
Six Months Ended June 30, 2006
COMBINED
NGRU REL BPOMS PRO FORMA COMPANY
HISTORICAL DISPOSITION MERGER ADJUSTMENTS PRO FORMA
-------------- ------------- ---------- ------------- -----------
(A)
Net revenues:
Collaborative software products and services $ 724 $ (6) $ - $ - $ 718
IT services 1,242 (411) 3,426 - 4,257
-------------- ------------- ---------- ------------- -----------
Total net revenues $ 1,966 (417) $ 3,426 $ - $ 4,975
Cost of revenues:
Collaborative software products and services 118 (4) - 114
IT services 822 (262) 999 - 1,559
-------------- ------------- ---------- ------------- -----------
Total cost of revenues 940 (266) 999 - 1,673
-------------- ------------- ---------- ------------- -----------
Gross profit $ 1,026 $ (151) $ 2,427 $ - $ 3,302
-------------- ------------- ---------- ------------- -----------
Operating expenses:
Selling, general and administrative 2,104 (571) 3,445 - 4,978
Research and development 208 (2) - - 206
Depreciation 129 (47) - - 82
-------------- ------------- ---------- ------------- -----------
Total operating expenses $ 2,441 $ (620) $ 3,445 $ - $ 5,266
-------------- ------------- ---------- ------------- -----------
Operating loss (1,415) 469 (1,018) - (1,964)
-------------- ------------- ---------- ------------- -----------
Interest (income) expense, net (50) (2) 5 (47)
Other (income) expense (103) 96 - (7)
-------------- ------------- ---------- ------------- -----------
Loss from continuing operations before income
taxes (1,262) 375 (1,023) - (1,910)
Income tax expense 35 (26) - 9
-------------- ------------- ---------- ------------- -----------
Loss from continuing operations (1,297) 401 (1,023) - $ (1,919)
-------------- ------------- ---------- ------------- -----------
Loss from discontinued operations (1,007) (401) - - (1,408)
-------------- ------------- ---------- ------------- -----------
Net loss $ (2,304) $ - $ (1,023) $ (3,327)
============== ============= ========== ============= ===========
Basic and diluted loss per common share:
Loss per common share from continuing
operations $ (0.45)
Loss per common share from discontinued
operations $ (0.33)
-----------
Basic and diluted loss per common share $ (0.77)
===========
Common shares used in computing basic 4,309,457
and diluted net loss per common share (B1) 4,309,457
===========
See accompanying notes to unaudited pro forma condensed consolidated statement of operations.
D-5
CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended December 31, 2005
BPOMS
MERGER
JULY 26,
2005
(INCEPTION) COMBINED
NGRU REL TO DECEMBER PRO FORMA COMPANY
HISTORICAL DISPOSITION 31, 2005 ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- ------------- -----------
Net revenues:
Collaborative software products and services $ 453 $ - $ - $ - $ 453
IT services 1,329 (502)(C) 3,379 - 4,206
-------------- ------------- ----------- ------------- -----------
Total net revenues $ 1,782 $ (502) $ 3,379 $ - $ 4,659
Cost of revenues:
Collaborative software products and services 39 - - - 39
IT services 1,040 (408)(C) 1,289 - 1,921
-------------- ------------- ----------- ------------- -----------
Total cost of revenues 1,079 (408) 1,289 - 1,960
-------------- ------------- ----------- ------------- -----------
Gross profit 703 (94) 2,090 - 2,699
Operating expenses:
Selling, general and administrative 1,912 (648)(C) 2,989 - 4,253
Research and development 244 (5)(C) - - 239
Depreciation 158 (37)(C) - - 121
Impairment charge 2,924 - - - 2,924
-------------- ------------- ----------- ------------- -----------
Total operating expenses 5,238 (690) 2,989 - 7,537
-------------- ------------- ----------- ------------- -----------
Operating loss (4,535) 596 (899) - (4,838)
-------------- ------------- ----------- ------------- -----------
Other expense (income):
Interest, net 470 (19)(C) (1) - 450
Other (49) 9 (C) - - (40)
-------------- ------------- ----------- ------------- -----------
Total other expense (income) 421 (10) (1) - 410
Loss from continuing operations before income
taxes (4,956) 606 (898) - (5,248)
Income tax expense - - 4 - 4
-------------- ------------- ----------- ------------- -----------
Loss from continuing operations (4,956) 606 (902) - (5,252)
-------------- ------------- ----------- ------------- -----------
Income (Loss) from discontinued operations,
net of taxes 21,811 (606) - - $ 21,205
-------------- ------------- ----------- ------------- -----------
Income (Loss) from continuing operations 16,855 - (902) - $ 15,953
-------------- ------------- ----------- ------------- -----------
Basic and diluted loss per common share:
Loss per common share from continuing
operations $ (1.22)
===========
Income per common share from
discontinued operations $ 4.66
===========
Income per common share $ 3.51
===========
Common shares used in computing basic net
income per common share: 4,309,457 (B1) 4,309,457
===========
Common shares used in computing and diluted
net income per common share 4,550,120 (B2) 4,550,120
===========
See accompanying notes to unaudited pro forma condensed consolidated statement of operations.
D-6
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
(A) Reflects the elimination of all revenues and expenses of the REL
subsidiary for the six months ended June 30, 2006. The selling, general,
and administrative expenses that were eliminated represent the amounts
allocated to the REL subsidiary that were specifically identified as
expenses of the REL subsidiary. As a result of NGRU reporting
discontinued operations, EITF 87-24 does not allow corporate expenses to
be allocated to the discontinued operations, therefore these amounts do
not include any corporate overhead expenses.
(B1) Represents shares of common stock outstanding after the merger and
1-for-30 stock split. See computation below
(B2) Includes shares of common stock and common stock equivalents outstanding
after the merger and 1-for-30 stock split. See computation below:
---------------------------------------------------------------------------------------
NGRU EXCHANGED AT
SECURITIES 0.3623 SHARE COMBINED
SHARES OR SHARE AFTER 1-FOR-30 FOR ONE NGRU COMPANY
EQUIVALENTS OUTSTANDING BEFORE SPLIT SPLIT SHARE SECURITIES
---------------------------------------------------------------------------------------
COMMON
NGRU 19,235,041 641,169 N/A N/A
BPOMS 10,125,000 N/A 3,668,288 4,309,457
---------------------------------------------------------------------------------------
PREFERRED
NGRU N/A N/A N/A N/A
BPOMS
SERIES A 2,088,036 N/A 756,495 756,495
SERIES B 2,000,000 N/A 724,600 724,600
SERIES C N/A N/A N/A 0
---------------------------------------------------------------------------------------
OPTIONS AND WARRANTS
NGRU 427,500 14,250 N/A N/A
BPOMS 664,250 N/A 240,663 254,913
---------------------------------------------------------------------------------------
(C) Reflects the elimination of all revenues and expenses of the REL
subsidiary for the six months ended December 31, 2005. The selling,
general, and administrative expenses that were eliminated represent the
amounts allocated to REL that were specifically identified as expenses
of REL. As a result of NGRU reporting discontinued operations, EITF
87-24 does not allow corporate expenses to be allocated to the
discontinued operations, therefore these amounts do not include any
corporate overhead expenses.
D-7
APPENDIX E
HISTORICAL FINANCIAL INFORMATION OF
NETGURU, INC. AND RESEARCH ENGINEERS LIMITED
The following unaudited historical financial statements for netGuru,
Inc. and subsidiaries and for and Research Engineers Limited (A Subsidiary of
netGuru, Inc.) are included in this APPENDIX E:
PAGE
NETGURU, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Operations for the
Three Months Ended September 30, 2005...........................E-2
Condensed Consolidated Balance Sheet as of September 30, 2005........E-3
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended September 30, 2005.............................E-4
Notes to Condensed Consolidated Financial Statements.................E-6
Condensed Consolidated Statement of Operations for the Three
Months Ended December 31, 2005.................................E-19
Condensed Consolidated Balance Sheet as of December 31, 2005........E-20
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended December 31, 2005............................E-21
Notes to Condensed Consolidated Financial Statements................E-23
RESEARCH ENGINEERS LIMITED
Statements of Operations for the Quarters Ended June 30, 2006
and 2005 and the Years Ended March 31, 2006 and 2005...........E-37
Balance Sheets as of June 30, 2006 and March 31, 2006...............E-38
Statements of Cash Flows for the Quarters Ended June 30, 2006
and 2005 and the Years Ended March 31, 2006 and 2005...........E-39
Statements of Changes in Divisional Equity and Comprehensive Loss
for the Years Ended March 31, 2006 and 2005 and Three Months
Ended June 30, 2006............................................E-40
Notes to Unaudited Financial Statements.............................E-41
E-1
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
THREE MONTHS
ENDED
SEPTEMBER 30,
2005
-----------------
Net revenues:
Collaborative software products and $ 172
services
IT services 744
-----------------
Total net revenues 916
Cost of revenues:
Collaborative software products and 1
services
IT services 570
-----------------
Total cost of revenues 571
-----------------
Gross profit 345
-----------------
Operating expenses:
Selling, general and administrative 737
Research and development 138
Bad debt expense 165
Depreciation 48
-----------------
Total operating expenses 1,088
-----------------
Operating loss (743)
-----------------
Other expense (income):
Interest, net 127
Other (11)
-----------------
Total other expense 116
-----------------
Loss from continuing operations before (859)
income taxes
Income tax (benefit) expense (3)
-----------------
Loss from continuing operations (856)
(Loss) income from discontinued operations
(Note 14) (138)
-----------------
Net loss $ (994)
=================
Basic and diluted loss per common share:
Loss per common share from continuing
operations $ (0.04)
(Loss) income from discontinued
operations (0.01)
-----------------
Basic and diluted loss per common share $ (0.05)
=================
Common shares used in computing basic and
diluted loss per common share: 19,117,154
=================
E-2
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
SEPTEMBER 30,
2005
(UNAUDITED)
---------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,753
Accounts receivable (net of allowance for doubtful
accounts of $166, as of September 30, 2005) 806
Income tax receivable 12
Notes and related party loans receivable 12
Deposits 38
Prepaid expenses and other current assets 773
Current assets held for sale (Note 14) 3,549
---------------
Total current assets 7,943
Property, plant and equipment, net 895
Goodwill 2,929
Other assets 135
---------------
$ 11,902
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, net of discount
of $209 $ 1,361
Related party loans payable -
Current portion of capital lease obligations 16
Accounts payable 405
Accrued expenses 410
Income taxes payable 24
Deferred revenues 317
Other liabilities 157
Liabilities held for sale (Note 14) 2,976
---------------
Total current liabilities 5,666
Long-term debt, net of current portion and net of
discount of $99 1,644
Capital lease obligations, net of current portion 47
Deferred gain on sale-leaseback 643
---------------
Total liabilities 8,000
---------------
Stockholders' equity:
Preferred stock, par value $.01 (Authorized
5,000,000 shares; no shares issued and outstanding) -
Common stock, par value $.01; (Authorized
150,000,000 shares; 19,117,154 shares outstanding) 191
Additional paid-in capital 36,869
Accumulated deficit (32,560)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (598)
---------------
Total stockholders' equity 3,902
---------------
$ 11,902
===============
E-3
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS
ENDED
SEPTEMBER 30,
2005
-----------------
Cash flows from operating activities:
Net loss $ (1,328)
Income from discontinued operations 154
-----------------
Loss from continuing operations (1,482)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 95
Bad debt expense 221
Amortization of discount on loan 113
Changes in operating assets and liabilities:
Accounts receivable 462
Income tax receivable 4
Prepaid expenses and other current assets 187
Deposits 15
Other assets 9
Accounts payable 227
Accrued expenses (55)
Income taxes payable 6
Other current liabilities (10)
Deferred revenues (255)
Deferred gain on sale-leaseback (35)
-----------------
Net cash used in operating activities (498)
-----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (67)
-----------------
Net cash (used in) provided by
investing activities (67)
-----------------
Cash flows from financing activities:
Repayment of long-term debt (604)
Repayment of capital lease obligations (7)
-----------------
Net cash (used in) provided by
financing activities (611)
-----------------
Effect of exchange rate changes on cash and cash
equivalents (46)
-----------------
Net cash used in continuing operations (1,222)
Net cash provided by (used in)
discontinued operations 294
-----------------
Cash and cash equivalents, beginning of period 3,681
-----------------
Cash and cash equivalents, end of period $ 2,753
=================
(continued on the following page)
E-4
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In thousands)
SIX MONTHS
ENDED
SEPTEMBER 30,
2005
----------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 165
================
Income taxes $ 8
================
Supplemental disclosure of non-cash investing and
financing activities:
None
See accompanying notes to condensed consolidated financial statements.
E-5
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
netGuru, Inc. and its wholly-owned subsidiaries (the "Company"). All significant
transactions among the consolidated entities have been eliminated upon
consolidation.
These condensed consolidated financial statements have been prepared by
the Company and include all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position at September 30, 2005 and the results of operations and the cash flows
for the three and six months ended September 30, 2005 and 2004, pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for annual
consolidated financial statements. Results of operations for the three and six
months ended September 30, 2005 are not necessarily indicative of the results to
be expected for the full year ending March 31, 2006 or any other period. It is
suggested that the accompanying condensed consolidated financial statements be
read in conjunction with the Company's audited consolidated financial statements
included in the Company's annual report on Form10-KSB for the year ended March
31, 2005.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that 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 reporting periods. Actual results
could differ from those estimates.
On August 19, 2005, the Company entered into an Asset Purchase Agreement
with privately held Bentley Systems, Incorporated to sell the Company's Research
Engineers International ("REI") business and STAAD product lines. As of that
date, the Company met the criteria required to account for the REI business as a
discontinued operation. As such, unless otherwise noted, all amounts presented,
including all note disclosures, contain only information related to the
Company's continuing operations. See note 14 for additional discontinued
operations disclosures.
Certain reclassifications have been made to the fiscal 2005 condensed
consolidated financial statements to conform to the fiscal 2006 presentation.
The primary reclassifications relate to the separate reporting for the
discontinued operations of the REI business and STAAD product lines (note 14).
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. At September 30, 2005, the Company's
management believed the carrying amounts of cash and cash equivalents,
receivable and payable amounts, and accrued expenses approximated fair value
because of the short maturity of these financial instruments. The Company's
management also believed that the carrying amounts of its capital lease
obligations approximated their fair values, as the interest rates approximated a
rate that the Company could have obtained under similar terms at the balance
sheet date. In addition, the Company's management also believed that the
carrying amounts of its long-term debt obligations approximated their fair
values, as the borrowing rates are consistent with those of other lending
sources. The estimated fair value of the Company's long-term debt at September
30, 2005, was approximately $3.0 million.
E-6
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
EXCHANGES OF NONMONETARY ASSETS
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 153, "Exchanges of Nonmonetary Assets," an Amendment of
Accounting Principles Board ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions." SFAS No. 153 requires companies to measure exchanges of
nonmonetary assets, including similar productive assets that have commercial
substance, based on the fair value of the assets exchanged, recognizing a gain
or loss. SFAS No. 153 is effective for interim periods beginning after June 15,
2005 and, thus, became effective for the Company beginning with the second
quarter of fiscal 2006. The adoption of SFAS No. 153 has not had a material
effect on the Company's consolidated financial condition or results of
operations.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment." SFAS No. 123(R) requires companies to measure and recognize
compensation expense for all stock-based payments at fair value. For small
businesses, SFAS No. 123(R) is effective for the first quarter of the first
fiscal year beginning after December 15, 2005 and, thus, will be effective for
the Company for the interim periods beginning with first quarter of fiscal 2007.
Early adoption is encouraged and retroactive application of the provisions of
SFAS No. 123(R) to the beginning of the fiscal year that includes the effective
date is permitted, but not required. The Company is currently evaluating the
effect of adopting SFAS No. 123(R) and the Company's management believes the
adoption of SFAS No. 123(R), will have a material effect on the Company's
consolidated results of operations, similar to the pro forma results described
in "Stock-Based Compensation" in note 1 to the Company's consolidated financial
statements included in the Company's annual report on Form 10-KSB for fiscal
2005 and note 8 of this quarterly report. However, management has not yet
determined the actual effect of the accounting for stock option and related
income tax components.
4. SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY
The Company capitalizes costs related to the development of certain
software products in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. As of September 30,
2005, there were no unamortized capitalized software costs.
The Company amortizes capitalized software development costs and
purchased technology using the straight-line method over two to five years, or
the ratio of actual sales to anticipated sales, whichever is greater.
Amortization of software development costs and purchased technology charged to
operations was approximately $0 and $69,000 for the six months ended September
30, 2005 and 2004, respectively. Accumulated amortization on capitalized
software was $544,000 as of September 30, 2005 and 2004.
5. REVENUE RECOGNITION
The Company recognizes revenue when the following criteria are met: (1)
persuasive evidence of an arrangement, such as agreements, purchase orders or
written or online requests, exists; (2) delivery has been completed and no
significant obligations remain; (3) the Company's price to the buyer is fixed or
determinable; and (4) collection is reasonably assured. The Company's revenues
arise from the following segments: collaborative software products and services;
and IT services.
E-7
Revenue from software sales is recognized upon shipment if no
significant post-contract support obligations remain outstanding and collection
of the resulting receivable is reasonably assured probable. Since July 1, 2002,
the Company has provided at the time of sale a 15-day right of return on the
purchase of a product during which time the customer may return the product
subject to a $50 restocking fee per item returned. Customers may choose to
purchase maintenance contracts that include telephone, e-mail and other methods
of support, and the right to receive upgrades. Revenue from these maintenance
contracts is deferred and recognized ratably over the life of the contract,
usually twelve months.
In October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the AICPA issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 distinguishes between significant and insignificant
vendor obligations as a basis for recording revenue, with a requirement that
each element of a software licensing arrangement be separately identified and
accounted for based on relative fair values of each element. The Company
determines the fair value of each element in multi-element transactions based on
vendor-specific objective evidence ("VSOE"). VSOE for each element is based on
the price charged when the same element is sold separately.
In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which modifies SOP
97-2 to allow for use of the residual method of revenue recognition if certain
criteria have been met. If evidence of fair value of all undelivered elements
exists but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of
the transaction fee is recognized as revenue.
The Company sells its collaborative software along with a maintenance
package. This constitutes a multiple element arrangement. The price charged for
the maintenance portion is the same as when the maintenance is sold separately.
The fair values of the maintenance contracts sold in all multiple element
arrangements are recognized over the terms of the maintenance contracts. The
collaborative software portion is recognized when persuasive evidence of an
arrangement exits, price is fixed and determinable, when delivery is complete,
collection of the resulting receivable is reasonably assured and no significant
obligations remain.
Revenues from providing IT services are recognized primarily on a time
and materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price contracts
where progress toward completion is measured by mutually agreed upon
pre-determined milestones for which the Company recognizes revenue upon
achieving such milestones. Fixed price IT contracts are typically for a short
duration of one to six months. The Company did not have any fixed price
contracts at September 30, 2005.
6. DEFERRED REVENUES
The Company defers revenues for its maintenance contracts and for its
collaborative software sales that are not considered earned. The Company defers
its maintenance revenues when the maintenance contracts are sold, and then
recognizes the maintenance revenues over the term of the maintenance contracts.
The Company defers its collaborative software sales revenues if it invoices or
receives payment prior to the completion of a project, and then recognizes these
revenues upon completion of the project when no significant obligations remain.
E-8
7. LONG-TERM DEBT
2002 NOTE
On December 13, 2002, the Company entered into a Securities Purchase
Agreement ("Agreement") with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to
the Agreement, the Company issued to Laurus a 6% Convertible Note ("2002 Note")
in the principal amount of $2,000,000 and a five-year warrant to purchase up to
200,000 shares of the Company's common stock at exercise prices ranging from
$1.76 to $2.40 per share.
On August 4, 2003, the terms of the 2002 Note were amended as follows:
(1) the interest rate was amended from 6% to the greater of 5% or prime rate
plus 1%, payable in arrears; (2) the amortization period was extended from 20
months ending on November 13, 2004 to 24 months ending on July 31, 2005; (3) the
penalty for repayments of the outstanding balance in cash was removed; and (4)
the fixed conversion price, upon which potential issuances of the Company's
common stock to satisfy the obligations of the convertible note are based, was
reduced from $1.60 to $1.30.
In April 2004, Laurus converted $650,000 of principal balance on the
2002 Note into 500,000 shares of the Company's common stock. In December 2004,
Laurus converted the remaining balance of $80,000 into 61,358 shares of the
Company's common stock. At September 30, 2005, the Company had no principal
balance outstanding under the 2002 note.
REVOLVING CREDIT FACILITY
On July 31, 2003, the Company obtained a three-year, renewable,
$4,000,000 revolving accounts receivable credit facility from Laurus
("Facility"). The amount available under this Facility is reduced by the
balances, if any, outstanding on the 2002 Note and the Amended and Restated 2003
Note (defined below).
Borrowings under the Facility accrued interest, initially, at an annual
rate equal to the greater of 5% or the prime rate plus 1%. Since November 1,
2003, the interest rate may be adjusted every month based on certain
registration requirements and on the volume weighted average price of the
Company's common stock. The interest rate was adjusted up to 7.75% in September
2005 as a result of increases in the prime rate. Obligations owed under this
Facility may be repaid at the Company's option in cash or through the issuance
of shares of the Company's common stock at the fixed conversion price of $1.30
per share, subject to volume limitations and other terms, as described in the
Facility. An early termination fee of up to $120,000 will be payable if the
Facility is terminated prior to August 1, 2006. It is anticipated that this
termination fee will be waived when all outstanding borrowings from Laurus are
repaid. The Facility also provides the Company, under certain conditions, the
flexibility to borrow additional amounts up to $1,000,000 above what is
available based upon eligible accounts receivable. Any such additional
borrowings will accrue interest at a rate of 0.6% per month, payable monthly.
In connection with this Facility, the Company issued to Laurus a
five-year warrant to purchase 180,000 shares of the Company's common stock,
exercisable at various prices ranging from $1.50 to $1.89 per share. Laurus may
also receive additional five-year warrants to purchase up to 400,000 shares of
the Company's common stock at an exercise price equal to 125% of the fixed
conversion price based upon how much of the outstanding obligation under the
Facility is converted to equity. As of September 30, 2005, none of the
additional five-year warrants had been issued. The Facility is secured by a
general security interest in the assets of the Company and its subsidiaries and
prohibits the Company from paying any dividends on its common stock without
Laurus' permission.
E-9
On December 4, 2003, the outstanding balance of $900,000 under the
Facility was refinanced with Laurus along with $500,000 of additional borrowings
into a three-year, 5% secured convertible note ("2003 Note"). At September 30,
2005, the Company had no borrowings under the Facility.
2003 NOTE
The interest rate on the 2003 Note was equal to the greater of 5% or the
prime rate plus 1%. The fixed conversion price, upon which potential issuances
of the Company's common stock to satisfy the obligations of the 2003 Note were
based, was $1.30. On April 27, 2004, the Company amended and restated the 2003
Note to reflect an additional $1,000,000 that it borrowed on April 27, 2004, so
that the principal amount of the 2003 Note was increased to $2,400,000 from
$1,400,000 (the "Amended and Restated 2003 Note"). The net proceeds from the
additional principal under the Amended and Restated 2003 Note were used for
working capital.
The Amended and Restated 2003 Note requires monthly principal payments
of $50,000 plus accrued interest (payable in arrears) on the first business day
of each month, commencing August 1, 2004, with the entire remaining principal
balance becoming due on December 3, 2006. Monthly payments under the original
2003 Note had been scheduled to begin in April 2004. The amount of monthly
principal payment was increased from $30,000 to $50,000. The Company is required
to pay any remaining balance of principal, including any accrued and unpaid
interest, on the maturity date. The final payment due at maturity was increased
from $440,000 to $710,000. The Company recorded approximately $173,000 as
additional discount to the Amended and Restated 2003 Note, which included the
$11,000 in fees it paid to an affiliate of Laurus and the $162,000 it recorded
in April 2004 due to the beneficial conversion feature of the debt related to
the additional borrowings. This additional discount, along with approximately
$133,000 in unamortized discount remaining at the time of the amendment for a
total discount of $306,000, is being amortized to interest expense over the
remainder of the term of the Amended and Restated 2003 Note. In April 2004 and
December 2004, Laurus converted $260,000 and $219,000 of the principal balance
under the Amended and Restated 2003 Note into 200,000 and 168,462 shares of the
Company's common stock, respectively. At September 30, 2005, the Company had an
outstanding balance of $1,410,000, excluding unamortized fees and unamortized
beneficial conversion adjustments, under the Amended and Restated 2003 Note.
The Amended and Restated 2003 Note is secured by a general security
interest in the assets of the Company and its domestic subsidiaries. The Company
was required to use the net proceeds from the Amended and Restated 2003 Note for
general corporate purposes only. The Company is also required not to permit for
any fiscal quarter commencing April 1, 2003, the net operating cash flow deficit
to be greater than $500,000, excluding extraordinary items, as determined by
Laurus. At September 30, 2005, the Company was in compliance with this covenant.
2004 NOTE
On December 23, 2004 ("Closing Date"), the Company entered into a
Securities Purchase Agreement ("2004 Agreement") with Laurus. Pursuant to the
2004 Agreement, the Company sold to Laurus a secured convertible note in the
original principal amount of $1,000,000 ("2004 Note") that is scheduled to
mature on December 23, 2007 ("Maturity Date"). The Company paid Laurus Capital
Management, LLC, an affiliate of Laurus, a $5,000 fee, and reimbursed Laurus for
$5,000 of expenses in connection with the offering. The net proceeds from the
sale of the 2004 Note were used for working capital. In connection with the 2004
Note, we issued to Laurus a warrant to purchase up to 130,000 shares of the
Company's common stock at any time or from time to time on or before December
23, 2009 at an exercise price of $1.56 per share ("2004 Warrant"). On September
30, 2005, the outstanding principal balance of the 2004 Note was $910,000.
E-10
The 2004 Note bears an annual interest rate equal to the greater of 5%
or prime rate plus 1% based on a 360-day year, and requires monthly interest
payments in arrears on the first business day of each month beginning February
1, 2005 through the Maturity Date. The interest rate may be adjusted downward
(but not below 0%) following effective registration of the shares underlying the
2004 Note with the Securities and Exchange Commission, (the "SEC") if certain
increases occur in the closing price of the Company's common stock. The 2004
Note requires monthly principal repayments of $30,000 along with any related
accrued but unpaid interest (together the "Monthly Payment") beginning July 1,
2005 and through the Maturity Date. The remaining balance of principal,
including any accrued and unpaid interest, is due on the Maturity Date. The
Monthly Payment must be paid through conversion into shares of the Company's
common stock at the initial fixed conversion price of $1.29 per share (subject
to anti-dilution adjustments in connection with mergers, acquisitions, stock
splits, dividends and the like, and in connection with future issuances of the
Company's common stock at prices per share below the then-applicable conversion
price) if the following conversion criteria are met:
(1) the shares are registered with the SEC for public resale
(2) the average closing price of the Company's common stock for the
5 trading days preceding a repayment date is at least 110% of
the fixed conversion price; and
(3) the amount of such conversion does not exceed 25% of the
aggregate dollar trading volume of the Company's common stock
for the 30-day trading period immediately preceding the
applicable repayment date.
Any amount of Monthly Payment that cannot be converted into common stock
due to failure to meet the conversion criteria must be paid in cash at a rate of
102% of the monthly principal amount. Laurus may convert at the fixed conversion
price amounts due under the 2004 Note if the underlying shares are registered
for resale or an exemption from registration is available and no event of
default under the 2004 Note remains uncured or remains unwaived by Laurus.
The Company may also prepay the amount of the 2004 Note in cash by
paying 104% of the principal balance together with any accrued but unpaid
interest.
In the event of a default and continuation of a default, Laurus may
accelerate the payment of the principal balance requiring the Company to pay
115% of the entire principal balance of the 2004 Note outstanding on that date.
In the event of a default and continuation of default, the interest rate will
increase by 5% per annum on the unpaid principal balance until the default is
cured or waived. Events of default that would give rise to automatic
acceleration of payment of the principal balance and an increase in annual
interest rate on unpaid principal balance include:
o A failure to pay principal, interest or fees;
o Breach of covenant, representations and warranties;
o A receiver or trustee for the Company is appointed;
o Any judgment against the Company or any of its assets in excess
of $250,000 remains unvacated, unbonded or unstayed for ninety
days;
o Bankruptcy, insolvency, liquidation or reorganization
proceedings against the Company are not resolved within 30 days;
o Trading stop in the Company's common stock is in effect for more
than five days;
o Failure to deliver the Company's common stock or replacement
note;
o Occurrence of default or continuation of default in related or
other agreements with Laurus; and
o Change in control of ownership of the Company.
E-11
As security for payment of the 2004 Note, the Company granted to Laurus
a continuing general security interest in the Company's assets.
On June 28, 2005, the Company and Laurus entered into a waiver and
extension, pursuant to which they agreed to amend the definition of
"Effectiveness Date" contained in a Registration Rights Agreement (the
"Agreement") dated December 23, 2004 that they entered into simultaneously with
the issuance of the 2004 Note and the 2004 Warrant. Pursuant to the Agreement,
the Company was required to file by a January 22, 2005 initial filing date a
resale registration statement with the SEC covering the shares of common stock
issuable upon conversion of the 2004 Note and upon exercise of the 2004 Warrant.
The Company was also required to obtain effectiveness of the registration
statement by a May 22, 2005 initial Effectiveness Date.
The Agreement provides that:
o if a registration statement is not filed on or prior to the
initial filing date, or
o if the registration statement is not declared effective by the
SEC by the Effectiveness Date, or
o if after the registration statement is filed with and declared
effective by the SEC, the registration statement ceases to be
effective as to all registrable securities to which it is
required to relate at any time prior to the time that all of the
registrable securities have been sold or may be sold without
volume restrictions under Rule 144(k) of the Securities Act of
1933, as amended, or
o if trading of our common stock is suspended for more than three
trading days, then subject to certain grace periods, until the
event described above is cured, the Company must pay to Laurus
cash liquidated damages equal to 1.0% for each 30-day period
(prorated for partial periods) of the original principal amount
of the 2004 Note.
The Company was unable to meet either the initial filing deadline or the
initial Effectiveness Date. Accordingly, the Company and Laurus entered into the
June 28, 2005 waiver and extension. The waiver and extension provides that the
January 22, 2005 initial filing deadline is waived. The waiver and extension
also provides that the amended Effectiveness Date for the initial registration
statement filed under the Agreement is September 1, 2005, and with respect to
each additional registration statement that may be required to be filed in the
future, a date no later than 30 days following the applicable filing date. The
Company paid $10,000 in liquidated damages for the delay in the registration
statement being declared effective by the SEC. The $10,000 liquidated damage
payment was recorded as a penalty expense under other expense in July 2005. The
registration statement was declared effective by the SEC on August 12, 2005.
With the exception of previously disclosed issuances of stock and the
exception of stock options granted to employees and directors, the Company is
prohibited from issuing any securities with a continuously variable/floating
conversion feature that could become free-trading prior to the full repayment or
conversion of the 2004 Note together with all related accrued and unpaid
interest and fees.
The five-year 2004 Warrant permits Laurus to purchase up to 130,000
shares of common stock, at any time or from time to time, at the exercise price
of $1.56 per share. The exercise price and the number of shares underlying the
2004 Warrant are fixed but are subject to anti-dilution adjustments in
connection with mergers, acquisitions, stock splits, dividends and the like.
Laurus has contractually agreed to two separate beneficial ownership
limitations that restrict conversion of the 2004 Note and the exercise of the
2004 Warrant. Laurus has agreed that the 2004 Note shall not be converted and
the 2004 Warrant shall not be exercised to the extent such conversion would
result in Laurus, together with its affiliates, beneficially owning in excess of
4.99% of the number of shares of the Company's common stock outstanding at that
time. Laurus may cause this 4.99% limitation to expire by providing the Company
with 75 days' advance notice of its intention to do so. This 4.99% limitation
does not preclude conversion of the 2004 Note or exercise of the 2004 Warrant
over time, so long as Laurus' beneficial ownership of the Company's common
stock, together with its affiliates, does not exceed the limitation amount. This
4.99% limitation automatically becomes void upon an event of default under the
2004 Note.
E-12
The Company recorded a debt discount as a result of the issuance of the
2004 Warrant of approximately $103,000 and a debt discount as a result of
$10,000 in fees paid to Laurus and its affiliate. The total debt discount of
$113,000 is being charged to interest expense, ratably, over the term of the
2004 Note.
In connection with the Company's entry into the Asset Purchase Agreement
described in note 14, Laurus and the Company entered into a Stand Still
Agreement as of August 19, 2005. Under the Stand Still Agreement, Laurus
consented to the Company's entry into and consummation of the transactions
contemplated by the Asset Purchase Agreement and agreed to release its security
interest in the assets being sold, subject to Laurus being paid in full at the
closing all of the Company's obligations under the convertible promissory notes
held by Laurus. In anticipation of the consummation of the asset sale described
in note 14 , Laurus has agreed to release all UCC filings against assets of the
Company immediately upon receiving payment in full for all principal and accrued
interest. Laurus also agreed not to exercise any of its warrants to purchase the
Company's common stock until the earlier to occur of the closing of the Asset
Purchase Agreement, the termination of the Asset Purchase Agreement or February
15, 2006. In addition, Laurus agreed not to interfere with the transactions
contemplated by the Asset Purchase Agreement through involvement in any merger,
sale of assets, sale of equity or similar transaction involving the Company or
any of its divisions or any other transaction that would involve the transfer or
potential transfer of control of the Company. The Stand Still Agreement does
not, however, limit the right of Laurus to transfer or vote shares of the
Company's common stock.
8. STOCKHOLDERS' EQUITY
The Company continues to follow the guidance of APB No. 25. Pursuant to
APB No. 25, compensation related to stock options is measured as the difference
between the grant price and the fair market value of the underlying common
shares at the grant date. Generally, the Company issues options to employees
with a grant price equal to the market value of its common stock on the grant
date. Accordingly, the Company has recognized no compensation expense on its
grants of employee stock options.
The following represents pro forma information as if the Company
recorded compensation cost using the fair value of the issued compensation
instrument under SFAS No. 123 (in thousands, except amounts per share):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss - as reported $ (994) $ (73) $ (1,328) $ (691)
Deduct: Stock-based compensation
expense determined under the fair
value based method for all awards,
net of tax (36) (145) (72) (290)
------------ ------------ ------------ ------------
Net loss - pro forma $ (1,030) $ (218) $ (1,400) $ (981)
============ ============ ============ ============
Basic and diluted net loss per share -
As reported $ (0.05) $ (0.00) $ (0.07) $ (0.04)
Pro forma $ (0.05) $ (0.01) $ (0.07) $ (0.05)
Weighted average fair value of
options granted $ 1.02 1.45 $ 1.02 1.45
E-13
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------
2005 2004
------------ ------------
Black-Scholes option pricing model
Assumptions:
Dividend yield - -
Expected volatility 81.0% 80.7%
Risk-free interest rate 4.26 3.56%
Expected option lives (in years) 7.01 6.93
9. FOREIGN CURRENCY TRANSLATION
The financial condition and results of operations of the Company's
foreign subsidiaries are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
into United States dollars (the reporting currency) at the exchange rate in
effect at the end of the interim period. Statements of operations accounts are
translated at the average rate of exchange prevailing during the respective
interim periods. Translation adjustments arising from the use of differing
exchange rates from period to period are included in accumulated other
comprehensive income (loss) in the consolidated statements of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations and were not material to the first half of fiscal 2005
and 2006.
10. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which prescribes rules for the reporting and display of
comprehensive income (loss) and its components. SFAS No. 130 requires foreign
currency translation adjustments, which are reported separately in stockholders'
equity, to be included in other comprehensive income (loss). Total comprehensive
loss was $1,383,000 and $681,000 for the six months ended September 30, 2005 and
2004, respectively.
11. NET LOSS PER SHARE
Basic earnings (loss) per share ("EPS") is calculated by dividing net
income (loss) by the weighted-average common shares outstanding during the
period. Diluted EPS reflects the potential dilution to basic EPS that could
occur upon conversion or exercise of securities, options, or other such items,
to common shares using the treasury stock method based upon the weighted-average
fair value of the Company's common shares during the period.
The following table illustrates the computation of basic and diluted net
loss per share (in thousands, except per share amounts):
E-14
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Numerator:
Net loss and numerator for basic and diluted
loss per share $ (994) $ (73) $ (1,328) $ (691)
============ ============ ============ ============
Denominator:
Denominator for basic net loss per share -
average number of common shares 19,117 18,833 19,117 18,730
outstanding during the period
Incremental common shares attributable to
exercise of outstanding options, warrants
and other common stock equivalents - - - -
------------ ------------ ------------ ------------
Denominator for diluted net loss per share $ 19,117 $ 18,833 19,117 18,730
============ ============ ============ ============
Basic and diluted net loss per share $ (0.05) $ (0.00) $ (0.07) $ (0.04)
============ ============ ============ ============
Options, warrants and other common stock equivalents amounting to
1,790,000 potential common shares for the three and six month periods ended
September 30, 2005 (all of which are potential common shares from the possible
conversion of the convertible notes issued to Laurus for each of the same
periods), and 1,615,000 and 1,664,000 potential common shares for the three and
six month periods ended September 30, 2004, respectively, were excluded from the
computation of diluted EPS for the periods presented because the Company
reported net losses and, therefore, the effect would be antidilutive.
12. SEGMENT AND GEOGRAPHIC DATA
The Company is an integrated Internet and IT technology and services
company. The Company's operating segments are:
o Collaborative software products and services; and
o IT services
The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources. The Company's
management monitors unallocable expenses related to the Company's corporate
activities in a separate "Center," which is reflected in the tables below.
E-15
The significant components of worldwide operations by reportable
operating segment are:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET REVENUE
Collaborative software products and services $ 172 $ 185 $ 380 $ 268
IT services 744 1,034 1,517 2,109
------------ ------------ ------------ ------------
Consolidated $ 916 $ 1,219 $ 1,897 $ 2,377
============ ============ ============ ============
GROSS PROFIT
Collaborative software products and services $ 171 $ 184 $ 378 $ 197
IT services 174 377 342 721
------------ ------------ ------------ ------------
Consolidated $ 345 $ 561 $ 720 $ 918
============ ============ ============ ============
OPERATING (LOSS) INCOME
Collaborative software products and services $ 15 $ 22 $ 45 $ (274)
IT services (286) 50 (440) 77
Center (472) (439) (836) (850)
------------ ------------ ------------ ------------
Consolidated $ (743) $ (367) $ (1,231) $ (1,047)
============ ============ ============ ============
The Company's operations are based worldwide through foreign and
domestic subsidiaries and branch offices in the United States, India, Germany
and Asia-Pacific. The following are significant components of worldwide
operations by geographic location:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET REVENUE
United States $ 627 $ 856 $ 1,398 $ 1,691
Europe 52 167 104 242
Asia-Pacific 237 196 395 444
------------ ------------ ------------ ------------
Consolidated $ 916 $ 1,219 $ 1,897 $ 2,377
============ ============ ============ ============
EXPORT SALES
United States $ 24 $ 57 $ 110 $ 309
============ ============ ============ ============
SEPTEMBER 30, MARCH 31,
2005 2005
---------------- ----------------
(IN THOUSANDS)
LONG-LIVED ASSETS
United States $ 2,929 $ 2,897
Europe 109 113
Asia-Pacific 921 989
---------------- ----------------
Consolidated $ 3,959 $ 3,999
================ ================
E-16
13. CONTINGENCIES
The Company is a named defendant in a civil action commenced against it
by plaintiffs Ash Brahma ("Brahma"), Sujit Kumar ("Kumar"), and Venture
International ("Venture") (collectively, "Plaintiffs") on August 18, 2005, in
the Commonwealth of Massachusetts, Essex County, Superior Court Department of
the Trial Court, Civil Action No. 05-1446 B, entitled, ASH BRAHMA, ET AL. V.
NETGURU, INC. (the "Action").
In the Action, Plaintiffs allege breach of contract and fraud on the
part of the Company, and they seek alleged damages of $4,885,000. On October 5,
2005, the Company timely filed a Notice of Removal of the Action to the United
States District Court, District of Massachusetts, where the Action is currently
pending.
On October 13, 2005, the Company filed its answer and counterclaim in
the Action. The Company has denied any breach of contract or other wrongdoing on
its part, and has denied that Plaintiffs are entitled to equitable relief or
damages. The Company's counterclaim seeks recission of contract and/or breach of
contract, restitution and/or damages for consulting fees paid to Plaintiffs,
damages for time and money spent pursuant to the contracts alleged objectives,
(plus interest, costs and attorneys' fees.
The Company is also party to various litigation matters arising in the
normal course of business. Management believes the resolution of these matters
will not materially affect the Company's consolidated results of operations or
financial condition.
14. DISCONTINUED OPERATIONS
On August 19, 2005, the Company entered into an Asset Purchase Agreement
with privately held Bentley Systems, Incorporated ("Bentley"). The Asset
Purchase Agreement provides for the sale of the Company's REI business and STAAD
product lines to Bentley for approximately $23.5 million in cash. The sale is
subject to various closing conditions, including approval by the Company's
stockholders and compliance with regulatory requirements. If approved by
stockholders at the Annual Meeting on November 17, 2005, the Company anticipates
the sale will close during the quarter ended December 31, 2005. Bentley will
acquire the worldwide operations associated with REI, including the STAAD
structural analysis and design product line, software and product development,
customer support and relationships, and offices associated with the worldwide
business.
The Company's condensed consolidated financial statements have been
reclassified for all periods presented to reflect the REI business segment as
discontinued operations. In accordance with GGAAP, the revenues, costs, and
expenses directly associated with the REI business have been reclassified as
discontinued operations on the condensed consolidated statements of operations
for all periods presented. Corporate expenses such as general corporate overhead
and interest have not been allocated to discontinued operations. Additionally,
assets and liabilities of the REI business segment have been reclassified as
held for sale on the Company's condensed consolidated balance sheets for all
periods presented, and the Company's condensed consolidated statements of cash
flows have been reclassified to reflect the operations of the REI business
segment as discontinued operations for all periods presented.
Separately, in September 2004, the Company sold its Web-based
telecommunications services division in its continuing efforts to focus on its
core software products and IT services businesses. Accordingly, the results of
the operations of the Web-based telecommunications services division is excluded
from continuing operations and reported as "Discontinued Operations" for the
three and six months ended September 30, 2004. The total sales price was
$130,000 for the sale of the Web-based telecommunications services division in
September 2004. The Company received the entire proceeds from the sale of the
Web-based telecommunications services division prior to March 31, 2005.
E-17
The carrying value of the assets and liabilities held for sale of the
discontinued REI business segment included in the consolidated balance sheets
are as follows:
SEPTEMBER 30, MARCH 31,
2005 2005
---------------- -----------------
ASSETS HELD FOR SALE
Accounts receivable, net $ 2,212 $ 2,843
Deposits 47 42
Prepaid expenses and other current assets 341 376
---------------- -----------------
Total current assets 2,600 3,261
Property, plant and equipment, net 588 758
Goodwill 157 157
Other assets 204 98
---------------- -----------------
$ 3,549 $ 4,274
================ =================
LIABILITIES HELD FOR SALE
Current portion of capital lease obligations $ 142 $ 129
Accounts payable 215 285
Accrued expenses 499 667
Income taxes payable 10 10
Deferred revenues 1,817 2,118
Other liabilities 33 33
--------------- -----------------
Total current liabilities 2,716 3,242
Capital lease obligations, net of current portion 237 288
Other long term liabilities 23 -
--------------- -----------------
Total liabilities $ 2,976 $ 3,530
=============== =================
The net revenues and net income of the Company's discontinued operations
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenues:
Web-based telecommunications services business $ - $ 109 $ - $ 327
REI business 2,952 2,680 5,821 5,047
------------ ------------ ------------ ------------
$ 2,952 $ 2,789 $ 5,821 $ 5,374
------------ ------------ ------------ ------------
Net (loss) income:
Web-based telecommunications services business $ - $ 38 $ - $ 67
REI business (138) 333 154 455
------------ ------------ ------------ ------------
$ (138) $ 371 $ 154 $ 522
------------ ------------ ------------ ------------
E-18
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED
DECEMBER 31, 2005
-------------------
Net revenues:
Collaborative software products and services $ 245
IT services 636
-------------------
Total net revenues 881
-------------------
Cost of revenues:
Collaborative software products and services 38
IT services 485
-------------------
Total cost of revenues 523
-------------------
Gross profit 358
-------------------
Operating expenses:
Selling, general and administrative 897
Research and development 106
Bad debt expense 32
Depreciation 83
Impairment charge (Note 11) 2,924
-------------------
Total operating expenses 4,042
-------------------
Operating loss (3,684)
-------------------
Other expense (income):
Interest, net 343
Other (38)
-------------------
Total other expense 305
-------------------
Loss from continuing operations before income taxes (3,989)
Income tax expense 3
-------------------
Loss from continuing operations (3,992)
-------------------
Discontinued operations:
(Loss) income from discontinued operations (Note 14) (327)
Gain on sale of business, net of taxes (Note 14) 22,168
-------------------
Income from discontinued operations 21,841
-------------------
Net income (loss) $ 17,849
===================
Basic and diluted income (loss) per common share:
Loss per common share from continuing operations $ (0.21)
Income from discontinued operations 1.14
-------------------
Basic income (loss) per common share $ 0.93
===================
Common equivalent shares used in computing basic and
diluted net loss per common share: 19,117,154
E-19
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
2005
(UNAUDITED)
---------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,540
Restricted cash 1,070
Accounts receivable (net of allowance for doubtful
accounts of $180) 853
Income tax receivable 8
Notes and related party loans receivable 2
Deposits 85
Prepaid expenses and other current assets 736
Current assets held for sale (Note 14) 164
---------------
Total current assets 23,458
Property, plant and equipment, net 1,046
Goodwill -
Other assets 128
---------------
$ 24,632
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, net of discount
of $15 $ 66
Related party loans payable -
Current portion of capital lease obligations 138
Accounts payable 248
Accrued expenses 563
Income taxes payable 660
Cash distribution payable (Note 15) 16,250
Deferred revenues 174
Other liabilities 39
Liabilities held for sale (Note 14) 220
---------------
Total current liabilities 18,358
Long-term debt, net of current portion and net of
discount of $7 28
Capital lease obligations, net of current portion 221
Deferred gain on sale-leaseback (Note 14) 625
---------------
Total liabilities 19,232
---------------
Stockholders' equity:
Preferred stock, par value $.01 (Authorized
5,000,000 shares; no shares issued and outstanding) -
Common stock, par value $.01; (Authorized
150,000,000 shares; 19,117,154 shares outstanding) 191
Additional paid-in capital 20,619
Accumulated deficit (14,711)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (699)
---------------
Total stockholders' equity 5,400
---------------
$ 24,632
===============
E-20
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
NINE MONTHS ENDED
DECEMBER 31, 2005
-------------------
Cash flows from operating activities:
Net income (loss) $ 16,521
Less: (Loss) income from discontinued operations (118)
Less: Gain on sale 22,168
-------------------
Loss from continuing operations (5,529)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 232
Tax expense allocation to discontinued operations (650)
Bad debt expense 246
Impairment charge-goodwill 2,924
Amortization of discount on loan 399
Changes in operating assets and liabilities:
Accounts receivable 445
Notes and related party loans receivable 10
Prepaid expenses and other current assets 177
Deposits 8
Other assets 15
Accounts payable 77
Accrued expenses 30
Income taxes payable 636
Other current liabilities (19)
Deferred revenues (234)
Deferred gain on sale-leaseback (52)
-------------------
Net cash used in operating activities (1,285)
-------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (224)
Increase in restricted cash (1,070)
Proceeds from sale of discontinued operations 23,500
-------------------
Net cash provided by investing activities 22,206
-------------------
Cash flows from financing activities:
Repayment of long-term debt (3,775)
Repayment of capital lease obligations (140)
-------------------
Net cash (used in) provided by financing activities (3,915)
-------------------
Effect of exchange rate changes on cash and cash equivalents (49)
-------------------
Net cash provided by continuing operations 16,957
-------------------
Cash flows from discontinued operations (Revised- See Note 16)
Cash provided by operating activities 59
Cash used in investing activities (147)
Cash used in financing activities (10)
-------------------
Net cash (used in) provided by discontinued operations (98)
-------------------
Cash and cash equivalents, beginning of period 3,681
-------------------
Cash and cash equivalents, end of period $ 20,540
===================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 266
===================
Income taxes $ 25
===================
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases $ 27
See accompanying notes to condensed consolidated financial statements.
E-21
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
netGuru, Inc. and its wholly-owned subsidiaries (the "Company"). All significant
transactions among the consolidated entities have been eliminated upon
consolidation.
The condensed consolidated financial statements have been prepared by
the Company and include all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position at December 31, 2005 and the results of operations and the cash flows
for the three and nine months ended December 31, 2005 and 2004, pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America, ("GAAP") for
annual consolidated financial statements. Results of operations for the three
and nine months ended December 31, 2005 are not necessarily indicative of the
results to be expected for the full year ending March 31, 2006 or any other
period. It is suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements included in the Company's annual report on Form 10-KSB for
the year ended March 31, 2005.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that 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 reporting periods. Actual results
could differ from those estimates.
On November 18, 2005, the Company completed its sale of the assets of
its Research Engineers International ("REI") business and STAAD product lines to
privately held Bentley Systems, Incorporated ("Bentley") for $23.50 million and
recorded a net gain of $22.17 million. As such, unless otherwise noted, all
amounts presented, including all note disclosures, contain only information
related to the Company's continuing operations. In accordance with GAAP, the
balance sheet at March 31, 2005 has been adjusted to reflect the assets and
liabilities of the REI business and STAAD product lines as held for sale. At
December 31, 2005, all of the assets and liabilities in our France subsidiary,
which we plan to sell during the fourth quarter of fiscal 2006, remained
classified as held for sale. Additionally, the statements of operations and cash
flows have been adjusted to reflect the results of the REI business and STAAD
product lines as discontinued for the periods presented. See note14 for
additional discontinued operations disclosures.
Certain reclassifications have been made to the fiscal 2005 condensed
consolidated financial statements to conform to the fiscal 2006 presentation.
The primary reclassifications relate to the separate reporting for the
discontinued operations of the REI business and STAAD product lines (note 14).
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. At December 31, 2005, the Company's
management believed the carrying amounts of cash and cash equivalents,
receivable and payable amounts, and accrued expenses approximated fair value
because of the short maturity of these financial instruments. The Company's
management also believed that the carrying amounts of its capital lease
obligations approximated their fair values, as the interest rates approximated a
rate that the Company could have obtained under similar terms at the balance
sheet date. In addition, the Company's management also believed that the
carrying amounts of its long-term debt obligations approximated their fair
values, as the borrowing rates are consistent with those of other lending
sources. The estimated fair value of the Company's long-term debt at December
31, 2005, was approximately $94,000.
E-22
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
EXCHANGES OF NONMONETARY ASSETS
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 153, "Exchanges of Nonmonetary Assets," an Amendment of
Accounting Principles Board ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions." SFAS No. 153 requires companies to measure exchanges of
nonmonetary assets, including similar productive assets that have commercial
substance, based on the fair value of the assets exchanged, recognizing a gain
or loss. SFAS No. 153 is effective for interim periods beginning after June 15,
2005 and, thus, became effective for the Company beginning with the second
quarter of fiscal 2006. The adoption of SFAS No. 153 has not had a material
effect on the Company's consolidated financial condition or results of
operations.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment." SFAS No. 123(R) requires companies to measure and recognize
compensation expense for all stock-based payments at fair value. For small
businesses, SFAS No. 123(R) is effective for the first quarter of the first
fiscal year beginning after December 15, 2005 and thus, will be effective for
the Company for the interim periods beginning with first quarter of fiscal 2007.
Early adoption is encouraged and retroactive application of the provisions of
SFAS No. 123(R) to the beginning of the fiscal year that includes the effective
date is permitted, but not required. The Company is currently evaluating the
effect of adopting SFAS No. 123(R) and the Company's management believes the
adoption of SFAS No. 123(R), will have a material effect on the Company's
consolidated results of operations, similar to the pro forma results described
in "Stock-Based Compensation" in note 1 to the Company's consolidated financial
statements included in the Company's annual report on Form 10-KSB for fiscal
2005 and note 8 of this quarterly report. However, management has not yet
determined the actual effect of the accounting for stock option and related
income tax components.
4. REVENUE RECOGNITION
The Company recognizes revenue when the following criteria are met: (1)
persuasive evidence of an arrangement, such as agreements, purchase orders or
written or online requests, exists; (2) delivery has been completed and no
significant obligations remain; (3) the Company's price to the buyer is fixed or
determinable; and (4) collection is reasonably assured. The Company's revenues
arise from the following segments: collaborative software products and services
and IT services.
Revenue from software sales is recognized upon shipment if no
significant post-contract support obligations remain outstanding and collection
of the resulting receivable is reasonably assured. Customers may choose to
purchase maintenance contracts that include telephone, e-mail and other methods
of support, and the right to unspecified upgrades on a when-and-if available
basis. Revenue from these maintenance contracts is deferred and recognized
ratably over the life of the contract, usually twelve months.
E-23
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
In October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the AICPA issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 distinguishes between significant and insignificant
vendor obligations as a basis for recording revenue, with a requirement that
each element of a software licensing arrangement be separately identified and
accounted for based on relative fair values of each element. The Company
determines the fair value of each element in multi-element transactions based on
vendor-specific objective evidence ("VSOE"). VSOE for each element is based on
the price charged when the same element is sold separately.
In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which modifies SOP
97-2 to allow for use of the residual method of revenue recognition if certain
criteria have been met. If evidence of fair value of all undelivered elements
exists but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of
the transaction fee is recognized as revenue.
The Company sells its collaborative software along with a maintenance
package. This constitutes a multi-element arrangement. The price charged for the
maintenance portion is the same as when the maintenance is sold separately. The
fair values of the maintenance contracts sold in all multi-element arrangements
are recognized over the terms of the maintenance contracts. The collaborative
software portion is recognized when persuasive evidence of an arrangement exits,
price is fixed and determinable, when delivery is complete, collection of the
resulting receivable is reasonably assured and no significant obligations
remain.
Revenues from providing IT services are recognized primarily on a time
and materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price contracts
where progress toward completion is measured by mutually agreed upon
pre-determined milestones for which the Company recognizes revenue upon
achieving such milestones. Fixed price IT contracts are typically for a short
duration of one to nine months. The Company did not have any fixed price
contracts at December 31, 2005.
5. DEFERRED REVENUES
The Company defers revenues for its maintenance contracts and for its
collaborative software sales that are not considered earned. The Company defers
its maintenance revenues when the maintenance contracts are sold, and then
recognizes the maintenance revenues over the term of the maintenance contracts.
The Company defers its collaborative software sales revenues if it invoices or
receives payment prior to the completion of a project, and then recognizes these
revenues upon completion of the project when no significant obligations remain.
6. LONG-TERM DEBT
In connection with the Company's entry into the Asset Purchase Agreement
with Bentley described in note 14, the Company and Laurus Master Fund, Ltd.,
("Laurus"), then a secured creditor and beneficial owner of more than 5% of the
Company's outstanding common stock, entered into a Stand Still Agreement as of
August 19, 2005. Under the Stand Still Agreement, Laurus consented to the
Company's entry into and consummation of the transactions contemplated by the
Asset Purchase Agreement and agreed to release its security interest in the
assets being sold, subject to Laurus being paid in full at the closing all of
the Company's obligations under the convertible promissory notes described below
held by Laurus. The Stand Still Agreement did not, however, limit the right of
Laurus to transfer or vote shares of the Company's common stock.
E-24
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
As described below, on November 18, 2005, the Company used part of the
sale proceeds to pay the remaining total outstanding debt and accrued interest
owed to Laurus in the amount of approximately $2.25 million. This amount also
included 4% prepayment penalty charges aggregating approximately $86,000. Upon
receiving payment in full for all of the Company's obligations under the
convertible promissory notes held, Laurus released all UCC filings against
assets of the Company. In addition, the revolving credit facility described
below was terminated.
REVOLVING CREDIT FACILITY
On July 31, 2003, the Company obtained a three-year, renewable,
$4,000,000 revolving accounts receivable credit facility from Laurus
("Facility"). The amount available under this Facility was reduced by the
balance outstanding on the Amended and Restated 2003 Note (defined below).
On December 4, 2003, the outstanding balance of $900,000 under the
Facility was refinanced with Laurus along with $500,000 of additional borrowings
into a three-year, 5% secured convertible note ("2003 Note"). In connection with
the Facility, the Company issued to Laurus a warrant to purchase up to 180,000
shares of the Company's common stock at any time or from time to time on or
before July 2008 at an exercise price ranging from $1.50 to $1.89 per share. The
Company recorded a debt discount as a result of the issuance of this warrant of
approximately $201,000. The total debt discount was being charged to interest
expense, ratably, over the term of the Facility
On November 18, 2005, this Facility was terminated after the entire
outstanding debt balance for the Amended and Restated 2003 Note and 2004 Note
were paid off. As of that date the Company had no borrowings under the Facility.
On the day the note was terminated, the Company expensed the remaining
unamortized discount to interest expense in the amount of approximately $38,000.
The early termination fee that was due if the Facility were to be terminated
prior to August 1, 2006 was waived since all of the outstanding borrowings from
Laurus were repaid.
2003 NOTE
On April 27, 2004, the Company amended and restated the 2003 Note to
reflect an additional $1,000,000 that it borrowed on April 27, 2004, so that the
principal amount of the 2003 Note was increased to $2,400,000 from $1,400,000
(the "Amended and Restated 2003 Note"). The net proceeds from the additional
principal under the Amended and Restated 2003 Note were used for working
capital.
The Company recorded approximately $173,000 as additional discount to
the Amended and Restated 2003 Note, which included the $11,000 in fees it paid
to an affiliate of Laurus and the $162,000 it recorded in April 2004 due to the
beneficial conversion feature of the debt related to the additional borrowings.
This additional discount, along with approximately $133,000 in unamortized
discount remaining at the time of the amendment for a total discount of
$306,000, was being amortized to interest expense over the remainder of the term
of the Amended and Restated 2003 Note. In April 2004 and December 2004, Laurus
converted $260,000 and $219,000 of the principal balance under the Amended and
Restated 2003 Note into 200,000 and 168,462 shares of the Company's common
stock, respectively.
E-25
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
As of November 18, 2005, there was an outstanding principal balance of
$1,310,000 and accrued interest of approximately $5,000 for the 2003 Note. On
November 18, 2005, the Company paid the entire amount of outstanding debt and
accrued interest for the 2003 Note. In addition, the Company was charged a 4%
pre-payment penalty fee in the amount of approximately $52,000. The total amount
that was paid for the 2003 Note was approximately $1,367,000. On the day the
note was paid off, the Company expensed the remaining unamortized discount to
interest expense in the amount of approximately $85,000.
2004 NOTE
On December 23, 2004 ("Closing Date"), the Company entered into a
Securities Purchase Agreement ("2004 Agreement") with Laurus. Pursuant to the
2004 Agreement, the Company sold to Laurus a secured convertible note in the
original principal amount of $1,000,000 ("2004 Note") that is scheduled to
mature on December 23, 2007 ("Maturity Date"). The Company paid Laurus Capital
Management, LLC, an affiliate of Laurus, a $5,000 fee, and reimbursed Laurus for
$5,000 of expenses in connection with the offering. The net proceeds from the
sale of the 2004 Note were used for working capital.
In connection with the 2004 Note, the Company issued to Laurus a warrant
to purchase up to 130,000 shares of the Company's common stock at any time or
from time to time on or before December 23, 2009 at an exercise price of $1.56
per share ("2004 Warrant"). The Company recorded a debt discount as a result of
the issuance of the 2004 Warrant of approximately $103,000 and a debt discount
as a result of $10,000 in fees paid to Laurus and its affiliate. The total debt
discount of $113,000 was being charged to interest expense, ratably, over the
term of the 2004 Note.
As of November 18, 2005, there was an outstanding principal balance of
$850,000 and accrued interest of approximately $3,000 for the 2004 Note. On
November 18, 2005, the Company paid the entire amount of outstanding debt and
accrued interest for the 2004 Note. In addition, the Company was charged a 4%
pre-payment penalty fee in the amount of $34,000. The total amount that was paid
for the 2004 Note was approximately $887,000. On the day the note was paid off,
the Company expensed the remaining unamortized discount to interest expense in
the amount of approximately $124,000.
7. STOCKHOLDERS' EQUITY
The Company continues to follow the guidance of APB No. 25. Pursuant to
APB No. 25, compensation related to stock options is measured as the difference
between the grant price and the fair market value of the underlying common
shares at the grant date. Generally, the Company issues options to employees
with a grant price equal to the market value of its common stock on the grant
date. Accordingly, the Company has recognized no compensation expense on its
grants of employee stock options.
E-26
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
The following represents pro forma information as if the Company
recorded compensation cost using the fair value of the issued compensation
instrument under SFAS No. 123 (in thousands, except amounts per share):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) - as reported $ 17,849 $ (235) $ 16,521 $ (925)
Deduct: Stock-based compensation
expense determined under the
fair value based method for
all awards, net of tax (36) (68) (108) (204)
------------ ------------ ------------ ------------
Net income (loss) - pro forma $ 17,813 $ (303) $ 16,413 $ (1,129)
============ ============ ============ ============
Basic and diluted net income
(loss) per share -
As reported $ 0.93 $ (0.01) $ 0.86 $ (0.05)
Pro forma $ 0.93 $ (0.02) $ 0.86 $ (0.06)
Weighted average fair value of
options granted $ - $ - $ 1.02 1.45
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2005 2004
------------ ------------
Black-Scholes option pricing model
Assumptions:
Dividend yield - -
Expected volatility 81.0% 83.9%
Risk-free interest rate 4.26 3.81
Expected option lives (in years) 7.01 6.85
8. FOREIGN CURRENCY TRANSLATION
The financial condition and results of operations of the Company's
foreign subsidiaries are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
into United States dollars (the reporting currency) at the exchange rate in
effect at the end of the interim period. Statements of operations accounts are
translated at the average rate of exchange prevailing during the respective
interim periods. Translation adjustments arising from the use of differing
exchange rates from period to period are included in accumulated other
comprehensive income (loss) in the consolidated statements of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations and were not material to the first nine months of fiscal
2005 and 2006.
9. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which prescribes rules for the reporting and display of
comprehensive income (loss) and its components. SFAS No. 130 requires foreign
currency translation adjustments, which are reported separately in stockholders'
equity, to be included in other comprehensive income (loss). Total comprehensive
loss was $17,748,000 and $59,000 for the three months ended December 31, 2005
and 2004, respectively, and was $16,365,000 and $738,000 for the nine months
ended December 31, 2005 and 2004, respectively.
E-27
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
10. NET LOSS PER SHARE
Basic earnings (loss) per share ("EPS") is calculated by dividing net
income (loss) by the weighted-average common shares outstanding during the
period. Diluted EPS reflects the potential dilution to basic EPS that could
occur upon conversion or exercise of securities, options, or other such items,
to common shares using the treasury stock method based upon the weighted-average
fair value of the Company's common shares during the period.
The following table illustrates the computation of basic and diluted net
loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Numerator:
Net income (loss) and numerator for basic
and diluted income (loss) per share $ 17,849 $ (235) $ 16,521 $ (925)
============ ============ ============ ============
Denominator:
Denominator for basic net loss per share -
average number of common shares
outstanding during the period 19,117 18,866 19,117 18,776
Incremental common shares attributable to
exercise of outstanding options, warrants
and other common stock equivalents - - - -
------------ ------------ ------------ ------------
Denominator for diluted net loss per share $ 19,117 $ 18,866 19,117 18,776
============ ============ ============ ============
Basic and diluted net income (loss) per share $ 0.93 $ $(0.01) $ 0.86 $ (0.05)
============ ============ ============ ============
There were no options, warrant and other common stock equivalents that
amounted to potential common shares for the three and nine-month periods ended
December 31, 2005. Options, warrants and other common stock equivalents
amounting to 1,377,000 and 1,360,000 potential common shares for the three and
nine month periods ended December 31, 2004 were excluded from the computation of
diluted EPS for the periods presented because the Company reported net losses
and, therefore, the effect would be antidilutive.
11. IMPAIRMENT CHARGE
On April 1, 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested at least annually for impairment.
The Company considers the following operating segments- collaborative
software products and services and IT services - to be our reporting units for
purposes of testing for impairment.
The Company uses a two-step test to assess potential impairment to
goodwill. In the first step, the fair value of each reporting unit is compared
to its carrying value including goodwill. If the fair value exceeds the carrying
value, then goodwill is not considered impaired, and the Company does not need
to proceed to the second step. If the carrying value of a reporting unit exceeds
its fair value, then the Company has to determine and compare the implied fair
value of the reporting unit's goodwill to the carrying value of its goodwill. If
the carrying value of the reporting unit's goodwill exceeds its implied fair
value, then the Company has to record an impairment loss in the amount of the
excess.
E-28
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit to all of the assets (recognized and unrecognized)
and liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, "Business Combinations." The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
In accordance with SFAS No. 142, the Company assessed the fair value of
its two reporting units by considering their projected cash flows, using
risk-adjusted discount rates and other valuation techniques. Given consideration
of relevant factors, such as the decline in revenue of these reporting units and
the projected cash flows being negatively affected due to the Company's total
operating costs now being charged against the remaining operations after the REI
sale, the Company conducted a test and concluded that as of December 31, 2005,
an impairment write-down of its IT services division and collaborative service
division were required. In accordance with the provisions of SFAS No. 142, the
Company recorded an impairment charge of $2,924,000 during the three months
ended December 31, 2005 for the write-down of goodwill related to the purchases
of netGuru Systems, Inc., R-Cube Technologies, Inc., Apex Technology, and
Allegria, Inc. The amount of the write-down represented the excess of the
carrying amount of goodwill over its fair value. As of December 31, 2005, the
Company had no remaining goodwill balance.
12. SEGMENT AND GEOGRAPHIC DATA
The Company is an integrated Internet and IT technology and services
company. The Company's operating segments are:
o Collaborative software products and services; and
o IT services
The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources. The Company's
management monitors unallocable expenses related to the Company's corporate
activities in a separate "Center," which is reflected in the tables below.
E-29
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
The significant components of worldwide operations by reportable
operating segment are:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET REVENUE
Collaborative software products and services $ 245 $ 193 $ 624 $ 461
IT services 636 903 2,153 3,012
------------ ------------ ------------ ------------
Consolidated $ 881 $ 1,096 $ 2,777 $ 3,473
============ ============ ============ ============
GROSS PROFIT
Collaborative software products and services $ 207 $ 192 $ 584 $ 389
IT services 151 267 494 988
------------ ------------ ------------ ------------
Consolidated $ 358 $ 459 $ 1,078 $ 1,377
============ ============ ============ ============
OPERATING (LOSS)
Collaborative software products and services $ (1,786) $ (27) $ (1,742) $ (331)
IT services (1,321) (97) (1,761) (19)
Center (577) (475) (1,467) (1,295)
------------ ------------ ------------ ------------
Consolidated $ (3,684) $ (599) $ (4,970) $ (1,645)
============ ============ ============ ============
The Company's operations are based worldwide through foreign and
domestic subsidiaries and branch offices in the United States, India, France,
United Kingdom, Germany and Asia-Pacific. The following are significant
components of worldwide operations by geographic location:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET REVENUE
United States $ 618 $ 727 $ 2,017 $ 2,418
Europe 87 52 190 294
Asia-Pacific 176 317 570 761
------------ ------------ ------------ ------------
Consolidated $ 881 $ 1,096 $ 2,777 $ 3,473
============ ============ ============ ============
EXPORT SALES
United States $ 24 $ 136 $ 134 $ 445
============ ============ ============ ============
E-30
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
DECEMBER 31, MARCH 31,
2005 2005
---------------- ----------------
(IN THOUSANDS)
LONG-LIVED ASSETS
United States $ 324 $ 3,050
Europe 30 101
Asia-Pacific 820 989
---------------- ----------------
Consolidated $ 1,174 $ 4,140
================ ================
13. CONTINGENCIES
The Company is a named defendant in a civil action commenced against it
by plaintiffs Ash Brahma, Sujit Kumar , and Venture International (collectively,
"Plaintiffs") on August 18, 2005, in the Commonwealth of Massachusetts, Essex
County, Superior Court Department of the Trial Court, Civil Action No. 05-1446
B, entitled, ASH BRAHMA, ET AL. V. NETGURU, INC. (the "Action").
In the Action, Plaintiffs allege breach of contract and fraud on the
part of the Company, and they seek alleged damages of $4,885,000. On October 5,
2005, the Company timely filed a Notice of Removal of the Action to the United
States District Court, District of Massachusetts, where the Action is currently
pending.
On October 13, 2005, the Company filed its answer and counterclaim in
the Action. The Company has denied any breach of contract or other wrongdoing on
its part, and has denied that Plaintiffs are entitled to equitable relief or
damages. The Company's counterclaim seeks recession of contract and/or breach of
contract, restitution and/or damages for consulting fees paid to Plaintiffs,
damages for time and money spent pursuant to the contracts alleged objectives
(plus interest, costs and attorneys' fees).
Both parties have engaged in early discussions exploring potential
resolution of the disputes to avoid protracted litigation. During the course of
the discussions, Plaintiffs have been made aware of material facts, which serve
to obviate the bulk of their alleged damages claim. Accordingly, with respect to
the complaint, the Company believes that the alleged damages approximate $60,000
as opposed to the original claim.
The assigned judge has issued an inquiry asking if the parties will
stipulate to assignment of the Action to a magistrate judge for all purposes.
The parties have until February 17, 2006, to respond to the inquiry.
The Company's wholly-owned subsidiary, R-Cube Technologies, Inc.
("R-Cube") is a named defendant in a civil action commenced against it by
plaintiff EOP-Central Park Plaza, LLC ("EOP") on December 27, 2005, in Orange
County Superior Court, Case No. 05NL25236, entitled, EOP-CENTRAL PARK PLAZA. LLC
V. R-CUBE TECHNOLOGIES, INC. (the "R-Cube Action").
In the R-Cube Action, EOP alleges causes of action for (1) breach of
contract; (2) open book account; and (3) account stated on the part of R-Cube,
and seeks alleged damages of $21,3000. R-cube denies any breach of contract or
other wrongdoing and/or contends that its performance under the agreement was
excused. R-Cube further denies that EOP is entitled to the claimed damages
E-31
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
Management believes the resolution of these matters will not materially
affect the Company's consolidated results of operations or financial condition.
14. DISCONTINUED OPERATIONS
On November 18, 2005, the Company completed the sale of assets of its
REI business and STAAD product lines to Bentley for $23.50 million in cash and
recorded a net gain of approximately $22.17 million, net of approximately
$650,000 in net tax expense. Net operating losses from prior years are being
utilized to significantly reduce the Company's taxable income. The primary
difference in the Company's federal statutory rate compared to the effective tax
rate resulted from a change of approximately $7.3 million in the Company's
valuation allowance. The change decreased the expected tax from approximately
$8.0 million to approximately $650,000. The Company continues to record a full
valuation allowance against the remaining net deferred tax assets, which
includes state net operating losses, research and development tax credits,
reserves, and other accruals. In November 2005 the company set aside a cash
reserve of $1.07 million in accordance with the purchase agreement with Bentley.
In addition to the $23.50 million, the Company also received $250,000 for
reimbursement of expenses relating to legal and financial services in connection
with the asset sale.
The asset sale included the worldwide operations associated with REI,
including the STAAD structural analysis and design product line, software and
product development, customer support and relationships, and offices associated
with the worldwide business. The Yorba Linda office sale-leaseback was assigned
to Bentley on November 17, 2005. Effective as of that date, the Company assigned
to Bentley all of its right, title, and interest in and to the lease. Bentley
assumed all of the Company's obligations under the lease, and agreed to make all
payments and to perform all covenants and agreements of tenant under the lease,
however the assignment did not alter the primary responsibility of the Company
for the payment of rent if Bentley defaults or breaches the lease assignment. As
such, the deferred gain on the sale-leaseback that was recorded in November 1999
remains on the balance sheet as a liability and is being recognized over the
remaining period of the original lease.
On January 5, 2006, the Company entered into a separate agreement with
Mr. Badreddine Ziane to sell the Company's France subsidiary for $100,000. Mr.
Ziane has agreed to purchase all the outstanding shares of the subsidiary and he
intends to sell the REI products and offer related consulting services as an
independent contractor to Bentley. The Company expects this sale to be finalized
by the end of the fourth quarter of fiscal 2006. At December 31, 2005 the assets
and liabilities associated with the France subsidiary remained classified as
held for sale.
The Company's condensed consolidated financial statements have been
reclassified for all periods presented to reflect the REI business as
discontinued operations. The Company first reflected these operations as
discontinued in the second quarter of fiscal 2006 when the Company decided to
sell the operations. In accordance with GAAP, the revenues, costs, and expenses
directly associated with the REI business have been reclassified as discontinued
operations on the condensed consolidated statements of operations for all
periods presented. Corporate expenses such as general corporate overhead and
interest have not been allocated to discontinued operations. Additionally,
assets and liabilities of the REI business segment have been reclassified as
held for sale on the Company's condensed consolidated balance sheets for all
periods presented, and the Company's condensed consolidated statements of cash
flows have been reclassified to reflect the operations of the REI business
segment as discontinued operations for all periods presented.
E-32
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
Separately, in September 2004, the Company sold its Web-based
telecommunications services division in its continuing efforts to focus on its
core software products and IT services businesses. Accordingly, the results of
the operations of the Web-based telecommunications services division are
excluded from continuing operations and reported as discontinued operations for
the three and nine months ended December 31, 2004. The total sales price was
$130,000 for the sale of the Web-based telecommunications services division in
September 2004. The Company received the entire proceeds from the sale of the
Web-based telecommunications services division prior to March 31, 2005.
The carrying value of the assets and liabilities held for sale of the
discontinued REI business included in the consolidated balance sheets are as
follows:
DECEMBER 31,
2005
----------------
ASSETS HELD FOR SALE
Accounts receivable, net $ 133
Income taxes receivable -
Prepaid expenses and other current assets 23
----------------
Total current assets 156
Property, plant and equipment, net 8
Goodwill -
Other assets -
----------------
$ 164
================
LIABILITIES HELD FOR SALE
Current portion of capital lease obligations $ -
Accounts payable 10
Accrued expenses 26
Income taxes payable 12
Deferred revenues 27
Other liabilities 145
----------------
Total current liabilities 220
Capital lease obligations, net of current portion -
----------------
Total liabilities $ 220
================
E-33
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
The net revenues, net income (loss), gain on sale, and income tax
expense of the Company's discontinued operations, were as follows:
THREE MONTHS
ENDED DECEMBER 31,
2005
----------------------
Net revenues:
Web-based telecommunications services business $ -
REI business 1,707
----------------------
$ 1,707
Net (loss) income from operations of:
Web-based telecommunications services business $ -
REI business (327)
----------------------
$ (327)
Gain on sale before income taxes from:
Web-based telecommunications services business
$ -
REI business 22,818
----------------------
$ 22,818
Income tax expense:
REI business $ 650
----------------------
15. SUBSEQUENT EVENTS
On December 29, 2005, the Company announced that its board of directors
approved a cash distribution in the amount of $0.85 per share payable on January
27, 2006 to stockholders of record as of January 17, 2006. The total amount that
was distributed on January 27, 2006 was approximately $16,250,000, which has
been recorded as a cash distribution payable on the December 31, 2005 balance
sheet. The distribution follows the Company's sale of the assets of its REI
business and STAAD product lines on November 18, 2005 and the board of
directors' subsequent decision to distribute substantially all of the net
proceeds of the sale after repaying debt and setting aside reserves for taxes,
continuing operations, and other contingencies. In connection with the
distribution, options issued under the Company's stock option plans ceased
further vesting and then terminated if not exercised prior to the
ex-distribution date of January 30, 2006. Non-plan options and warrants that
remained outstanding on the ex-distribution date had an $0.85 per share
reduction in their exercise prices of those options and warrants on the
ex-distribution date.
On January 5, 2006, the Company entered into a separate agreement with
Mr. Badreddine Ziane to sell the Company's France subsidiary for $100,000. Mr.
Ziane has agreed to purchase all the outstanding shares of the subsidiary and he
intends to sell the REI products and offer related consulting services as an
independent contractor to Bentley. The Company expects this sale to be finalized
by the end of the fourth quarter of fiscal 2006. At December 31, 2005 the assets
and liabilities associated with the France subsidiary remained classified as
held for sale.
E-34
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED) (CONTINUED)
16. CASH FLOWS FROM DISCONTINUED OPERATIONS
At December 31, 2005, the Company has separately disclosed the
operating, investing and financing portions of the cash flows attributable to
its discontinued operations, which in prior periods were reported on a combined
basis as a single amount.
E-35
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE QUARTERS ENDED FOR THE YEARS ENDED
JUNE 30, MARCH 31,
------------------------------ ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues $ 195 $ 197 $ 1,063 $ 896
Cost of revenues 141 195 816 397
------------- ------------- ------------- -------------
Gross profit 54 2 247 499
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 198 190 1,136 797
Research and development 1 3 9 20
Bad debt expense - 56 329 63
Depreciation 35 19 105 53
Impairment charge - 195
------------- ------------- ------------- -------------
Total operating expenses 234 268 1,774 933
------------- ------------- ------------- -------------
Operating loss (180) (266) (1,527) (434)
------------- ------------- ------------- -------------
Other (income) expense:
Interest, net 5 5 19 76
Other income (75) - (145) (32)
------------- ------------- ------------- -------------
Total other (income) expense (70) 5 (126) 44
------------- ------------- ------------- -------------
Loss from operations before income taxes (110) (271) (1,401) (478)
Income tax expense - - 26 -
------------- ------------- ------------- -------------
Net income $ (110) $ (271) $ (1,427) $ (478)
============= ============= ============= =============
See accompanying notes to unaudited financial statements
E-36
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, MARCH 31,
2006 2006
(UNAUDITED) (UNAUDITED)
----------------- -----------------
Current assets:
Cash and cash equivalents $ 290 $ 251
Restricted cash 51 147
Accounts receivable (net of allowance for doubtful accounts of $233
and $256, respectively) 228 276
Deposits 46 69
Prepaid expenses and other current assets 538 515
----------------- -----------------
Total current assets 1,153 1,258
Property and equipment, net 842 875
----------------- -----------------
$ 1,995 $ 2,133
================= =================
Current liabilities:
Current portion of long-term bank debt, net of discount of $14 and $ 52 $ 57
$18, respectively
Current portion of capital lease obligations 18 18
Accounts payable 57 109
Accrued expenses 272 458
Income taxes payable 8 8
Deferred revenues 8 9
Other
----------------- -----------------
Total current liabilities 415 659
Capital lease obligations, net of current portion 36 41
Long-term bank debt - 17
----------------- -----------------
Total liabilities 451 717
----------------- -----------------
Divisional equity:
Divisional capital 1,765 1,745
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (221) (329)
----------------- -----------------
Total divisional equity 1,544 1,416
----------------- -----------------
$ 1,995 $ 2,133
================= =================
See accompanying notes to unaudited financial statements
E-37
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE QUARTERS ENDED FOR THE YEARS ENDED
JUNE 30, MARCH 31,
------------------------------ ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss $ (110) $ (271) $ (1,428) $ (478)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 35 19 105 53
Bad debt expense - 56 329 63
Goodwill impairment charge - - 195 -
Amortization of discount on loan 4 4 15 11
Changes in operating assets and liabilities:
Accounts receivable 41 12 - (204)
Prepaid expenses and other current assets (25) 39 210 (111)
Deposits 21 (4) 25 (29)
Other assets - (1) - -
Accounts payable (49) 3 45 (219)
Accrued expenses (172) (22) 313 32
Income taxes payable - - 8
Deferred revenues - 8 (2) 10
------------- ------------- ------------- -------------
Net cash used in operating activities (255) (157) (185) (872)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (29) (38) (284) (92)
Payments to acquire companies, net of cash acquired - (19) - (76)
Decrease (increase) in restricted cash 91 2 (87) (62)
------------- ------------- ------------- -------------
Net cash used in investing activities 62 (55) (371) (230)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Repayment of long term debt (22) (75) -
Repayment of capital lease obligations (5) (4) (9) (12)
Net capital receivables to the subsidiary 264 101 509 1,352
------------- ------------- ------------- -------------
Net cash provided by financing activities 237 97 425 1,330
------------- ------------- ------------- -------------
Effect of exchange rate changes on cash and
cash equivalents (5) 1 (10) 2
------------- ------------- ------------- -------------
Net cash provided by (used in) operations 39 (114) (141) 230
Cash and cash equivalents, beginning of period 251 392 392 162
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 290 $ 278 $ 251 $ 392
============= ============= ============= =============
Supplemental disclosure for cash flow information:
Cash paid during the period for:
Interest $ 5 $ 5 $ 19 $ 76
Taxes $ - $ - $ - $ -
See accompanying notes to unaudited financial statements.
E-38
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005
AND THREE MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
(IN THOUSANDS)
OTHER TOTAL
COMPREHENSIVE DIVISIONAL
DIVISIONAL CAPITAL INCOME (LOSS) EQUITY
-------------------- --------------- --------------
Balance, March 31, 2004 $ 1,969 $ (408) $ 1,561
Net loss (478) -- (478)
Net distributions to the Division 1,314 -- 1,314
Foreign currency translation -- 29 29
-------------------- --------------- --------------
Balance, March 31, 2005 2,781 (379) 2,402
Net loss (1,428) -- (1,428)
Net distributions to the Division 392 -- 392
Foreign currency translation -- 50 50
-------------------- --------------- --------------
Balance, March 31, 2006 1,745 (329) 1,416
Net loss (110) -- (110)
Net contributions to the Division 130 -- 130
Foreign currency translation -- 108 108
-------------------- --------------- --------------
Balance, June 30, 2006 $ 1,765 $ (221) $ 1,544
==================== =============== ==============
See accompanying notes to unaudited financial statements.
E-39
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Research Engineers Limited (the "Subsidiary") is a majority-owned
subsidiary of netGuru, Inc. ("netGuru") offering IT enabled services,
engineering design and detailing services, and sale of hardware and
networking items.
BASIS OF PRESENTATION
The Subsidiary is a separate private legal entity. The unaudited
financial statements of the Subsidiary present the operating results and
the financial position of the India-based subsidiary of netGuru.
The unaudited financial statements have been prepared from the
historical accounting records of netGuru and reflect the allocation of
various corporate overhead costs and activities. All of the accounting
judgments, estimations and allocations in these financial statements are
based on assumptions that the management of netGuru believe are
reasonable for purposes of preparing the Subsidiary's financial
statements. Allocations were specifically identifiable and directly
associated with the Subsidiary. However, these allocations are not
necessarily indicative of the costs that would have resulted had the
Subsifiary operated as a stand-alone, separate entity.
The unaudited financial statements have been prepared by netGuru and
include all normal and recurring adjustments which are, in the opinion
of management, necessary for a fair presentation of the financial
position as of June 30, 2006 and March 31, 2006 and the results of
operations and the cash flows for the quarters ended June 30, 2006 and
2005 and fiscal years ended March 31, 2006 and 2005, pursuant to the
rules and regulations of the Securities and Exchange Commission.
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 at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires
management to disclose the estimated fair value of certain assets and
liabilities defined by SFAS No. 107 as financial instruments. Management
believed the carrying amounts of cash and cash equivalents, receivable
and payable amounts, and accrued expenses approximated fair value at
June 30, 2006, March 31, 2006 and 2005 because of the short maturity of
these financial instruments. The Subsidiary also believed that the
carrying amounts of its capital lease obligations approximated their
fair value, as the interest rates approximated a rate that the
Subsidiary could have obtained under similar terms at the balance sheet
date.
E-40
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION
The financial condition and results of operations of the Subsidiary's
foreign operations are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are
translated into U.S. dollars (the reporting currency) at the exchange
rate in effect at the fiscal year-end. Statements of operations accounts
are translated at the average rate of exchange prevailing during the
respective fiscal years. Translation adjustments arising from the use of
differing exchange rates from period to period are included in
accumulated other comprehensive (loss) in the statements of changes in
divisional capital and comprehensive loss. Gains and losses resulting
from foreign currency transactions are included in operations and are
not material for the three months ended June 30, 2006 and 2005 and the
years ended March 31, 2006 and 2005.
CASH AND CASH EQUIVALENTS
The Subsidiary considers all liquid investments with maturities of three
months or less at the date of purchase to be cash equivalents. The
Subsidiary maintains its cash balances at financial institutions that
management believes possesses high-credit quality. Although a portion of
the related cash balances are federally insured, the Subsidiary
maintains amounts on deposit in excess of federally insured limits.
PROPERTY AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the following useful
lives:
Computer equipment 5 years
Computer software 2-3 years
Office equipment and furniture 3-7 years
Assets subject to capital lease agreements and leasehold improvements
are amortized over the lesser of the life of the asset or the term of
the lease.
GOODWILL
The Subsidiary adopted the provisions of SFAS No. 142 "Goodwill and
Other Intangible Assets" on April 1, 2002. SFAS No. 142 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 to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144. SFAS No. 142 required the Subsidiary to perform an
assessment of whether there was an indication that goodwill was impaired
as of the date of adoption. The India subsidiary is required to perform
reviews for impairment annually, or more frequently when events occur or
circumstances change that would more likely than not reduce the fair
value of the net carrying amount. The evaluation of goodwill impairment
involves assumptions about the fair values of assets and liabilities of
each reporting unit. If these assumptions are materially different from
actual outcomes, the carrying value of goodwill will be incorrect.
E-41
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
The Subsidiary assessed the fair value of its reporting unit by
considering their projected cash flows, using risk-adjusted discount
rates and other valuation techniques. Given consideration of relevant
factors, such as the decline in revenue of this reporting unit, the
Subsidiary concluded that as of December 31, 2005, impairment
write-downs in its IT services division and collaborative service
division were required. In accordance with the provisions of SFAS No.
142, the Subsidiary recorded an impairment charge of $195,000 during the
three months ended December 31, 2005. The amount of the write-down
represented the excess of the carrying amounts of goodwill over their
fair value. As of June 30, 2006, the India subsidiary had no remaining
goodwill balance.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Subsidiary accounts for its long-lived assets under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the
carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has
been disposed of (by sale, abandonment, or in a distribution to owners)
or is classified as held for sale. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
REVENUE RECOGNITION
The Subsidiary recognizes revenue when the following criteria are met:
(1) persuasive evidence of an arrangement, such as agreements, purchase
orders or written or online requests, exists; (2) delivery has been
completed and no significant obligations remain; (3) the price to the
buyer is fixed or determinable; and (4) collection is reasonably
assured. The Subsidiary's revenues arise from the following segments: IT
enabled services, engineering design and detailing services, and sale of
hardware and networking items.
Revenues from providing IT enabled services and Engineering design and
detailing services are recognized primarily on a time and materials
basis, with time at a marked-up rate and materials and other reasonable
expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price
contracts where progress toward completion is measured by mutually
agreed upon pre-determined milestones for which the Subsidiary
recognizes revenue upon achieving such milestones. Fixed price IT
contracts are typically for a short duration of one to nine months.
Other products and services sold via Internet portals, where the
Subsidiary is an agent, are recognized net of purchase costs when the
products and services are delivered and collection is reasonably
assured. The Subsidiary recognizes revenues from sales of hardware and
networking items on the completion of delivery and receipt by the
customers of the hardware and networking items.
E-42
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Subsidiary sells to its customers on credit and grants credit to
those who are deemed credit worthy based on its analysis of their credit
history. The Subsidiary reviews its accounts receivable balances and the
collectibility of these balances on a periodic basis. Based on the
Subsidiaries analysis of the length of time that the balances have been
outstanding, the pattern of customer payments, the Subsidiaries
understanding of the general business conditions of its customers and
its communications with their customers, the Subsidiary estimates the
recoverability of these balances. When recoverability is uncertain, the
Subsidiary records bad debt expenses and increases the allowance for
accounts receivable by an amount equal to the amount estimated to be
unrecoverable. If the historical data the Subsidiary uses to calculate
the allowance provided for doubtful accounts does not reflect its future
ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the Subsidiaries future results of
operations could be materially affected.
DEFERRED REVENUES
The Subsidiary defers revenues for its maintenance contracts. The
Division defers its maintenance revenues when the maintenance contracts
are sold, and then recognizes the maintenance revenues over the term of
the maintenance contracts.
COMPREHENSIVE INCOME (LOSS)
The Subsidiary applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes rules for the reporting and
display of comprehensive income (loss) and its components. SFAS No. 130
requires changes in foreign currency translation adjustments, which are
reported separately in divisional equity, to be included in other
comprehensive income (loss).
INCOME TAXES
The Subsidiary files separate statutory local income tax returns and
records a provision for local income taxes based upon amounts payable or
refundable. The charge for taxation is based on the result for the year
and takes into account taxation deferred because of timing differences
between the treatment of certain items for taxation and accounting
purposes. Provision is made for deferred tax only to the extent that it
is probably that an actual liability will develop.
(2) PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of June 30, 2006 and March 31, 2006
consisted of the following (in thousands):
JUNE 30, MARCH 31,
2006 2006
---------------- ----------------
Land $ 25 $ 25
Building and leasehold improvements 754 765
Office and computer equipment, software
and furniture 338 331
Automobiles 102 106
---------------- ----------------
1,219 1,227
Less accumulated depreciation and amortization (377) (352)
---------------- ----------------
Property and equipment, net $ 842 $ 875
================ ================
(3) LONG TERM DEBT
Long-term debt, including capital lease obligations, consisted of the
following at June 30, 2006 and March 31, 2006 (dollars in thousands):
E-43
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, MARCH 31,
2006 2006
---------------- ----------------
Capital lease obligations maturing at dates ranging from
April 2006 to May 2009, secured by the leased assets 54 60
Note payable, at an imputed interest rate of 14.5% per annum,
principal and accrued interest due on or before April 1, 2007 66 75
Other - 16
---------------- ----------------
Total long-term debt 120 151
Less: Unamortized discount (14) (18)
---------------- ----------------
Long-term debt 106 133
Less: current portion (70) (75)
---------------- ----------------
$ 36 $ 58
================ ================
The long-term debt, excluding unamortized discount, and capital lease
obligations mature in each of the following years ending March 31 (in
thousands):
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
------------------ -----------------
2007 $ 75 $ 21
2008 3 22
2009 3 15
2010 3 8
2011 3 -
Thereafter 4 -
------------------ -----------------
Total minimum payments $ 91 66
==================
Less amount representing interest (6)
-----------------
Present value of minimum capital lease
payments $ 60
=================
(4) COMMITMENTS AND CONTINGENCIES
RESEARCH ENGINEERS LTD. (FORMERLY RESEARCH ENGINEERS PRIVATE LTD.) V.
VITAL COMMUNICATIONS, AND VITAL COMMUNICATIONS V. RESEARCH ENGINEERS
LTD.
The Subsidiary is a plaintiff in a civil action commenced by the
Subsidiary and is a defendant in a counter suit by Vital Communications
stemming from actions in 2001 in Tiz Hazari Court, India and Delhi High
Court, India, Suit No. 256 of 2001 lying pending at the High Court of
Delhi, India.
In the actions, the Subsidiary alleges causes of action for breach of
contract and seeks alleged damages of approximately $450,000. Vital
Communications denies any breach of contract or other wrongdoing and/or
contends and alleges that the Subsidiary is in breach of contract and is
demanding $1,350,000 in damages. The Subsidiary further denies that
Vital Communications is entitled to the claimed damages.
Both the Subsidiary and Vital Communications are engaged in settlement
discussions. No reserves regarding this dispute have been recorded under
accrued expenses in the June 30, 2006 consolidated balance sheet.
E-44
RESEARCH ENGINEERS LIMITED
(A SUBSIDIARY OF NETGURU, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUTODESK, INC. V. NETGURU SYSTEMS LIMITED AND THE SUBSIDIARY
(NETGURU SYSTEMS LIMITED WAS AMALGAMATED INTO THE SUBSIDIARY)
The Subsidiary was a defendant in a civil action commenced against it by
plaintiff Autodesk, Inc. ("Autodesk") on May 4, 2006, Suit No. 752 of
2006, in the High Court of Delhi, India. In the action, plaintiff
alleged infringement of copyright on account of unlicensed use of
software programs being utilized by defendant.
On June 29, 2006, the Subsidiary entered into a deed of settlement
agreement with Autodesk, Inc whereby the Subsidiary would purchase all
software programs allegedly being used and would agree to periodic
audits by plaintiff over a period of 12 months. The agreement called for
a payment of 5 million rupees for the purchase of the software and 1
million rupees towards legal fees, for a total of 6 million rupees,
which is $131,600. As of March 31, 2006, the Subsidiary accrued $120,000
for the settlement of this lawsuit. The entire payment of $131,600 was
paid in July 2006 and the remaining expense of approximately $12,000 was
recorded during the three months ended June 30, 2006.
(5) DIVISIONAL EQUITY
The Subsidiary has been partially dependent upon netGuru to fund its
working capital needs. All charges and allocations of costs for
functions and services provided by netGuru are deemed paid by the
Subsidiary, in cash, in the year in which the cost is recorded in these
unaudited financial statements. netGuru does not charge the Subsidiary
interest on the divisional capital balances.
(6) SEGMENT AND GEOGRAPHIC DATA
The Subsidiary's operations are based in India. The following are
significant components of the operations by geographic location:
FOR THE QUARTERS ENDED FOR THE YEARS ENDED
JUNE 30, MARCH 31,
------------------------------ ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
(in thousands) (in thousands)
NET REVENUE
United States $ 62 $ 95 $ 286 $ 95
Asia-Pacific 133 102 777 801
------------- ------------- ------------- -------------
CONSOLIDATED $ 195 $ 197 $ 1,063 $ 896
============= ============= ============= =============
AT JUNE 30, AT MARCH 31,
LONG-LIVED ASSETS 2006 2006
-------------- --------------
(in thousands) (in thousands)
Asia-Pacific $ 842 $ 875
-------------- --------------
Consolidated $ 842 $ 875
============== ==============
(7) SUBSEQUENT EVENT
On August 29, 2006, netGuru entered into a stock and asset sale
agreement ("sale agreement") pursuant to which it would, concurrently
with the consummation of a merger transaction with BPO Management
Services, Inc., sell and transfer its interest in the Subsidiary and
certain additional assets and liabilities to Das Family Holdings
("DFH"). DFH is owned and controlled by Amrit K. Das, who is netGuru's
Chairman, Chief Executive Officer, President and holder of more than 10%
of netGuru's outstanding common stock, Santanu K. Das, who is one of
netGuru's directors and former executive officers and holds more than
10% of netGuru's outstanding common stock, and their affiliates.
The pending sale is subject to various closing conditions, including
approval by netGuru stockholders and compliance with regulatory
requirements. If approved, the sale is expected to close before the end
of 2006.
E-45
HISTORICAL FINANCIAL INFORMATION OF
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
The following historical financial information of BPO Management
Services, Inc. and subsidiaries is included in this APPENDIX F:
PAGE
BPO MANAGEMENT SERVICES, INC.
-----------------------------
Report of Independent Registered Public Accounting Firm..............F-3
Consolidated Balance Sheet as of December 31, 2005...................F-4
Consolidated Statement of Operations for the Period from
July 26, 2005 (Inception) to December 31, 2005 ...................F-6
Consolidated Statement of Shareholders' Equity for the Period
from July 26, 2005 (Inception) to December 31, 2005 ..............F-7
Consolidated Statement of Cash Flows for the Period from
July 26, 2005 (Inception) to December 31, 2005 ...................F-8
Notes to Consolidated Financial Statements..........................F-10
Consolidated Balance Sheet as of June 30, 2006......................F-32
Consolidated Statement of Operations for the Six Month Period
Ended June 30, 2006..............................................F-33
Consolidated Statement of Cash Flows for the Six Month Period
Ended June 30, 2006..............................................F-34
Notes to Consolidated Financial Statements..........................F-36
Management's Discussion and Analysis or Plan of Operation...........F-51
ADAPSYS L.P.
------------
Report of Independent Registered Public Accounting Firm.............F-55
Combined Statement of Operations for the Period from January
1, 2005 to July 29, 2005........................................F-56
Combined Statement of Cash Flows for the Period from January
1, 2005 to July 29, 2005........................................F-57
F-1
ADAPSYS L.P. (CONTINUED)
------------------------
Notes to the Combined Financial Statements..........................F-58
Report of Independent Registered Public Accounting Firm.............F-63
Balance Sheets for Each of the Two Years in the Period
ended December 31, 2004 .........................................F-64
Statements of Operations for Each of the Two Years in the
Period ended December 31, 2004...................................F-66
Statements of Partners Capital for Each of the Two Years in
the Period ended December 31, 2004...............................F-67
Statements of Cash Flows for Each of the Two Years in the
Period ended December 31, 2004 ..................................F-68
Notes to Financial Statements.......................................F-70
DIGICA, INC.
------------
Report of Independent Registered Public Accounting Firm.............F-78
Balance Sheet as of June 30, 2005...................................F-79
Statement of Operations for the Year Ended June 30, 2005............F-80
Statement of Stockholders' Deficit for the Year Ended June 30,
2005.............................................................F-81
Statement of Cash Flows for the Year Ended June 30, 2005............F-82
Notes to Financial Statements.......................................F-84
NOVUS IMAGING SOLUTIONS INC.
----------------------------
Auditors' Report....................................................F-96
Balance Sheets as of September 2005 and 2004........................F-97
Statement of Income and Retained Earnings for the Years Ended
September 30, 2005 and 2004......................................F-98
Statement of Cash Flows for the Years Ended September 30,
2005 and 2004....................................................F-99
Notes to Financial Statements......................................F-100
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
BPO Management Services and Subsidiaries
We have audited the accompanying consolidated balance sheet of BPO Management
Services and Subsidiaries as of December 31, 2005 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from July 26, 2005 (inception) through December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BPO Management Services and
Subsidiaries as of December 31, 2005 and the results of its operations and its
cash flows for the 158 day period then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred a net loss
for the period from July 26, 2005 (inception) to December 31, 2005 of $792,227
and has incurred a net loss for the six month period ended June 30, 2006 of
$1,067,584. Despite its negative cash flows from operations, the Company has
been able to obtain operating capital through private equity funding sources.
Management's plans include the continued development and eventual implementation
of its business plan. The Company has relied upon equity funding since
inception. No assurances can be given that the Company can obtain sufficient
working capital through the sale of the Company's common stock and borrowing or
that the continued implementation of its business plan will generate sufficient
revenues in the future to sustain ongoing operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
As discussed in Note 9 - Concentration in Revenue to the financial statements,
the Company recognized seventy four percent of its revenue from one client. This
client's contract lapsed in February 2006 and was not renewed. The inability of
the Company to replace the lost revenue from this client could have an adverse
effect on the Company.
/s/ Kelly & Company
Kelly & Company
Costa Mesa, California
August 11, 2006
F-3
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
BALANCE SHEET
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,232,169
Accounts receivable - trade, net of allowance for doubtful accounts of $82,121 489,896
Accounts receivable - other 4,888
Prepaid expenses 3,643
Customer contract 245,265
----------------
Total current assets 1,975,861
Equipment, net of $12,963 of accumulated depreciation 56,035
Customer lists, net of $1,540 of accumulated amortization 219,162
Goodwill 826,071
----------------
TOTAL ASSETS $3,077,129
================
The accompanying notes are an integral part of the financial statements.
F-4
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
BALANCE SHEET
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $120,518
Accrued payroll liabilities 130,364
Current portion of note payable 17,184
Deferred income 32,830
Accrued professional fees 199,263
Reserve for severance obligations 1,027,276
Other 71,906
----------------
Total current liabilities 1,599,341
Note payable, less current portion 58,731
----------------
TOTAL LIABILITIES 1,658,072
----------------
Commitments and contingencies
Shareholders' equity:
Preferred shares; $0.001 par value; liquidation preference
of $1.00 per share, authorized 10,000,000 shares; issued
and outstanding:
Series A voting convertible preferred shares; 2,220,000
shares authorized; 1,500,000 issued and outstanding;
8% in kind annual dividend; and $1,500,000 liquidation
preference. 1,500
Series B voting convertible preferred shares; 2,000,000
shares authorized, issued and outstanding; and $2,000,000
liquidation preference. 2,000
Common shares; $.001 par value; 15,000,000 authorized;
9,425,000 issued and outstanding 9,425
Additional paid-in capital 2,198,359
Accumulated deficit (792,227)
----------------
TOTAL SHAREHOLDERS' EQUITY 1,419,057
----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,077,129
================
The accompanying notes are an integral part of the financial statements.
F-5
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
Revenue $2,347,534
Cost of revenue (887,456)
---------------
Gross profit 1,460,078
---------------
Operating expense:
Salaries and other personnel costs 813,875
Operating expense 202,417
General and administrative 1,252,416
---------------
Total operating expense 2,268,707
---------------
Operating loss (808,629)
---------------
Other income (expense):
Interest income 11,357
Interest expense (4,147)
Loss on the disposal of equipment (14,805)
Gain on foreign currency translation 15,704
---------------
Total other income 16,403
---------------
NET LOSS $(792,227)
===============
NET LOSS PER SHARE, BASIC AND DILUTED $(0.09)
===============
WEIGHTED NUMBER OF SHARES OUTSTANDING 9,222,727
===============
The accompanying notes are an integral part of the financial statements.
F-6
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Series A Preferred Series B Common Additional
----------------------------------------------------------------------- Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
--------------------------------------------------------------------------------------------------------------
BALANCE, JULY 26,
2005 - - - - - - - - -
Initial shares
issued for cash 1,500,000 $1,500 - - 7,250,000 $7,250 $1,491,250 - $1,500,000
Acquisition of
Adapsys entities - - 2,000,000 $2,000 2,000,000 2,000 629,580 - 633,580
Acquisition of HRO - - - - 175,000 175 27,544 - 27,719
Shares issued to
Board of Director
members - - - - - - - - -
Net value of
options granted - - - - - - 49,985 - 49,985
Net loss - - - - - - - $(792,227) $(792,227)
--------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2005 1,500,000 $1,500 2,000,000 $2,000 9,425,000 $9,425 $2,198,359 $(792,227) $1,419,057
==============================================================================================================
The accompanying notes are an integral part of the financial statements.
F-7
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(792,227)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 12,693
Recognition of acquired customer contract cost 719,243
Decrease in deferred revenue (103,985)
Amortization of customer lists 1,540
Stock-based compensation 49,985
Foreign currency translation gain (15,704)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade (39,853)
Other assets (5,279)
Increase (decrease) in:
Accounts payable - trade and accrued expenses 192,819
Severance obligation (68,768)
------------------
NET CASH USED IN OPERATING ACTIVITIES (49,536)
------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (111,321)
Purchase of equipment (7,839)
Cost of an investment held-for-sale - sold 124,663
Purchase of customer lists (220,702)
------------------
NET CASH USED IN INVESTING ACTIVITIES (215,199)
------------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payment on note payable (3,096)
Proceeds from issuance of preferred and common stock 1,500,000
------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,496,904
------------------
NET INCREASE IN CASH 1,232,169
CASH AND CASH EQUIVALENTS AT JULY 26, 2005 -
------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 2005 $1,232,169
==================
The accompanying notes are an integral part of the financial statements.
F-8
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $4,145
Income taxes paid -
NON-CASH FINANCING ACTIVITY TRANSACTIONS
Acquisition of the Adapsys Entities:
Accounts receivable $454,931
Acquired contract 964,508
Other current assets 424
Property, plant, and equipment 60,888
Other assets 125,297
Goodwill 826,071
------------------
Total assets acquired 2,432,119
------------------
Note payable to bank (79,011)
Accounts payable and other current liabilities (525,158)
Estimated termination liability (1,083,049)
------------------
Total liabilities assumed (1,687,218)
------------------
Assets acquired 744,901
Less: cash paid (111,321)
------------------
Net assets acquired $633,580
==================
Issuance of common and preferred Series B shares 633,580
Acquisition of the HRO customer list:
Customer list 27,719
Issuance of common shares (27,719)
The accompanying notes are an integral part of the financial statements.
F-9
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
BPO Management Services, Inc. (the "Company") was incorporated in
Delaware on July 26, 2005. The Company offers a broad range of business
process outsourcing services to middle market enterprises. The Company's
services include human resources outsourcing, document and data
management solutions and information technology outsourcing. Services
are provided using a blend of on and near shore resources utilizing the
Company's technology infrastructure platform and cross industry delivery
model. The Company has acquired and intends to acquire additional
companies operating in the business process outsourcing space in order
to add capability and build marketplace critical mass.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its two wholly owned subsidiary Canadian limited
partnerships and the related corporate general partners after
elimination of all material intercompany accounts, transactions, and
profits.
REVENUE RECOGNITION
The Company recognizes revenue only when all of the following criteria
have been met:
o Persuasive evidence of an arrangement exists
o Delivery has occurred or services have been rendered;
o The fee for the arrangement is fixed or determinable; and
o Collectibility is reasonably assured.
PERSUASIVE EVIDENCE OF AN ARRANGEMENT
The Company documents all terms of an arrangement in a written contract
signed by the customer prior to recognizing revenue.
DELIVERY HAS OCCURRED OR SERVICES HAVE BEEN PERFORMED
The Company performs all services or delivers all products prior to
recognizing revenue. Monthly services are considered to be performed
ratably over the term of the arrangement. Professional consulting
services are considered to be performed when the services are complete.
Equipment is considered delivered upon delivery to a customer's
designated location.
F-10
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION, CONTINUED
THE FEE FOR THE ARRANGEMENT IS FIXED OR DETERMINABLE
Prior to recognizing revenue, a customer's fee is either fixed or
determinable under the terms of the written contract. Fees for most
monthly services, professional consulting services, and equipment sales
are fixed under the terms of the written contract. Fees for certain
services are variable based on an objectively determinable factor such
as usage. Those factors are included in the written contract such that
the customer's fee is determinable. The customer's fee is negotiated at
the outset of the arrangement.
COLLECTIBILITY IS REASONABLY ASSURED
The Company determines that collectibility is reasonably assured prior
to recognizing revenue. Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by management. New
customers are subject to a credit review process, which evaluates the
customer's financial position and ultimately its ability to pay. The
Company does not enter into arrangements unless collectibility is
reasonably assured at the outset. Existing customers are subject to
ongoing credit evaluations based on payment history and other factors.
If it is determined during the arrangement that collectibility is not
reasonably assured, revenue will be recognized on a cash basis.
USE OF ESTIMATES
Preparing the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial statements include some amounts that are based on
management's best estimates and judgments. The most significant
estimates are the allocation of the purchase price in its business
combinations, the allowance for uncollectible accounts receivable, the
estimation of fixed asset useful lives, and the related valuation of
intangible assets and the determination of their useful lives, the
review for the impairment of goodwill, the estimation of the severance
liability, the valuation of stock options issued, the valuation of the
allocation of equity unit purchase price between preferred and common
share and the determination of the valuation reserves on the United
States and Canadian income tax assets. These estimates may be adjusted
as more current information becomes available, and any adjustment could
be significant.
F-11
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
management to disclose the estimated fair value of certain assets and
liabilities defined by SFAS No. 107 as financial instruments. Financial
instruments are generally defined by SFAS No. 107 as cash and cash
equivalents, evidence of ownership interest in equity, or a contractual
obligation that both conveys to one entity a right to receive cash or
other financial instruments from another entity and imposes on the other
entity the obligation to deliver cash or other financial instruments to
the first entity.
At December 31, 2005, the Company's financial instruments are cash and
cash equivalents, accounts receivable, accounts payable, accrued
liabilities and a note payable. The recorded values of cash and cash
equivalents, accounts receivable, and accounts payable and accrued
liabilities approximate their fair values based on their short-term
nature. The recorded value of the note payable approximates its fair
value, as interest approximates market rates.
CASH
The Company considers deposits that can be redeemed on demand and
investments that have original maturities of less than three months,
when purchased, to be cash equivalents. As of December 31, 2005, the
Company's cash and cash equivalents were deposited primarily in three
financial institutions.
At December 31, 2005, the Company had $740,102 on deposit that exceeded
United States (FDIC) federally insurance limit. At December 31, 2005,
the Company has $261,466 (the accounts are in Canadian dollars with a
value of $304,845 CDN) on a deposit that exceeded the Canadian (CDIC)
insurable limit of $100,000 CDN per entity per bank. The Canadian funds'
insurance is limited to Canadian currency deposits only and does provide
coverage to money master high interest savings accounts (money market
accounts) but all accounts are considered in the overall limitation per
entity per bank.
ACCOUNTS RECEIVABLE - TRADE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are stated at the amount the Company expects
to collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit- worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional
allowances
F-12
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCOUNTS RECEIVABLE - TRADE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS,
CONTINUED
would be required. Based on management's assessment, the Company
provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain
outstanding after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
accounts receivable.
EQUIPMENT
Equipment is recorded at cost. Expenditures for major additions and
improvements are capitalized, and minor replacements, maintenance, and
repairs are charged to expense as incurred. When property and equipment
are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations for the respective period.
Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method for financial statement purposes.
The Company uses other depreciation methods (generally accelerated) for
tax purposes where appropriate. The estimated useful lives for
significant equipment categories are as follows:
Computer equipment 2 to 5 years
Furniture and fixtures 5 to 10 years
The Company reviews the carrying value of equipment for impairment
whenever events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets. The factors considered
by management in performing this assessment include current operating
results, trends and prospects, the manner in which the property is used,
and the effects of obsolescence, demand, competition, and other economic
factors. Based on this assessment there was no impairment at December
31, 2005.
SHARE-BASED PAYMENT
The Company accounts for employee stock-based compensation using the
fair value method provided in Statement of Financial Accounting
Standards ("SFAS") No. 123(R). The fair value of options granted is
recognized as compensation expense over the vesting period of the
options.
F-13
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SHARE-BASED PAYMENT, CONTINUED
The Company accounts for non-employee stock-based compensation using the
fair value method provided by SFAS No. 123(R), as amended by SFAS No.
148. When stock options are granted to non-employees, the Company
estimates the fair value of the award and recognizes related expenses
over the performance period as prescribed by EITF 96-18.
The fair value of each stock option grant has been estimated on the date
of grant using the Black-Scholes option-pricing model, assuming no
expected dividends and the following weighted average assumptions:
Volatility 125%
Risk free interest rate 4.16% to 4.28%
Expected life of options 5 years
The Black-Scholes model was developed to estimate the fair value of
freely-tradable, fully-transferable options without vesting
restrictions, which significantly differ from the Company's stock
options. This model also require highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated fair value on the grant
date.
ADVERTISING
Advertising and sales promotion costs are expensed as incurred.
Advertising expense totaled $6,815 for the period from July 26, 2005
(inception) to December 31, 2005.
LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss
applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net loss per common
share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of
common stock equivalents, consisting of shares that might be issued upon
exercise of common stock options. In periods where losses are reported,
the weighted-average number of common shares outstanding excludes common
stock equivalents, because their inclusion would be anti-dilutive.
F-14
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FUTURE OPERATIONS ARE DEPENDENT ON FOREIGN OPERATIONS
The Company's future operations and earnings will depend, in large part,
on the results of the Company's operations in Canada. There can be no
assurance that the Company will be able to successfully conduct such
operations, and a failure to do so would have a material adverse effect
on the Company's financial position, results of operations, and cash
flows. Also, the success of the Company's operations will be subject to
numerous contingencies, some of which are beyond management's control.
These contingencies include general and regional economic conditions,
prices for the Company's services, competition, and changes in
regulation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's
Canadian subsidiaries are measured using the Canadian currency as the
functional currency. Revenues and expenses of the Canadian subsidiaries
have been translated into U.S. dollars at average exchange rates
prevailing during the period. Assets and liabilities have been
translated at the rates of exchange on the balance-sheet date. The
resulting translation gain and loss adjustments are recorded as other
income or expense during the period. Foreign currency translation
adjustments resulted in gains of $15,704 for the period from July 26th
(inception) to December 31, 2005. Since December 31, 2005 the U.S.
dollar-Canadian dollar exchange rate has fluctuated with the average
exchange rate for the period for December 31, 2005 through August 31,
2006 resulting in a decrease in the value of the US dollar in
relationship to the Canadian dollar of 3%.
INCOME TAX
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. Deferred tax assets, including tax loss and credit
carryforwards, 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.
Deferred income tax expense represents the change during the period in
the deferred tax assets and deferred tax liabilities. The components of
the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics.
The Company's practice is to provide U.S. Federal taxes on undistributed
earnings of the Company's non-U.S. subsidiaries.
F-15
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAX, CONTINUED
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Realization of the
deferred income tax asset is dependent on generating sufficient taxable
income in future years. Although realization is not assured, management
believes it is more likely than not that all of the deferred income tax
asset will be realized.
The amount of the deferred income tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income are reduced.
The Company recognizes the amount of taxes payable or refundable for the
current year and recognizes deferred tax liabilities and assets for the
expected future tax consequences of events and transactions that have
been recognized in the Company's financial statements or tax returns.
The Company currently has substantial net operating loss carryforwards.
The Company has recorded a 100% valuation allowance against net deferred
tax assets due to uncertainty of their ultimate realization.
INTANGIBLE ASSETS
The Company evaluates the recoverability of identifiable intangible
assets whenever events or changes in circumstances indicate that an
intangible asset's carrying amount may not be recoverable. Such
circumstances could include, but are not limited to: (1) a significant
decrease in the market value of an asset, (2) a significant adverse
change in the extent or manner in which an asset is used, or (3) an
accumulation of costs significantly in excess of the amount originally
expected for the acquisition of an asset. The Company measures the
carrying amount of the asset against the estimated undiscounted future
cash flows associated with it. Should the sum of the expected future net
cash flows be less than the carrying value of the asset being evaluated,
an impairment loss would be recognized. The impairment loss would be
calculated as the amount by which the carrying value of the asset
exceeds its fair value. The fair value is measured based on quoted
market prices, if available. If quoted market prices are not available,
the estimate of fair value is based on various valuation techniques,
including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires the Company to make assumptions
about future cash flows over the life of the asset being evaluated.
These assumptions require significant judgment and actual results may
differ from assumed and estimated amounts. The Company's evaluation of
intangible assets completed during the year resulted in no impairment
losses.
F-16
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
GOODWILL
The Company evaluates the carrying value of goodwill during the fourth
quarter of each year and between annual evaluations if events occur or
circumstances change that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. Such
circumstances could include, but are not limited to: (1) a significant
adverse change in legal factors or in business climate, (2)
unanticipated competition, or (3) an adverse action or assessment by a
regulator. When evaluating whether goodwill is impaired, the Company
compares the fair value of the reporting unit to which the goodwill is
assigned to the reporting unit's carrying amount, including goodwill.
The fair value of the reporting unit is estimated using a combination of
the income, or discounted cash flows, approach and the market approach,
which utilizes comparable companies' data. If the carrying amount of a
reporting unit exceeds its fair value, then the amount of the impairment
loss must be measured. The impairment loss would be calculated by
comparing the implied fair value of reporting unit goodwill to its
carrying amount. In calculating the implied fair value of reporting unit
goodwill, the fair value of the reporting unit is allocated to all of
the other assets and liabilities of that unit based on their fair
values. The excess of the fair value of a reporting unit over the amount
assigned to its other assets and liabilities is the implied fair value
of goodwill. An impairment loss would be recognized when the carrying
amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the fourth quarter of 2005
resulted in no impairment losses.
SALES AND VALUE ADDED TAXES
The Company excludes sales and value added taxes from revenues as they
are recorded as a liability when incurred.
3. EQUIPMENT
The following is a summary of equipment, at cost less accumulated
depreciation, at December 31, 2005:
Computer equipment $40,147
Furniture and fixtures 28,851
--------------
Total equipment 68,998
Less: accumulated depreciation (12,963)
--------------
EQUIPMENT, NET $56,035
==============
F-17
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
3. EQUIPMENT, CONTINUED
The Company's two Canadian subsidiaries equipment (with a net carrying
value at December 31, 2005 of $52,826) has been pledged in the security
agreement with the Bank of Nova Scotia which covers both the operating
and the revolving term leasing lines of credit.
Depreciation of equipment amounted to $12,963 for the period from July
26, 2005 (inception) to December 31, 2005.
4. BUSINESS COMBINATIONS
ACQUISITION OF ADAPSYS TRANSACTION PROCESSING, INC. AND ADAPSYS DOCUMENT
MANAGEMENT, INC.
In August 2005, the Company completed the purchase of all the voting
equity interest of ADAPSYS Transaction Processing, Inc. and ADAPSYS
Document Management, Inc., (the "Adapsys entities"), privately held
providers of data and document management solutions by acquiring all of
their outstanding capital stock for a total purchase price of
$1,319,048. The Adapsys entities' results of operations have been
included in the consolidated financial statements since the date of
acquisition. In addition to adding the Adapsys data and document
management solutions capability with its long term Canadian-based
customer relationships, this acquisition enabled the company to offer a
high quality, cost-effective service utilizing its near shore delivery
model to its US customers.
The purchase price consisted of cash in the amount of $659,899 and
preferred stock, common stock and options valued at $659,149. The value
of the 2 million shares of preferred Series B stock, 2 million shares of
common stock and options to purchase 168,000 common shares issued all at
fair value based on the cash price paid for a comparable number of
shares of Company's common stock at formation in July 2005.
F-18
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS
ACQUISITION OF ADAPSYS TRANSACTION PROCESSING, INC. AND ADAPSYS DOCUMENT
MANAGEMENT, INC., CONTINUED
The following table presents the allocation of the acquisition price,
including professional fees and other related acquisition costs, to the
assets acquired and liabilities assumed, based on their fair values as
of the date of acquisition:
Cash and cash equivalents $574,147
Accounts receivable 454,931
Acquired contract 964,508
Other current assets 424
Property, plant, and equipment 60,888
Other assets 125,297
Goodwill 826,071
----------------
Total assets acquired 3,006,266
----------------
Note payable to bank (79,011)
Accounts payable and other current liabilities (525,158)
Estimated termination liability (1,083,049)
----------------
Total liabilities assumed (1,687,218)
----------------
NET ASSETS ACQUIRED $1,319,048
================
The $826,071 of goodwill is not expected to be deductible for United
States income tax, state income tax or Canadian income tax purposes.
The allocation of the purchase price is based on preliminary data and
could change when final valuation of certain intangible assets is
obtained.
ALLOCATION OF PURCHASE PRICE TO A CUSTOMER CONTRACT
Customer contract at December 31, 2005 represents the unrealized portion
of the purchase price allocated to the customer contract. This customer
contract had 6.5 months remaining when it was acquired in August 2005
and expired in February 2006. Under this agreement, the Company
determined the fair value of the customer contract based upon an income
approach in which an estimated gross profit margin of 60% was utilized.
The gross profit estimate was based on the SIC average computer service
industry gross profit margins over a 5 year period. During the period
from July 26, 2005 (inception) to December 31, 2005, the Company
expensed $719,243 of this amount based on the actual revenue recognized
on the contract during the period.
F-19
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS, CONTINUED
ALLOCATION OF PURCHASE PRICE TO GOODWILL
The purchase price and costs associated with the Adapsys entities
acquisition exceeded the Company's allocation of the fair value of net
assets acquired by $826,071, which was assigned to goodwill (Note 9).
ACQUISITION OF CUSTOMER LISTS
In November and December 2005, the Company through its Canadian
subsidiary acquired two small companies, a San Francisco based provider
of human resources management and a Canadian based provider of data
management services for a total of $192,983 in cash and 175,000 shares
of its common stock, with a fair value of $27,719. The purchase price
was allocated to customer lists. There were no other significant assets
or liabilities of either entity. The customer lists are being amortized
over three and ten year periods with a weighted-average useful life of
9.1 years.
No significant residual value is estimated for these intangible assets.
Aggregate amortization expense for the five months ended December 31,
2005 was $1540. The following table represents the total estimated
amortization of intangible assets for the five succeeding years:
Estimated
Amortization
For the Year Ending December 31 Expense
----------------
2006 $28,538
2007 $28,538
2008 $26,998
2009 $19,298
2010 and thereafter $115,790
ACQUISITION OF DIGICA, INC.
In January 2006, the Company completed its acquisition of all of the
shares of Digica, Inc., a state of New York corporation ("Digica"), a
privately held provider of information technology outsourcing services
based in New Jersey. Under the terms of the purchase agreement, the
Company paid $400,000 in cash and issued 500,000 shares of the Company's
common stock, in exchange for all outstanding equity of Digica. The fair
value of the 500,000 shares of the Company's common stock issued in this
acquisition was determined using cash price of shares of the Company's
common stock sold in July 2005 and the fair value of common shares
issued in other acquisitions (Note 4 - Acquisition of ADAPSYS
Transaction Processing, Inc. and ADAPSYS Document Management, Inc). The
Company's push down accounting allocation of the purchase price to
assets and liabilities related to this acquisition has not as of yet
been completed.
F-20
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS, CONTINUED
The following table summarizes Digica's estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. The
purchase price allocation herein is based on management's preliminary
assessment of the fair value of both the assets acquired and liabilities
assumed.
Current assets $210,213
Property, plant, and equipment 420,369
Other noncurrent assets 53,098
Identifiable intangible assets 218,206
---------------
Total assets acquired 901,886
---------------
Current liabilities 377,660
Other noncurrent liabilities 36,559
Long-term debt 8,470
---------------
Total liabilities assumed 422,689
---------------
NET ASSETS ACQUIRED $479,197
===============
Acquired identifiable intangible assets in the amount of $218,206 were
assigned to customer relationships, with an estimated useful life of 6
years with no residual value.
5. NOTE PAYABLE
Note payable at December 31, 2006, consists of the following:
Note payable to Business Development Bank of Canada,
interest at prime plus 3.25% (10.25% at December 31, 2005),
monthly principal payments of $1,432 plus interest, due
May 21, 2010, substantially all of the Company's Canadian
subsidiary's assets as collateral $75,915
Less: amount due within one year 17,184
---------------
NOTE PAYABLE, DUE AFTER ONE YEAR $58,731
===============
F-21
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
5. NOTE PAYABLE, CONTINUED
Payments on this note payable during the following years are as follows:
2006 $17,184
2007 17,184
2008 17,184
2009 17,184
2010 7,179
6. ESTIMATED SEVERANCE LIABILITY
As part of the acquisition of the Adapsys entities, the Company acquired
the remaining term of a contract to provide services to IATA. This
contract expired in February 2006. As a result of the expiration of this
contract, the Company terminated 36 employees. The Company believes that
it has a termination obligation to certain of these prior employees. The
Company recorded the estimated liability as part of the allocation of
the purchase price of the Adapsys entities in August 2005, and reduces
the liability as individual prior employees and the Company reach
agreement on the amount of termination payment due. The Company believes
that the balance at December 31, 2005 of the termination liability is
sufficient to satisfy the remaining amounts due (Note 9).
7. DEFERRED INCOME
Revenue under maintenance agreements is deferred and recognized over the
term of the agreements (typically two years) on a straight-line basis.
At December 31, 2005 deferred revenue totaled $32,830 which is
recognizable within one year and is included as a current liability on
the accompanying balance sheet.
8. INCOME TAXES
There is no current or deferred income tax provision due to the
Company's losses and valuation allowance.
Significant components of the Company's deferred tax assets and
liabilities are as follows at December 31 2005:
Deferred tax assets (liabilities):
Net operating loss carryforward $116,863
Loss on foreign currency exchange (5,339)
----------------
111,524
Total deferred tax assets
Valuation allowance (111,524)
----------------
NET DEFERRED TAX ASSETS -
================
F-22
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
8. INCOME TAXES, CONTINUED
The Company, based upon its limited history of losses and management's
assessment of when operations are anticipated to generate taxable
income, has concluded that it is more likely than not that none of the
net deferred income tax assets will be realized through future taxable
earnings and has established a valuation allowance for them. The
valuation allowance incurred during the period from July 26, 2006
(inception) to December 31, 2005 amounted to $111,524.
Reconciliation of the effective tax rate to the U.S. statutory rate is
as follows:
Tax expense at U.S. statutory rate (34.0)%
Change in valuation allowance 28.8%
Canadian operations (8.1)%
Permanent difference related to acquisitions costs 13.3%
-------------
Effective income tax rate -
=============
The Company has federal net operating loss carryforwards of $343,716.
The federal net operating loss carryforward will expire in 2025. The
Company has a Canadian net operating loss carryforward of $174,971 that
will expire in 2,010. Due to the uncertainty of its realization on the
loss carry-forward, a full valuation allowance has been provided for the
deferred tax assets.
9. CONTINGENCIES, RISKS, UNCERTAINTIES, AND CONCENTRATIONS
FINANCIAL RESULTS, LIQUIDITY AND MANAGEMENT'S PLAN
The Company has incurred a net loss for the period from July 26, 2005
(inception) to December 31, 2005 of$792,227, and has incurred a net loss
for the six month period ended June 30, 2006 of $1,067,584. Despite its
negative cash flows from operations, the Company has been able to obtain
operating capital through private equity funding sources. Management's
plans include the continued development and eventual implementation of
its business plan. The Company has relied upon equity funding since
inception.
No assurances can be given that the Company can obtain sufficient
working capital through the sale of the Company's common stock and
borrowing or that the continued implementation of its business plan will
generate sufficient revenues in the future to sustain ongoing
operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
F-23
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
9. CONTINGENCIES, RISKS, UNCERTAINTIES, AND CONCENTRATIONS, CONTINUED
OPERATING LEASES
The Company has operating leases for certain of its facilities leases,
office equipment and automobiles. Future minimum lease payments are as
follows at December 31:
2006 $124,575
2007 79,929
2008 44,464
2009 46,072
2010 and after 31,072
------------------
TOTAL MINIMUM LEASE PAYMENTS $326,112
==================
For the five-month period ended December 31, 2005, rental expense was
$81,637.
The Company occupies five facilities under rental agreements with lease
terms that expire at various times through April 2010. None of the
Company's facilities have lease agreements with lease extension options.
The facility with the lease that expired in February 2006 is currently
operating on a month-to-month basis.
CONCENTRATION OF SUPPLIERS
The Company made approximately 14% of its purchases from one vendor in
the period from July 26, 2005 (inception) to December 31, 2005. If the
Company were unable to obtain products from the current supplier, the
Company believes that the impact on its financial statements from such
an uncertainty would be minimal. The Company has not experienced any
such disruption in supply of products as of December 31, 2005.
CONCENTRATION IN REVENUE TO ONE CUSTOMER
In the five-month period ended December 31, 2005, the company's largest
customer accounted for 74% of revenue. This customer was the only one
that exceeded 10% of the company's revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade accounts
receivable. The Company provides business process and information
technology outsourcing services in Canada and the United States.
Exposure to losses on trade accounts receivable is principally dependent
on the individual customer's financial conditions, as credit sales are
not collateralized. The Company monitors its exposure to credit losses
and writes off those accounts receivable that it deems to be not
collectible. The Company had three customers that exceeded 10% of the
accounts receivable, and combined they represented 56% of the Company's
accounts receivable at December 31, 2005.
F-24
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
9. CONTINGENCIES, RISKS, UNCERTAINTIES, AND CONCENTRATIONS, CONTINUED
LITIGATION
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its
business activities. Management believes that any liability that may
ultimately result from the resolution of these matters will not have a
material adverse effect on the financial condition or results of
operations of the Company.
The Company is currently the defendant in three Canadian civil lawsuits,
all of which involve individuals who were former employees of the
Adapsys entities. The basis for all three lawsuits by the former
employees is the amount and timing of payments due them from the Company
resulting from their termination. The Company believes that it has
created an adequate liability to cover the liabilities owed the
plaintiffs (Note 6).
BANK LINES OF CREDIT
One of the Company's Canadian subsidiaries has an operating line of
credit with The Bank of Nova Scotia with a maximum borrowing limit of
$300,000, collateralized by the that subsidiary's accounts receivable
(with a net carrying value of $464,196 at December 31, 2005) and
repayable on demand. The line of credit matured on November 30, 2002 and
was renewed. Outstanding borrowings, when they occur, will accrue
interest at the bank's prime interest rate plus 1%. There was no
outstanding balance at December 31, 2005.
The Company also has a revolving term leasing line of credit with the
Bank of Nova Scotia to assist with the acquisition of computer equipment
with a maximum leased equipment purchase value of $100,000,
collateralized by the bank leased computer equipment. The line of credit
matured on November 30, 2002 and was renewed. The lease financing will
accrue interest at the bank's prime interest rate plus 2%. There was no
outstanding balance under this leasing line of credit at December 31,
2005.
10. EQUITY TRANSACTIONS
In December 2005 the Company issued 175,000 shares of its common stock
for the acquisition of customer lists. The Company valued these shares
at $.16 per share, based on the cash sales price of common shares in
July 2005.
At formation, the Company issued 1,500,000 shares of Preferred Series A
stock and 7,250,000 shares of common stock for total cash consideration
of $1,500,000. The Company valued each of the common and Preferred
Series A shares at $.16 per share.
The Company issued 2,000,000 shares of Preferred Series B stock and
2,000,000 shares of common stock in connection with the acquisition of
the Adapsys Entities. The Company valued each of the common and
Preferred Series B shares at $.16 per share for a total value of
$633,580.
F-25
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
10. EQUITY TRANSACTIONS, CONTINUED
PREFERRED SHARES
The Company has authorized 10 million shares of preferred stock. At
December 31, 2005 the Company had established two series of preferred
shares, Series A and Series B. A description of each series follows.
PREFERRED SERIES A STOCK
The preferred Series A stock ranks senior to the preferred Series B
stock and receives an annual 8% in kind dividend payable quarterly. The
Company's Board has not declared the dividends required on this series.
The total number of additional preferred Series A stock required to be
issued as a dividend at December 31, 2005 is 60,000.
Each share of preferred Series A stock is convertible into one share of
common stock and has the same voting rights as one share of common
stock. The preferred Series A stock have a $1.00 per share liquidation
preference. There are 2,200,000 shares of Preferred Series A Stock
authorized.
PREFERRED SERIES B STOCK
Each share of preferred Series B stock is convertible into one share of
the Company's common stock and has the same voting rights as one share
of common stock. The preferred Series B stock is not entitled to
dividends and has a $1.00 per share liquidation preference and is
subordinate to the preferred Series A stock.
The shares of both the preferred Series A stock and the preferred Series
B stock are convertible at the option of the holders, however both
series automatically convert upon sale of the Company or upon closing of
a firmly underwritten offering of shares of the common stock with
aggregate gross cash proceeds of at least $10 million and a public
offering price of $5.00 per share.
COMMON SHARES
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 2005, the Company has reserved 6,488,000 shares of its
authorized but unissued common stock for possible future issuance in
connection with the following:
Exercise and future grants of stock options 2,268,000
Conversion of preferred stock 4,220,000
------------------
6,488,000
==================
F-26
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
10. EQUITY TRANSACTIONS, CONTINUED
STOCK-BASED PAYMENTS
A summary of all stock-based payments for the year ended December 31,
2005 is as follows:
Weighted
Common Average
Stock Exercise
Options Price
Outstanding at beginning of year - -
Granted 2,268,000 $0.025
Exercised - -
Forfeited - -
Expired - -
---------------------------------
OUTSTANDING AT END OF YEAR 2,268,000 $0.025
=================================
EXERCISABLE AT END OF YEAR 168,000 $0.025
=================================
The following table summarizes information about stock options
outstanding under all plans at December 31, 2005:
Options Weighted Weighted Options Weighted
Outstanding Average Average Exercisable at Average
December 31, Remaining Exercise December 31, Exercise
Range of Exercise Price 2005 Life Price 2005 Price
----------------------- ------------------------------------------------------------------------
$0.025 2,268,000 4.63 $0.025 168,000 $0.025
-------------- --------------
2,268,000 168,000
============== ==============
OPTIONS
During the period from July 26, 2005 (inception) to December 31, 2005,
the board of directors granted options to purchase an aggregate of
2,268,000 shares of the Company's common stock. These options are
exercisable at $0.025 per share, vest over four years and expire at
various dates in 2010. Of the options granted, 168,000 are currently
vested. No options were exercised, cancelled or forfeited during the
five-month period ended December 31, 2005. The average fair value of the
options issued was $0.15.
F-27
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
11. LOSS PER COMMON SHARE
Basic loss per common share for the period from July 26, 2005
(inception) to December 31, 2005 is calculated by dividing net loss by
weighted-average common shares outstanding during the period. Diluted
loss per common share is computed by dividing net loss by the
weighted-average number of common shares and dilutive potential common
shares outstanding during the period.
Net loss $(792,227)
Weighted-average number of common shares
outstanding - basic and diluted 9,222,727
------------------
Basic and diluted net loss per share
attributable to common shareholders $0.09
==================
The following securities were not included in the computation of diluted
net loss per share for the period from July 26, 2005 (inception) to
December 31, 2005 as their effect would have been anti-dilutive:
Securities that could be potentially anti-dilutive to the loss per
share:
Convertible preferred shares 3,500,000
Options to purchase common stock 2,268,000
------------------
DILUTIVE POTENTIAL COMMON SHARES 5,768,000
==================
F-28
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
12. TERMINATION OF SIGNIFICANT CONTRACT
The Company when it acquired one of the Adapsys entities recorded as an
asset the value of an existing customer contract (Note 4). During the
period from July 26, 2005 (inception) through December 31, 2005, this
customer contract resulted in 64% of the all Company revenues. This
contract terminated on February 14, 2006, and there has not been any
follow-on revenue. The total acquisition value of the contract has been
recognized as expense over the period from acquisition through February
14, 2006, the final day of the customer contract. This one contract
resulted in $126,918 of the Company's gross profit for the period from
July 26, 2005 (inception) through December 31, 2005.
13. SEGMENT REPORTING
Upon acquisition of the Adapsys entities in July 2005, the Company
manages its operations through two geographical segments; United States
("domestic") and Canada. Each segment provides business process
outsourcing and other computer related services. The Canadian business
segment recognizes the majority of its revenue from Canadian customers,
while the United States segment services the United States domestic
market.
All functions of the Company are done on a decentralized basis. The
operating segments do not share any facilities or personnel. There are
no inter-segment transactions. All costs of revenue and operating and
general and administrative expenses are captured and reported within
each operating segment. The Company's assets and liabilities are
captured and reported discretely within each operating segment.
F-29
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND
FOR THE PERIOD FROM JULY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
- --------------------------------------------------------------------------------
13. SEGMENT REPORTING, CONTINUED
Segment results for the period from July 26, 2005 (inception) to
December 31, 2005 are as follows:
United
States Canada Consolidated
-----------------------------------------------
July 26, 2005 (inception) to December 31, 2005:
Assets:
Total assets $943,162 $2,136,660 $3,079,822
Cash 884,726 347,443 1,232,169
Accounts receivable 25,700 469,084 494,784
Fixed assets 3,209 52,826 56,035
Customer contract - 245,265 245,265
Goodwill - 826,071 826,071
Customer list 26,180 192,982 219,162
Liabilities:
Total liabilities 44,064 1,614,008 1,658,072
Reserve for severance obligations - 1,027,276 1,027,276
Operations:
Revenue 25,700 2,321,834 2,347,534
Operating loss (345,711) (462,919) (808,630)
Other income (loss) (1,998) 18,401 16,403
Net loss (347,709) (444,518) (792,227)
Significant customer - 1,837,695 1,837,695
Interest expense - 4,147 4,147
Depreciation expense - 12,693 12,693
Amortization expense - 1,540 1,540
F-30
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
- -----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $190,572
Accounts receivable - trade, net of allowance for doubtful accounts of
$2,586 438,170
Prepaid expenses 21,561
---------------
Total current assets 650,303
Equipment, net of $55,895 of accumulated depreciation 590,408
Deposit 33,115
Customer lists, net of $33,930 of accumulated amortization 390,094
Goodwill 826,071
---------------
TOTAL ASSETS $2,489,991
===============
The accompanying notes are an integral part of the financial statements.
F-31
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $536,014
Accrued payroll 110,381
Current portion of note payable 85,983
Current portion of capital leases 28,573
Deferred income 186,880
Reserve for severance obligations 981,750
---------------
Total current liabilities 1,929,581
Notes payable, less current portion 85,829
Leases payable, less current portion 3,959
---------------
TOTAL LIABILITIES 2,019,369
---------------
Commitments and contingencies
Shareholders' equity:
Preferred shares; $0.001 par value; liquidation
preference of $1.00 per share, authorized
10,000,000 shares; issued and outstanding:
Series A voting convertible preferred shares;
2,220,000 shares authorized; 1,500,000 issued
and outstanding; 8% in-kind annual dividend;
and $1,500,000 liquidation preference. 1,500
Series B voting convertible preferred shares;
2,000,000 shares authorized, issued and
outstanding; and $2,000,000 liquidation preference. 2,000
Common shares; $.001 par value; 15,000,000 authorized;
9,925,000 issued and outstanding 9,925
Additional paid-in capital 2,317,008
Accumulated deficit (1,859,811)
---------------
TOTAL SHAREHOLDERS' EQUITY 470,622
---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,489,991
===============
The accompanying notes are an integral part of the financial statements.
F-32
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
Revenue $2,889,609
Cost of revenue (965,115)
---------------
Gross profit 1,924,494
---------------
Operating expense:
Salaries and other personnel costs 1,779,575
Operating expense 124,654
General and administrative 1,047,448
---------------
Total operating expense 2,951,677
---------------
Operating loss (1,027,183)
Interest expense (4,996)
Loss on foreign currency exchange (35,405)
---------------
NET LOSS $(1,067,584)
===============
NET LOSS PER SHARE, BASIC AND DILUTED $(0.11)
===============
WEIGHTED NUMBER OF SHARES OUTSTANDING 9,925,000
===============
The accompanying notes are an integral part of the financial statements.
F-33
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- -------------------------------------------------------------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES: $(1,067,584)
Net loss
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 42,932
Amortization of acquired customer contract cost 245,265
Decrease in deferred revenue 22,115
Amortization of customer lists 32,390
Stock-based compensation 39,953
Changes in operating assets and liabilities:
Decrease in assets:
Accounts receivable - trade 171,806
Other assets 52,696
Decrease in liabilities:
Accounts payable - trade and accrued expenses (31,506)
Payments made on severance obligation (45,526)
----------------
NET CASH USED IN OPERATING ACTIVITIES (537,459)
----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (375,593)
Acquisition of equipment (125,470)
----------------
NET CASH USED IN INVESTING ACTIVITIES (501,063)
----------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of note payable (3,075)
----------------
NET CASH USED IN FINANCING ACTIVITIES (3,075)
----------------
NET DECREASE IN CASH (1,041,597)
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 2005 1,232,169
----------------
CASH AND CASH EQUIVALENTS AT JUNE 30, 2006 $190,572
================
The accompanying notes are an integral part of the financial statements.
F-34
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $(4,996)
Income taxes paid -
Acquisition of Digica, Inc.:
Equipment $79,197
Issuance of shares of common stock $(79,197)
The accompanying notes are an integral part of the financial statements.
F-35
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
1. BUSINESS AND THE BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
BPO Management Services, Inc and Subsidiaries (the "Company") was
incorporated in Delaware on July 26, 2005. The Company offers a broad
range of business process outsourcing services to middle market
enterprises, primarily grouped into three types of businesses, human
resources outsourcing, document and data management solutions and
information technology outsourcing. Services are provided using a blend
of on and near shore resources utilizing the Company's technology
infrastructure platform and cross industry delivery model. The Company
has acquired and intends to acquire additional companies operating in
the business process outsourcing.
BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by BPO Management Services, Inc and Subsidiaries (the "Company"),
without audit, pursuant to Rule 310 of Regulation SB applicable to
quarterly reporting on Form 10-QSB and reflect, in the opinion of
management, all adjustments necessary to present fairly the financial
information for the Company. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements, prepared in accordance with generally
accepted accounting principles ("GAAP"), have been condensed or omitted
as permitted by Rule 310 of Regulation SB. These consolidated financial
statements and related notes should be read in conjunction with the
consolidated financial statements and related notes of the Company's
consolidated financial statements for the period from July 26, 2005
(inception) through December 31, 2005. Results of operations for this
interim period are not necessarily indicative of annual results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company, its two wholly owned subsidiary Canadian limited
partnerships and the related corporate general partners, and one wholly
owned subsidiary U.S. corporation after elimination of all material
intercompany accounts, transactions, and profits.
REVENUE RECOGNITION
The Company recognizes revenue only when all of the following criteria
have been met:
o Persuasive evidence of an arrangement exists
o Delivery has occurred or services have been rendered;
o The fee for the arrangement is fixed or determinable; and
o Collectibility is reasonably assured.
F-36
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION, CONTINUED
PERSUASIVE EVIDENCE OF AN ARRANGEMENT
The Company documents all terms of an arrangement in a written contract
signed by the customer prior to recognizing revenue.
DELIVERY HAS OCCURRED OR SERVICES HAVE BEEN PERFORMED
The Company performs all services or delivers all products prior to
recognizing revenue. Monthly services are considered to be performed
ratably over the term of the arrangement. Professional consulting
services are considered to be performed when the services are complete.
Equipment is considered delivered upon delivery to a customer's
designated location.
THE FEE FOR THE ARRANGEMENT IS FIXED OR DETERMINABLE
Prior to recognizing revenue, a customer's fee is either fixed or
determinable under the terms of the written contract. Fees for most
monthly services, professional consulting services, and equipment sales
are fixed under the terms of the written contract. Fees for certain
services are variable based on an objectively determinable factor such
as usage. Those factors are included in the written contract such that
the customer's fee is determinable. The customer's fee is negotiated at
the outset of the arrangement.
COLLECTIBILITY IS REASONABLY ASSURED
The Company determines that collectibility is reasonably assured prior
to recognizing revenue. Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by management. New
customers are subject to a credit review process, which evaluates the
customer's financial position and ultimately its ability to pay. The
Company does not enter into arrangements unless collectibility is
reasonably assured at the outset. Existing customers are subject to
ongoing credit evaluations based on payment history and other factors.
If it is determined during the arrangement that collectibility is not
reasonably assured, revenue will be recognized on a cash basis.
USE OF ESTIMATES
Preparing the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the
F-37
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES, CONTINUED
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The financial statements include some amounts that are based on
management's best estimates and judgments. The most significant
estimates have been the allocation of the purchase prices in its
business combinations, the estimation of fixed asset useful lives, the
valuation of intangible assets and the determination of their useful
lives, the review for the impairment of goodwill, the estimation of the
severance obligation, the valuation of stock options issued, the
valuation of the allocation of equity unit purchase price between
preferred and common shares and the determination of the valuation
reserves on the United States and Canadian income tax assets. These
estimates may be adjusted as more current information becomes available
and it is at least a reasonable possible that changes could occur in the
near future, and any adjustment could be significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
management to disclose the estimated fair value of certain assets and
liabilities defined by SFAS No. 107 as financial instruments. Financial
instruments are generally defined by SFAS No. 107 as cash and cash
equivalents, evidence of ownership interest in equity, or a contractual
obligation that both conveys to one entity a right to receive cash or
other financial instruments from another entity and imposes on the other
entity the obligation to deliver cash or other financial instruments to
the first entity.
At June 30, 2006, the Company's financial instruments are cash and cash
equivalents, accounts receivable, accounts payable, notes payable, and
long-term debt. The recorded values of cash and cash equivalents,
accounts receivable, and accounts payable and accrued liabilities
approximate their fair values based on their short-term nature. The
recorded values of notes payable and capital leases approximate their
fair values, as interest approximates market rates.
CASH
The Company considers deposits that can be redeemed on demand and
investments that have original maturities of less than three months,
when purchased, to be cash equivalents. As of June 30, 2006, the
Company's cash and cash equivalents were deposited primarily in three
financial institutions.
F-38
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CASH, CONTINUED
At June 30, 2006, the Company had $65,102 on deposit that exceeded
United States (FDIC) federally insurance limit. At June 30, 2006, the
Company had no amounts on deposit that exceeded the Canadian (CDIC)
insurable limit of $100,000 CDN per entity per bank. The funds insurance
is limited to Canadian currency deposits only and does provide coverage
to money master high interest savings accounts (money market accounts)
but all accounts are considered in the overall limitation per entity per
bank.
ACCOUNTS RECEIVABLE - TRADE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are stated at the amount the Company expects
to collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional
allowances would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain
outstanding after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
accounts receivable. Accounts receivable are presented net of an
allowance for doubtful accounts of $2,586 at June 30, 2006.
EQUIPMENT
Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, and minor replacements,
maintenance, and repairs are charged to expense as incurred. When
property and equipment are retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful
lives of the related assets using the straight line method for financial
statement purposes. The Company uses other depreciation methods
(generally accelerated) for tax purposes where appropriate. The
estimated useful lives for significant property and equipment categories
are as follows:
Computer equipment 2 to 5 years
Furniture and fixtures 5 to 10 years
F-39
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EQUIPMENT, CONTINUED
The Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash
flows expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets. The factors considered
by management in performing this assessment include current operating
results, trends and prospects, the manner in which the property is used,
and the effects of obsolescence, demand, competition, and other economic
factors. Based on this assessment there was no impairment at June 30,
2006.
SHARE-BASED PAYMENT
The Company accounts for employee stock-based compensation using the
fair value method provided in Statement of Financial Accounting
Standards ("SFAS") No. 123R. The fair value of options granted is
recognized as compensation expense over the vesting period of the
options.
The Company accounts for non-employee stock-based compensation using the
fair value method provided by SFAS No. 123R, as amended by SFAS No. 148.
When stock options are granted to non-employees, the Company estimates
the fair value of the award and recognizes related expenses over the
performance period as prescribed by EITF 96-18.
The fair value of each stock option grant has been estimated on the date
of grant using the Black-Scholes option-pricing model, assuming no
expected dividends and the following weighted average assumptions:
Volatility 125%
Risk free interest rate 4.16% to 4.28%
Expected life of options 5 years
The Black-Scholes model was developed to estimate the fair value of
freely-tradable, fully-transferable options without vesting
restrictions, which significantly differ from the Company's stock
options. This model also require highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated fair value on the grant
date.
F-40
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ADVERTISING
Advertising and sales promotion costs are expensed as incurred.
Advertising expense totaled $13,192 for the six-month period ended June
30, 2006.
LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss
applicable to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted net loss per common
share is determined using the weighted average number of common shares
outstanding during the period, adjusted for the dilutive effect of
common stock equivalents, consisting of shares that might be issued upon
exercise of common stock options. In periods where losses are reported,
the weighted average number of common shares outstanding excludes common
stock equivalents, because their inclusion would be anti dilutive.
FUTURE OPERATIONS ARE DEPENDENT ON FOREIGN OPERATIONS
The Company's future operations and earnings will depend, in large part,
on the results of the Company's operations in Canada. There can be no
assurance that the Company will be able to successfully conduct such
operations, and a failure to do so would have a material adverse effect
on the Company's financial position, results of operations, and cash
flows. Also, the success of the Company's operations will be subject to
numerous contingencies, some of which are beyond management's control.
These contingencies include general and regional economic conditions,
prices for the Company's services, competition, and changes in
regulation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's
Canadian subsidiaries are measured using the Canadian currency as the
functional currency. Revenues and expenses of the Canadian subsidiaries
have been translated into U.S. dollars at average exchange rates
prevailing during the period. Assets and liabilities have been
translated at the rates of exchange on the balance sheet date. The
resulting translation gain and loss adjustments are recorded directly as
a separate component of shareholders' equity, unless there is a sale or
complete liquidation of the underlying foreign investments. Foreign
currency translation adjustments resulted in losses of $35,405 for the
six month period ended June 30, 2006.
F-41
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAX
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. Deferred tax assets, including tax loss and credit
carryforwards, 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.
Deferred income tax expense represents the change during the period in
the deferred tax assets and deferred tax liabilities. The components of
the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics.
The Company's practice is to provide U.S. Federal taxes on undistributed
earnings of the Company's non-U.S. subsidiaries.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Realization of the
deferred income tax asset is dependent on generating sufficient taxable
income in future years. Although realization is not assured, management
believes it is more likely than not that all of the deferred income tax
asset will be realized.
The amount of the deferred income tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income are reduced.
The Company recognizes the amount of taxes payable or refundable for the
current year and recognizes deferred tax liabilities and assets for the
expected future tax consequences of events and transactions that have
been recognized in the Company's financial statements or tax returns.
The Company currently has substantial net operating loss carryforwards.
The Company has recorded a 100% valuation allowance against net deferred
tax assets due to uncertainty of their ultimate realization.
INTANGIBLE ASSETS
The Company evaluates the recoverability of identifiable intangible
assets whenever events or changes in circumstances indicate that an
intangible asset's carrying amount may not be recoverable. Such
circumstances could include, but are not limited to: (1) a significant
decrease in the market value of an asset, (2) a significant adverse
change in the extent or manner in which an asset is used, or (3) an
accumulation of costs significantly in excess of the amount originally
expected for the acquisition of an asset. The Company measures the
carrying amount of the asset against the estimated undiscounted future
cash flows associated
F-42
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTANGIBLE ASSETS, CONTINUED
with it. Should the sum of the expected future net cash flows be less
than the carrying value of the asset being evaluated, an impairment loss
would be recognized. The impairment loss would be calculated as the
amount by which the carrying value of the asset exceeds its fair value.
The fair value is measured based on quoted market prices, if available.
If quoted market prices are not available, the estimate of fair value is
based on various valuation techniques, including the discounted value of
estimated future cash flows. The evaluation of asset impairment requires
the Company to make assumptions about future cash flows over the life of
the asset being evaluated. These assumptions require significant
judgment and actual results may differ from assumed and estimated
amounts. The Company's evaluation of intangible assets completed during
the year resulted in no impairment losses.
GOODWILL
The Company evaluates the carrying value of goodwill during the fourth
quarter of each year and between annual evaluations if events occur or
circumstances change that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. Such
circumstances could include, but are not limited to: (1) a significant
adverse change in legal factors or in business climate, (2)
unanticipated competition, or (3) an adverse action or assessment by a
regulator. When evaluating whether goodwill is impaired, the Company
compares the fair value of the reporting unit to which the goodwill is
assigned to the reporting unit's carrying amount, including goodwill.
The fair value of the reporting unit is estimated using a combination of
the income, or discounted cash flows, approach and the market approach,
which utilizes comparable companies' data. If the carrying amount of a
reporting unit exceeds its fair value, then the amount of the impairment
loss must be measured. The impairment loss would be calculated by
comparing the implied fair value of reporting unit goodwill to its
carrying amount. In calculating the implied fair value of reporting unit
goodwill, the fair value of the reporting unit is allocated to all of
the other assets and liabilities of that unit based on their fair
values. The excess of the fair value of a reporting unit over the amount
assigned to its other assets and liabilities is the implied fair value
of goodwill. An impairment loss would be recognized when the carrying
amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the fourth quarter of 2005
resulted in no impairment losses.
SALES AND VALUE ADDED TAXES
The Company excludes sales and value added taxes from revenues as they
are recorded as a liability when incurred.
F-43
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
3. BUSINESS COMBINATIONS
DIGICA, INC.
In January 2006, the Company completed its acquisition of all of the
shares of Digica, Inc., a state of New York corporation ("Digica"), a
privately held provider of information technology outsourcing services
based in New Jersey. Under the terms of the purchase agreement, the
Company paid $400,000 in cash and issued 500,000 shares of the Company's
common stock, in exchange for all outstanding equity of Digica.
The fair value of the 500,000 shares of the Company's common stock
issued in this acquisition was determined using sales of shares of the
Company's common stock and the estimated value of common shares issued
in other acquisitions. The calculation of the preliminary purchase price
is subject to refinement.
The following table summarizes Digica's estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. The
purchase price allocation herein is based on management's preliminary
assessment of the fair value of both the assets acquired and liabilities
assumed.
Current assets $210,213
Property, plant, and equipment 420,369
Other noncurrent assets 53,098
Identifiable intangible assets 218,206
----------------
Total assets acquired 901,886
----------------
Current liabilities 377,660
Other noncurrent liabilities 36,559
Long term debt 8,470
----------------
Total liabilities assumed $422,689
----------------
NET ASSETS ACQUIRED $479,197
================
Acquired identifiable intangible assets in the amount of $217,453 were
assigned to customer relationships, with an estimated useful life of 6
years with no residual value.
F-44
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
4. CUSTOMER LISTS
In November and December 2005, and in January 2006 the Company
subsidiary acquired three companies. A portion of the combined purchase
price was allocated to customer lists. The customer lists are being
amortized over three, ten, and six year periods.
The following table represents the total estimated amortization of
intangible assets for the five succeeding years:
Estimated
Amortization
For the Year Ending December 31: Expense
-------------------------------- --------------
2007 $64,780
2008 $64,780
2009 $58,620
2010 $55,540
2011 and thereafter $127,014
5. ESTIMATED SEVERANCE LIABILITY
As part of the acquisition of the Adapsys entities, the Company acquired
the remaining term of a contract to provide services to IATA. This
contract expired in February 2006. As a result of the expiration of this
contract, the Company terminated 36 employees. The Company believes that
it has a termination obligation to certain of these prior employees. The
Company recorded the estimated liability as part of the allocation of
the purchase price of the Adapsys entities in August 2005, and reduces
the liability as individual prior employees and the Company reach
agreement on the amount of termination payment due. The Company believes
that the balance of $981,750 at June 30, 2006 of the termination
liability is sufficient to satisfy the remaining amounts due.
6. INCOME TAXES
There is no current or deferred income tax provision due to the
Company's losses and valuation allowance.
7. CONTINGENCIES, RISKS, UNCERTAINTIES, AND CONCENTRATIONS
FINANCIAL RESULTS, LIQUIDITY AND MANAGEMENT'S PLAN
The Company has incurred a net loss for the period from July 26, 2005
(inception) to June 30, 2005 of $1,859,811 and has incurred a net loss
for the six-month period ended June 30, 2006 of $1,067,584. Despite its
negative cash flows from operations, the Company has been
F-45
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
7. CONTINGENCIES, RISKS, UNCERTAINTIES, AND CONCENTRATIONS, CONTINUED
FINANCIAL RESULTS, LIQUIDITY AND MANAGEMENT'S PLAN, CONTINUED
able to obtain operating capital through private equity funding sources.
Management's plans include the continued development and eventual
implementation of its business plan. The Company has relied upon equity
funding since inception.
No assurances can be given that the Company can obtain sufficient
working capital through the sale of the Company's common stock and
borrowing or that the continued implementation of its business plan will
generate sufficient revenues in the future to sustain ongoing
operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
OPERATING LEASES
The Company has operating leases for certain of its facilities leases,
office equipment and automobiles. Future minimum lease payments are as
follows for the twelve-month period ended June 30:
2006 $182,797
2007 170,227
2008 169,909
2009 167,200
2010 and after 216,014
----------------
TOTAL MINIMUM LEASE PAYMENTS $906,147
================
LITIGATION
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its
business activities. Management believes that any liability that may
ultimately result from the resolution of these matters will not have a
material adverse effect on the financial condition or results of
operations of the Company.
The Company is currently the defendant in three Canadian civil lawsuits,
all of which involve individuals who were former employees of the
Adapsys entities. The basis for all three lawsuits by the former
employees is the amount and timing of payments due them from the Company
resulting from their termination. The Company believes that it has
created an adequate liability to cover the liabilities owed the
plaintiffs (Note 5).
F-46
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
7. CONTINGENCIES, RISKS, UNCERTAINTIES, AND CONCENTRATIONS, CONTINUED
CONCENTRATION OF SUPPLIERS
The Company had no purchases from any vendor that exceeded 10% in the
period from January 1, 2006 to June 30, 2006. The Company has not
experienced any disruption in supply of products as of June 30, 2006.
CONCENTRATION IN SALES TO FEW CUSTOMERS
In the six-month period ended June 30, 2006, the Company's two largest
customers accounted for 27% and 10% of the revenue. These two customers
were to only ones that exceeded 10% of the Company's revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade accounts
receivable. The Company provides business process outsourcing, software
development and information technology consulting services in Canada and
the United States. Exposure to losses on trade accounts receivable is
principally dependent on the individual customer's financial conditions,
as credit sales are not collateralized. The Company monitors its
exposure to credit losses and writes off those accounts receivable that
it deems to be not collectible. The Company had two customers that
combined represented 45% of the Company's accounts receivable at June
30, 2006.
8. EQUITY TRANSACTIONS
COMMON SHARES
In January 2006 the Company issued 500,000 shares of its common stock in
the acquisition of Digica, Inc. The fair value of these shares was
$79,178 and is included in the purchase price of Digica, Inc.
PREFERRED SHARES
The Company has authorized 10 million shares of preferred stock. At June
30, 2006 the Company had established two series of preferred shares,
Series A and Series B. A description of each series follows.
PREFERRED SERIES A STOCK
The Series A preferred stock ranks senior to the preferred Series B
stock and receives an annual 8% in kind dividend payable quarterly. The
Company's Board has not declared the dividends required on this series.
The total number of additional Series A preferred stock required to be
issued as a dividend at December 31, 2005 is 60,000.
Each share of preferred Series A stock is convertible into one share of
common stock and has the same voting rights as one share of common
stock. The Series A preferred stock have a $1.00 per share liquidation
preference. There are 2,200,000 shares of Series A Preferred Stock
authorized.
F-47
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
SERIES B PREFERRED STOCK
Each share of Series B preferred stock is convertible into one share of
the Company's common stock and has the same voting rights as one share
of common stock. The Series B preferred stock is not entitled to
dividends, has a $1.00 per share liquidation preference and is
subordinate to the Series A preferred stock.
F-48
BPO MANAGEMENT SERVICES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS, CONTINUED
PREFERRED SHARES, CONTINUED
The shares of both the Series A preferred stock and the Series B
preferred stock are convertible at the option of the holders, however
both series automatically convert upon sale of the Company or upon
closing of a firmly underwritten offering of shares of the common stock
with aggregate gross cash proceeds of at least $10 million and a public
offering price of $5.00 per share.
COMMON SHARES
The Company has issued 9,925,000 shares of its common stock. Of these
shares, 7,250,000 were issued for cash and 2,675,000 were issued in
acquisitions.
At June 30, 2006, the Company has reserved 6,488,000 shares of its
authorized but unissued common stock for possible future issuance in
connection with the following:
Exercise and future grants of stock options 2,268,000
Conversion of preferred stock 4,220,000
---------------
6,488,000
===============
10. LOSS PER COMMON SHARE
STOCK OPTIONS
During the period from July 26, 2005 (inception) to June 30, 2006, the
board of directors granted options to purchase an aggregate of 2,268,000
shares of the Company's common stock. These options are exercisable at
$.025 per share, vest over four years and expire at various dates in
2010. Of the options granted, 168,000 are currently vested. No options
were exercised, cancelled or forfeited during the six-month period ended
June 30, 2006.
Basic loss per common share for the six-month period ended June 30, 2006
is calculated by dividing net loss by weighted average common shares
outstanding during the period. Diluted loss per common share is computed
by dividing net loss by the weighted average number of common shares and
dilutive potential common shares outstanding during the period.
Net loss $ (1,067,584)
Weighted-average number of common shares
outstanding - Basic and diluted $ 9,222,727
Basic and diluted net loss per share
attributable to common shareholders $ (0.12)
The following securities were not included in the computation of diluted
net loss per share for the six-month period ended June 30, 2006 as their
effect would have been anti-dilutive:
F-49
10. LOSS PER COMMON SHARE, CONTINUED
STOCK OPTIONS, CONTINUED
Securities that could be potentially anti-dilutive to the loss per
share:
Convertible preferred shares 3,500,000
Options to purchase common stock 2,268,000
---------------
DILUTIVE POTENTIAL COMMON SHARES $5,768,000
===============
11. SEGMENT REPORTING
Upon acquisition of the Adapsys entities in July 2005, the Company
manages its operations through two geographical segments; United States
("domestic") and Canada. Each segment provides business process
outsourcing and other computer related services. The Canadian business
segment recognizes most of its revenue from Canadian companies, while
the United States segment services the domestic market.
All functions of the Company are done on a decentralized basis. The
operating segments do not share any facilities or personnel. There are
no inter-segment transactions. All costs of revenue and operating and
general and administrative expenses are captured and reported within
each operating segment. The Company's assets and liabilities are
captured and reported discretely within each operating segment.
Segment results for the six-month period ended June 30, 2006 are as
follows:
United
States Canada Consolidated
-----------------------------------------------
Revenue $1,092,279 $1,797,330 $2,889,609
Operating loss 758,696 273,483 1,032,179
Total assets 1,181,745 1,308,246 2,489,991
Total liabilities 457,046 1,562,323 2,019,369
Cash 190,572 - 190,572
Accounts receivable 224,530 213,640 438,170
Fixed assets 528,236 62,172 590,408
Intangible assets and goodwill 1,032,693 183,472 1,216,165
Reserve for severance obligations - 981,750 981,750
F-50
BPO MANAGEMENT SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This discussion contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 that are based on
current management's expectations. These statements may be identified by their
use of words like "plans," "expect," "aim," "believe," "projects," "anticipate,"
"intend," "estimate," "will," "should," "could" and other expressions that
indicate future events and trends. All statements that address expectations or
projections about the future, including statements about BPOMS' business
strategy, expenditures and financial results, are forward-looking statements.
BPOMS' believes that the expectations reflected in such forward-looking
statements are accurate. However, there is no assurance that those expectations
will be met.
Actual results could differ materially from those in the forward looking
statements due to a number of uncertainties including, but not limited to, those
discussed in this appendix and in the "Risk Factors" section of the accompanying
proxy statement. Factors that could cause future results to differ from these
expectations include general economic conditions, further changes in our
business direction or strategy, competitive factors, and an inability to
attract, develop, or retain technical, consulting, managerial, agents or
independent contractors. As a result, the identification and interpretation of
data and other information and their use in developing and selecting assumptions
from and among reasonable alternatives requires the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and accordingly, no opinion is expressed
on the achievability of those forward-looking statements. No assurance can be
given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and BPOMS' assumes no
obligation to update any such forward-looking statements. Readers should not
unduly rely on these forward-looking statements, which speak only as of the date
of the proxy statement. Except as required by law, BPOMS is not obligated to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances occurring after the date of this proxy statement or to
reflect the occurrence of unanticipated events.
OVERVIEW OF BPOMS
BPOMS provides a broad range of business process outsourcing services to
middle-market enterprises. The services BPOMS provides include human resources
outsourcing, document and data management solutions, and information technology
outsourcing. BPOMS was formed in July 2005. In August 2005, BPOMS acquired
ADAPSYS Transaction Processing, Inc. and ADAPSYS Document Management, Inc. (the
"Adapsys entities"). Since then, BPOMS has continued to expand its service
capabilities through the following additional acquisitions:
o In November 2005, BPOMS acquired the customer list of a small
human resources outsourcing provider;
o In December 2005, BPOMS acquired the customer list of a provider
of data management services;
o In January 2006, BPOMS acquired a provider of information
technology outsourcing; and
F-51
o In September 2006, BPOMS acquired a provider of data and
document management solutions.
In September 2006, BPOMS entered into an agreement to be acquired by
netGuru, Inc. Because BPOMS' stockholders will own the majority of the shares of
netGuru after the merger, this transaction will be accounted for as a "reverse
merger" where BPOMS will be considered to be the financial acquirer, and the
combined company's historical financial statements will be those of BPOMS.
There is little historical financial information about BPOMS upon which
to base an evaluation of BPOMS' performance. BPOMS has only been in operation
since August 2005 and cannot guarantee it will be successful in its core
business or in any business operations. BPOMS' business is subject to risks
inherent in the establishment of a new business enterprise, including limited
capital resources.
BPOMS cannot offer assurance that future financing will be available on
acceptable terms. If such financing is not available, BPOMS may be unable to
continue with its current business plan. If equity financing is available to
BPOMS on acceptable terms, it could result in additional dilution to BPOMS' and
the post-merger combined company's stockholders.
RESULTS OF OPERATIONS FOR THE PERIOD FROM JULY 26, 2006 (INCEPTION) TO DECEMBER
31, 2005 AND THE SIX MONTH PERIOD ENDED JUNE 30, 2006
From inception to December 31, 2005, BPOMS had a loss of $792,227. BPOMS
had a loss of $1,067,584 for the six-month period ended June 30, 2006. BPOMS
believes that a substantial part of the loss in each period relates to the costs
associated with forming its business, developing its business plan and
integrating the operations that it acquired. A description of the elements of
BPOMS' results of operations follows.
Revenue was $2,347,534 for the period from inception to December 31,
2005 and was $2,889,609 for the six-month period ended June 30, 2006. Revenue
included $1,422,331 and $414,566 during the periods in 2005 and 2006,
respectively, from a contract that ended in February 2006. In addition, revenue
in the six-month period ended June 30, 2006 included $869,598 from BPOMS'
subsidiary acquired on January 1, 2006. Therefore, BPOMS' revenue from the core
continuing business it acquired in 2005 increased from $925,203 during 2005 to
$1,605,445 during the six-month period ended June 30, 2006. BPOMS believes that
this increase supports its belief that its business plan and continued
acquisition and integration strategy have merit.
Cost of revenue in 2005 included the write-off of the amount of the
purchase price of the Adapsys entities allocated to the contract that lapsed in
February 2006 of $719,243 compared to $245,265 during the six-month period in
2006. This was offset by cost of revenue of $437,851 of the entity BPOMS
acquired in January 2006.
Salaries and other personnel costs increased during the six-month period
in 2006 compared to the five-month period in 2005 due to the inclusion of a full
six months of expenses of the two operations BPOMS acquired in November and
December of 2005 and the salary costs of the acquisition BPOMS made in January
2006.
The increase in operating expenses in 2006 results primarily from the
acquisition BPOMS made in January 2006. General and administrative expenses
decreased in 2006 as a result of efficiencies BPOMS achieved through its growth
in revenue. BPOMS believes that it expended one-time costs in 2005 of
approximately $350,000 related to the development of its infrastructure required
to support its growth.
F-52
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, BPOMS' total current assets were $650,303 compared
to $1,975,861 at December 31, 2005. This decrease is due to the cash cost of an
acquisition of $689,025 and the cash used in BPOMS' operations of $314,092. At
its formation, BPOMS raised $1.5 million through the sale of shares of its
common stock and preferred stock.
Despite its negative cash flows from operations of $118,529 and $314,092
during the five-month period in 2005 and the six-month period in 2006,
respectively, BPOMS has not raised additional capital since its formation,
except for $540,000 which was made available from the founders' bridge loan
facility in September 2006. BPOMS believes that it will be required to raise
additional capital, either through the sale of additional equity or from debt
financing. BPOMS management's plan includes the continued development and
eventual implementation of BPOMS' business plan.
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
Since inception, BPOMS has funded its operations from the private
placement of shares of its common stock and preferred stock. Although BPOMS
expects that, during the next twelve months, its operating capital needs will be
met by its current economic resources and, if required, by additional private
capital stock and/or debt transactions, there can be no assurance that funds
required will be available on terms acceptable to BPOMS or at all. If BPOMS is
unable to raise sufficient funds on acceptable terms, BPOMS may be unable to
complete its business plan. If equity financing is available to BPOMS on
acceptable terms, it could result in additional dilution to stockholders.
OFF-BALANCE SHEET ARRANGEMENTS
BPOMS had no off balance sheet arrangements at June 30, 2006.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BPOMS is exposed to certain market risks associated with interest rate
fluctuations and credit risk on its cash equivalents and marketable securities,
which investments are entered into for purposes other than trading. The primary
objective of its investment activities is to preserve principal, while at the
same time maximizing yields without significantly increasing risk. BPOMS does
not utilize hedging contracts or similar instruments.
BPOMS' primary exposures relate to (1) interest rate risk on its
investment portfolio, and (2) credit risk of the companies' bonds in which BPOMS
invests. BPOMS manages interest rate risk on its investment portfolio by
matching scheduled investment maturities with its cash requirements. BPOMS'
investments as of June 30, 2006 were primarily in floating rate securities,
short-term government securities and money market accounts. Because of the
ability to redeem these investments at par with short notice, changes in
interest rates would have an immaterial effect on the fair value of these
investments. If a 10% change in interest rates were to have occurred on June 30,
2006, any decline in the fair value of BPOMS' investments would not have been
material.
In addition, BPOMS is exposed to certain market risks associated with
credit ratings of corporations whose corporate bonds BPOMS may purchase from
time to time. If these companies were to experience a significant detrimental
change in their credit ratings, the fair market value of those corporate bonds
may significantly decrease. If these companies were to default on these
corporate bonds, BPOMS may lose part or all of its principal. BPOMS believes
that it effectively manages this market risk by diversifying its investments and
selecting securities that generally have third party insurance coverage in the
event of default by the issuer.
F-53
In addition, BPOMS is exposed to foreign currency exchange rate
fluctuations relating to payments it makes to vendors and suppliers using
foreign currencies. In particular, BPOMS has foreign expenses associated with
its ongoing business in Canada, which provided 63% of BPOMS' revenue during the
six-month period ended June 30, 2006. BPOMS' operations in Canada conduct
business using the Canadian dollar as the functional currency. BPOMS mitigates
this risk by maintaining a limited portion of its cash in Canadian dollars;
however accounts receivable of $224,530 at June 30, 2006 were Canadian dollar
accounts. Although fluctuations in exchange rates have an effect on BPOMS'
operations, such fluctuations have not had a material impact on its financial
condition or results of operations as of or for the six-month period ended June
30, 2006.
F-54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
ADAPSYS L.P. and ADAPSYS Document Management Services, L.P
We have audited the accompanying related combined statements of operations and
cash flows of ADAPSYS L.P. and ADAPSYS Document Management Services L.P. (the
"Adapsys Entities") (the "Company") for the period from January 1, 2005 to July
29, 2005. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, 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 combined financial statements of the Adapsys Entities
referred to above present fairly, in all material respects, the results of its
operations and its cash flows for the period from January 1, 2005 to July 29,
2005 in conformity with accounting principles generally accepted in the United
States of America.
These combined financial statements of the Adapsys Entities are presented
pursuant Rule 10 of Regulation SB concerning recently organized registrants and
the presentation of financial information of the registrant's predecessor entity
for all periods prior to its existence, with no lapse in audited periods. These
combined financial statements of the Adapsys Entities and related notes should
be read in conjunction with the consolidated financial statements and related
notes of BPO Management Services for the period from July 26, 2005 (inception)
through December 31, 2005 as well as the financial statements of Adapsys, L.P.
as of December 31, 2004 and the two year period ended December 31, 2004.
/s/ Kelly & Company
Kelly & Company
Costa Mesa, California
September 26, 2006
F-55
ADAPSYS, L.P.
ADAPSYS DOCUMENT MANAGEMENT SYSTEMS, L.P.
CANADIAN LIMITED PARTNERSHIPS (ONTARIO)
COMBINED STATEMENT OF OPERATIONS
FOR PERIOD FROM JANUARY 1, 2005 TO JULY 29, 2005
- --------------------------------------------------------------------------------
Service revenue $3,110,900
Cost of services provided (319,649)
-----------------
Gross profit on services provided 2,791,251
-----------------
Operating expenses:
Salaries and other personnel costs 1,488,107
Operations expenses 113,298
General and administrative 416,637
-----------------
Total operating expenses 2,018,042
-----------------
Operating income 773,209
Loss on currency translation (6,585)
Interest expense, net (854)
-----------------
NET INCOME $765,770
=================
The accompanying notes are in integral part of the financial statements.
F-56
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
COMBINED STATEMENT OF CASH FLOWS
FOR PERIOD FROM JANUARY 1, 2005 TO JULY 29, 2005
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $765,770
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 10,703
Allowance for doubtful accounts (11,738)
Loss on currency translation 6,585
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade 73,048
Other assets (424)
Increase (decrease) in:
Accounts payable - trade and accrued expenses (218,229)
Deferred revenue 100,436
------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 726,151
------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from sale of equipment 11,711
Partner withdrawals (983,836)
Sale of investment (61,147)
------------------
NET CASH USED IN INVESTING ACTIVITIES (1,033,272)
------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Increase in note payable 79,496
------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 79,496
------------------
NET DECREASE IN CASH (227,625)
CASH - BEGINNING OF PERIOD 801,772
------------------
CASH - END OF PERIOD $574,147
==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid - partner loans $854
Income taxes paid -
The accompanying notes are in integral part of the financial statements.
F-57
ADAPSYS, L.P.
ADAPSYS DOCUMENT MANAGEMENT SYSTEMS, L.P.
CANADIAN LIMITED PARTNERSHIPS (ONTARIO)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2005 TO JULY 29, 2005
- --------------------------------------------------------------------------------
1. BUSINESS PURPOSE AND STRUCTURE
ADAPSYS L.P. is a limited partnership formed on June 29, 1988 under the
laws of Ontario under the Limited Partnership Act (Ontario). ADAPSYS
L.P. is involved in providing business clients data processing, computer
software and hardware sales and consulting. The general partner is
SkyTrack Systems Inc., a Canadian Controlled Private Corporation.
Effective February 1, 2005, the Partnership sold its document management
division to ADAPSYS Document Management L.P., ("ADM L.P,") ( a newly
formed sister entity). The purchase price was $25,000 in cash and shares
in the newly formed entity's general partner with a fair value of at
$75,000. Adapsys, L.P. and Adapsys Document Management Systems, L.P.
(the Adapsys Entities) were sold to BPO Management Services on July 29,
2005.
The combined statements of operations and cash flows for ADAPSYS L.P.
and ADAPSYS Document Management LP (the "Company") for the period from
January 1, 2005 through July 29, 2005 are presented pursuant to Rule 10
of Regulation SB concerning recently organized registrants and the
presentation of financial information of the registrant's predecessor
entity for all periods prior to its existence, with no lapse in audited
periods. These combined financial statements and related notes should be
read in conjunction with the consolidated financial statements and
related notes of BPO Management Services for the period from July 26,
2005 (inception) through December 31, 2005 as well as the financial
statements of Adapsys, L.P. as of December 31, 2004 and the two year
period ended December 31, 2004.
2. SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
The preparation of financial statement and related disclosures in
conformity with accounting principles generally accepted in the United
States of America ("GAAP") requires the management of the Company to
make judgments, assumptions, and estimates that affect the amounts
reported in the combined financial statements and accompanying notes.
This note includes the significant accounting policies and methods used
in the preparation of the financial statement. The Company's management
considers the accounting policies described below to be its critical
accounting policies. These critical accounting policies are impacted
significantly by judgments, assumptions, and estimates used in the
preparation of the financial statement and actual results could differ
materially from the amounts reported based on these policies.
F-58
ADAPSYS, L.P.
ADAPSYS DOCUMENT MANAGEMENT SYSTEMS, L.P.
CANADIAN LIMITED PARTNERSHIPS (ONTARIO)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2005 TO JULY 29, 2005
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION
The Company recognizes revenue on service contracts ratably over
applicable contract periods or as services are performed. Amounts billed
before the services are performed are included in deferred revenues.
Revenue on all consulting and other services is recognized upon the
successful completion of the services provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. Management considers the following factors when determining
the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional
allowances would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain
outstanding after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
accounts receivable.
EQUIPMENT
Equipment is recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and
repairs are charged to expense as incurred. When equipment is retired or
otherwise disposed of, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is
provided over the estimated useful lives of the related assets using the
straight-line method for financial statement purposes:
Equipment: Estimated Useful Lives
-----------------------
Computer equipment 3 - 5 years
Computer software 2 years
Furniture and fixtures 5 - 10 years
Tapes and disks 5 years
Leasehold improvements The shorter of 5 years or the term of the lease
F-59
ADAPSYS, L.P.
ADAPSYS DOCUMENT MANAGEMENT SYSTEMS, L.P.
CANADIAN LIMITED PARTNERSHIPS (ONTARIO)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2005 TO JULY 29, 2005
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company consists of two Canadian limited partnerships and as such
are not subject to Canadian or provincial income taxes. Accordingly,
there has been no provision made for income taxes in these financial
statement.
USE OF ESTIMATES
The preparation of the consolidated financial statement in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statement and the reported
amounts of revenues and expenses during the reporting periods. These
estimates include revenue recognition, the determination of useful lives
for tangible assets, and the collectibility of accounts
receivable-trade, among others. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the financial
statement in the period they are determined to be necessary. Actual
results could differ from those estimates. necessary they are reported
in earnings in the periods in which they become known.
3. DEPRECIATION EXPENSE
Depreciation of equipment and fixtures for the period from January 1,
2005 to July 29, 2005 amounted to $10,703.
4. RELATED PARTY TRANSACTIONS
The Company has contracted with the general partner of ADAPSYS L.P.,
SkyTrack Systems, Inc., to obtain management and professional services
required for the operation of the business. Management and professional
services fees paid to SkyTrack Systems, Inc. were $60,919 for the period
from January 1, 2005 to July 29, 2005.
Legal fees were paid to a law firm where one of the shareholders of
SkyTrack Systems Inc. is a partner. These legal fees were $138,842 for
the period from January 1, 2005 to July 29, 2005.
The above transactions were conducted in the normal course of operations
and were for amounts established and agreed to by the related parties.
F-60
ADAPSYS, L.P.
ADAPSYS DOCUMENT MANAGEMENT SYSTEMS, L.P.
CANADIAN LIMITED PARTNERSHIPS (ONTARIO)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2005 TO JULY 29, 2005
- --------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES
FOREIGN CURRENCY RISK
The Partnership enters into transactions denominated in United States
currency for which the related revenues, expenses, accounts receivable
and accounts payable balances are subject to exchange rate fluctuations.
6. ECONOMIC DEPENDENCE AND SUBSEQUENT EVENTS
The Company operates under an exclusive contract with International Air
Transportation Association ("IATA") to provide certain services to the
travel industry. Under the terms of the current contract, as amended,
IATA may give twelve months written notice of termination at any time.
On January 31, 2005, IATA gave the Company twelve months written notice
that the Data Process Services contract between IATA and ADAPSYS L.P.
would terminate in February 2006.
F-61
7. SUMMARY COMBINED FINANCIAL STATEMENT
COMBINED STATEMENTS OF OPERATIONS
The following schedule reflects the combining of statements of
operations of ADAPSYS, L.P ("ADP") and Adapsys Document Management
Systems L.P. ("ADM") for the period from January 1, 2005 to July 29,
2005.
ADM ADP Combined
-------------------------------------------------
Service revenue $694,953 $2,415,947 $3,110,900
Cost of services provided (283,605) (36,044) (319,649)
-------------------------------------------------
Gross profit on services provided 411,348 2,379,903 2,791,251
-------------------------------------------------
Operating expenses:
Salaries and other personnel costs 380,702 1,107,405 1,488,107
Operations expenses 5,668 107,630 113,298
General and administrative 27,114 389,523 416,637
-------------------------------------------------
Total operating expenses 413,484 1,604,558 2,018,042
-------------------------------------------------
Operating income (loss) (2,136) 775,345 773,209
-------------------------------------------------
Other expense:
Interest expense, net (856) 2 (854)
Gain (loss) on currency translation 26 (6,611) (6,585)
-------------------------------------------------
Total other expense (830) (6,609) (7,439)
-------------------------------------------------
NET INCOME (LOSS) $(2,966) $768,736 $765,770
=================================================
F-62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the President
SkyTrack Systems, Inc.
General Partner
Adapsys. L.P.
We have audited the accompanying balance sheet as of December 31, 2004, and the
related statements of operations, partners' capital, and cash flows for the two
years ended December 31, 2004. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Adapsys, L.P. as of December
31, 2004, and the results of its operations and its cash flows for the two years
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 8 - CONCENTRATION IN REVENUE FROM ONE CUSTOMER to the
financial statements, Adapsys, L.P. recognized sixty-nine and sixty-eight
percent of its revenue from one customer for the years ended December 31, 2004
and 2003, respectively. This client's contract lapsed in February 2006 and was
not renewed. If the Company is unable to replace the lost revenue from this
client it could have an adverse effect on the Company. As discussed in Note 1 to
the financial statements, Adapsys, L.P. was acquired by BPO Management Services
in August 2005 and now operates as its wholly owned subsidiary.
/s/ Kelly & Company
Kelly & Company
Costa Mesa, California
September 1, 2006
F-63
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
- ---------------------------------------------------------------------------------------------------
ASSETS
2004 2003
-------------------------------------
Current assets:
Cash $801,772 $623,943
Investments 615 -
Accounts receivable - trade, net of allowance for
doubtful accounts of $44,411 and $332,662 as of
December 31, 2004 and 2003, respectively 530,210 789,096
Prepaid expenses - 3,035
-------------------------------------
Total current assets 1,332,597 1,416,074
Plant and equipment, net 84,448 137,784
-------------------------------------
TOTAL ASSETS $1,417,045 $1,553,858
=====================================
The accompanying notes are an integral part of the financial statements.
F-64
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
2004 2003
------------------------------------
Current liabilities:
Accounts payable - trade $194,809 $50,200
Payroll related payables and accrued expenses 432,126 375,828
Sale taxes payable - various - -
Deferred revenues 36,372 26,047
------------------------------------
Total current liabilities 663,307 452,075
Long-term liabilities:
Notes payable - related parties - 348,210
------------------------------------
TOTAL LIABILITIES 663,307 800,285
------------------------------------
Commitments and contingencies
Partners' capital:
General partner's capital 133,055 units issued, and
133,055 units outstanding at December 31, 2004
and 2003. 278,506 60,170
Limited partners' capital, 216,945 units issued, and
216,945 units outstanding at December 31, 2004 and 2003. 475,067 119,122
Partners' distributions (976,589) (134,093)
Income 976,754 708,374
------------------------------------
TOTAL PARTNERS' CAPITAL 753,738 753,573
------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $1,417,045 $1,553,858
====================================
The accompanying notes are an integral part of the financial statements.
F-65
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
STATEMENTS OF OPERATIONS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------
For the Year Ended December 31,
-------------------------------------------
2004 2003
-------------------------------------------
Service revenue $5,175,905 $5,084,388
Cost of services provided (956,639) (938,811)
-------------------------------------------
Gross profit on services provided 4,219,266 4,145,577
-------------------------------------------
Operating expenses:
Salaries and other personnel costs 2,431,087 2,607,929
Operations expenses 211,710 265,826
General and administrative 649,312 637,310
-------------------------------------------
Total operating expenses 3,292,109 3,511,065
-------------------------------------------
Operating income 927,157 634,512
-------------------------------------------
Other expense:
Interest expense, net (1,770) (7,236)
Gain on sale of assets - -
Gain on currency conversion 51,367 81,098
-------------------------------------------
Total other expense 49,597 73,862
-------------------------------------------
NET INCOME $976,754 $708,374
===========================================
Net income allocable to the general partner $371,320 $269,293
===========================================
Net income allocable to the limited partners $2.790726 $2.023926
===========================================
Weighted average number of general partnership
units 133,055 133,055
===========================================
Net income allocable to the limited partners $605,434 $439,081
===========================================
Net income per limited partnership unit
allocable to the limited partners $2.790726 $2.023926
===========================================
Weighted average number of limited partnership
units 216,945 216,945
===========================================
The accompanying notes are an integral part of the financial statements.
F-66
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
STATEMENTS OF PARTNER'S CAPITAL
FOR EACH OF THE YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------------
General Partner Limited Partner Total
------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2002 133,055 $95,040 216,945 $188,157 350,000 $283,197
Distributions - (51,009) - (83,170) - (134,179)
Undistributed profits
from 1988 - 2001 - 58 - 28 - 86
Currency translation - - - - - -
Net income - 269,293 - 439,081 - 708,374
------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2003 133,055 278,512 216,945 475,061 350,000 753,573
Distributions - (371,257) - (605,332) - (976,589)
Net income - 371,320 - 605,434 - 976,754
------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2004 $133,055 $278,575 216,945 $475,163 350,000 $753,738
==============================================================================
The accompanying notes are an integral part of the financial statements.
F-67
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- -------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
------------------------------------------
2004 2003
------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $976,754 $708,374
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 91,622 137,698
Increase in allowance for doubtful accounts 11,749 -
Gain on currency translation (51,367) (81,098)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade 268,809 (299,238)
Other assets 3,035 (1,942)
Increase (decrease) in:
Accounts payable - trade and accrued
expenses 210,143 26,032
Accrued compensation 10,325 9,402
------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES 1,521,070 499,228
------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sale of equipment - 1,649
Purchase of equipment - third parties (20,176) (36,388)
Shares - Ace Aviation (615) -
------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES
------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Change in Partners' Capital - partner withdrawals (976,589) (134,093)
Payments on note payable (345,861) -
------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,322,450) (134,093)
------------------------------------------
NET INCREASE IN CASH 177,829 330,396
CASH - BEGINNING OF PERIOD 623,943 293,547
------------------------------------------
CASH - END OF PERIOD $801,772 $623,943
==========================================
The accompanying notes are an integral part of the financial statements.
F-68
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Year Ended December 31,
------------------------------------------
2004 2003
------------------------------------------
Interest paid - third party - -
Interest paid - partner loans $11,413 $15,075
Income taxes paid - -
The accompanying notes are an integral part of the financial statements.
F-69
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
1. BUSINESS PURPOSE AND STRUCTURE
ADAPSYS L.P. (formerly called ADP Systems Partnership) is a limited
partnership formed on June 29, 1988 under the laws of Ontario by filing
and recording of a declaration under the Limited Partnership Act
(Ontario), and is also registered under the laws of the Province of
Manitoba.
ADAPSYS L.P. carries on the business of data processing, computer
software and hardware sales and consulting. The general partner is
SkyTrack Systems Inc., a Canadian Controlled Private Corporation.
Effective February 1, 2005, the Partnership sold its document management
division to ADAPSYS Document Management L.P., ("ADM L.P,") for proceeds
of $100,000. Consideration received was $25,000 in cash for equipment
and 125,000 Class A preference shares, 125,000 Class B preference shares
and 200,000 common shares, in ADAPSYS Information Management Inc. valued
at $75,000. These shares were then redeemed by ADAPSYS Information
Management Inc. for $75,000.
On July 1, 2005, all but one of the partnership units of ADAPSYS L.P.
were transferred to Adapsys Transaction Processing Inc. by the limited
partners in exchange for shares in Adapsys Transaction Processing Inc.
The shares of Adapsys Transaction Processing Inc. were then sold to BPO
Management Services Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United
States requires the Company's management to make judgments, assumptions,
and estimates that affect the amounts reported in the financial
statements and accompanying notes. This note includes the significant
accounting policies and methods used in the preparation of the financial
statements. The Company's management considers the accounting policies
described below to be its critical accounting policies. These critical
accounting policies are impacted significantly by judgments,
assumptions, and estimates used in the preparation of the financial
statements and actual results could differ materially from the amounts
reported based on these policies.
F-70
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION
The Company recognizes revenue on service contracts ratably over
applicable contract periods or as services are performed. Amounts billed
before the services are performed are included in deferred revenues.
Revenue on all consulting and other services is recognized upon the
successful completion of the services provided.
CASH EQUIVALENTS
The Company considers deposits that can be redeemed on demand and
investments that have original maturities of less than three months,
when purchased, to be cash equivalents.
ACCOUNTS RECEIVABLE - TRADE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are stated at the amount the Company expects
to collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional
allowances would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain
outstanding after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
accounts receivable. Accounts receivable are presented net of an
allowance for doubtful accounts of $44,411 at December 31, 2004.
INVESTMENT
The Company's investment is an equity security is classified as
"available-for-sale" and is reported at fair value. The unrealized gains
or losses on this equity security are included in accumulated other
comprehensive income (loss) as a separate component of partners equity
unless the decline in value is deemed to be other-than-temporary, in
which case it would be written down to the fair value and the loss
charged to income. The Company evaluates its equity security for
other-than-temporary declines based on quantitative and qualitative
factors.
F-71
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EQUIPMENT AND FIXTURES
Equipment and fixtures are recorded at cost. Expenditures for major
additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred. When
equipment and fixtures are retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful
lives of the related assets using the straight-line method for financial
statement purposes:
Estimated Useful
Lives
--------------------
Computer equipment 3 - 5 years
Computer software 2 years
Furniture and fixtures 5 - 10 years
Tapes and disks 5 years
Leasehold improvements The shorter of 5 years or the term of the lease
ADVERTISING
Advertising and sales promotion costs are expensed as incurred.
Advertising expense totaled $7,725 as of December 31, 2004.
INCOME TAXES
The Partnership is not a taxpaying entity for federal or state income
tax purposes; accordingly, a provision for income taxes has not been
recorded in the accompanying financial statements. Partnership income or
losses are reflected in the partners' individual or corporate income tax
returns in accordance with their ownership percentages.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. These
estimates include revenue recognition, the determination of useful lives
for tangible assets, the collectibility of accounts receivable-trade,
and the determination of the fair value of financial instruments, among
others. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the
F-72
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES, CONTINUED
financial statements in the period they are determined to be necessary.
Actual results could differ from those estimates and they are reported
in earnings in the periods in which they become known.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are cash and cash equivalents,
accounts receivable-trade, accounts payable-trade, and notes
payable-related parties. The recorded values of cash and cash
equivalents, accounts receivable, and accounts payable approximate their
fair values based on their short-term nature. The recorded values of
notes payable - related party approximate their fair values.
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
2004 2003
-------------------------------
Computer equipment $1,059,345 $1,055,721
Software 305,918 307,364
Furniture and fixtures 395,424 368,295
Tapes and disks 100,956 94,029
Leasehold improvement 29,898 27,846
-------------------------------
1,891,541 1,853,255
Accumulated depreciation (1,807,093) (1,715,471)
-------------------------------
TOTAL EQUIPMENT AND FIXTURES $84,448 $137,784
===============================
Depreciation of equipment for the years ended December 31, 2004 and 2003
amounted to $91,622 and $137,698, respectively.
F-73
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
4. INVESTMENT
During the year ended December 31, 2004, the Company received 37 shares
of Ace Aviation Holdings Inc. common stock (Ace shares) as an initial
distribution in respect to its unsecured claims relating to the
reorganization of Air Canada. The Ace shares are classified as
"available-for-sale" and are reported at fair value. Management has
determined that the Ace shares are available to support current
operations and, accordingly, has classified them as a current asset. The
estimated fair value of the Ace shares at December 31, 2004 was $1,310
with an unrealized holding gain of $570 for the year then ended.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2004
---------------
Goods and services tax payable $23,363
Trade payables and accrued liabilities 341,877
Accrued payroll and benefits 261,694
---------------
$626,934
===============
6. LOANS FROM PARTNERS
Loans from Partners were repaid during 2004. At December 31, 2003 there
were loans from partners in the amount of $348,210.
7. PARTNERS' CAPITAL
The balance of partnership accounts at the end of the year is the
aggregate of the net cash originally invested by the partners plus the
income earned by the partnership and reduced by all cash distributions
made to the partners. Income is allocated to the partners and cash is
distributed according to the Limited Partnership Agreement dated July 1,
1988. The Limited Partnership Agreement provides for retaining a portion
of income if deemed to be needed for working capital or capital
acquisitions, and payment of interest on related amounts.
The Partnership has 350,000 partnership units issued and authorized. At
December 31, 2004 and 2003, the Partnership had 350,000 partnership
units outstanding.
The net income per Limited Partnership unit was calculated by dividing
the allocable total limited partner net income by the weighted average
number of Limited Partnership units issued and outstanding during the
period. The General Partner does not own any Limited Partnership units.
F-74
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
8. COMMITMENTS
CASH DEMAND DEPOSITS IN EXCESS OF CANADIAN INSURED LIMITS
The Company maintains its cash in Canadian bank demand deposit accounts
that, at times, exceed Canadian insured limits. Accounts are guaranteed
by the Canadian Deposit Insurance Corporation ("CDIC") up to $100,000
CDN. At December 31, 2004, the Company had $865,061 CDN ($718,693 USD)
in excess respectively, of CDIC insurable limits. The Company has not
experienced any losses in such accounts.
BANK LINES OF CREDIT
The Company has an operating line of credit with The Bank of Nova Scotia
with a maximum borrowable amount of $300,000 CDN, collateralized by the
Company's accounts receivable (with a net carrying value of $530,210 at
December 31, 2004) and repayable on demand. The line of credit had
previously matured on November 30, 2002 and was renewed. Outstanding
borrowings, when they occur, will accrue interest at the bank's prime
interest rate plus 1%. There were no outstanding balances at December
31, 2004 and 2003, respectively.
The Company also has a revolving term leasing line of credit with the
Bank of Nova Scotia to assist with the acquisition of computer equipment
with a maximum leased equipment purchase value of $100,000 CDN,
collateralized by the leased computer equipment. The line of credit had
previously matured on November 30, 2002 and was renewed. The lease
financing will accrue interest at the bank's prime interest rate plus
2%. There were no outstanding balances under this leasing line of credit
at December 31, 2004 and 2003, respectively. OPERATING LEASES
OPERATING LEASES
The Company has operating leases for one piece of office equipment. As
of December 31, 2004, all facilities rent are due on a month to month
basis, with no future commitment. Future minimum annual lease payments
are as follows at December 31:
2005 $1,524
2006 $0
2007 $0
Rental expense was $260,088 and $262,371 for the years ended December
31, 2004 and 2003, respectively.
F-75
ADAPSYS, L.P.
A CANADIAN LIMITED PARTNERSHIP (ONTARIO)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
8. COMMITMENTS, CONTINUED
CONCENTRATION IN SALES TO ONE CUSTOMER
As of December 31, 2004 and 2003 respectively, the company's largest
customer accounted for 69% and 68% of revenue. This customer was the
only one that exceeded 10% of the company's revenue.
CONCENTRATION OF CREDIT RISK
As at December 31, 2004, two customers accounted for 55% of the accounts
receivable. The Partnership believes that there is no unusual exposure
associated with the collection of these receivables. The balance of
accounts receivable is widely distributed among the remainder of the
Partnership's large customer base. The Partnership performs regular
credit assessments of its customers and provides allowances for
potentially uncollectible accounts receivable.
FOREIGN CURRENCY RISK
The Partnership enters into transactions denominated in United States
currency for which the related revenues, expenses, accounts receivable
and accounts payable balances are subject to exchange rate fluctuations.
9. RELATED PARTY TRANSACTIONS
The partnership has contracted with the general partner, SkyTrack
Systems Inc., to obtain management and professional services required
for the operation of the business. Management and professional services
fees paid to SkyTrack Systems Inc. were $71,636 and $68,035 for the
years ended December 31, 2004 and 2003, respectively.
Legal fees were paid to a law firm where one of the shareholders of the
general partner SkyTrack Systems Inc. is a partner. These legal fees
were $19,205 and $73,068 in the years ended December 31, 2004 and 2003,
respectively.
The above transactions were conducted in the normal course of operations
and were measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties.
F-76
10. ECONOMIC DEPENDENCE AND SUBSEQUENT EVENTS
The BSP Operations operates under an exclusive contract with
International Air Transportation Association ("IATA") to provide certain
services to the travel industry. Under the terms of the current
contract, as amended, IATA may give twelve months written notice of
termination at any time.
On January 31, 2005 IATA gave ADAPSYS L.P. 12 months' written notice
that the Data Process Services contract between IATA and ADAPSYS L.P.
would terminate at the end of the settlement cycle for January, 2006,
being February 9, 2006.
F-77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Digica, Inc.
We have audited the accompanying balance sheet as of June 30, 2005, and the
related statements of operations, stockholders' deficit, and cash flows for the
year ended June 30, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digica, Inc. as of June 30,
2005, and the results of its operations and its cash flows for year ended June
30, 2005 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a loss $52,846 during the year ended June 30, 2005, and, as
of that date, had a working capital deficiency of $103,484 and a stockholders'
deficit of $92,169. The Company's business plan for the year ended June 30,
2006, which is described in Note 9 to the financial statements, contemplates
increasing its revenue and reducing costs. The Company's ability to achieve the
foregoing elements of its business plan, which may be necessary to permit the
realization of assets and satisfaction of liabilities in the ordinary course of
business, is uncertain. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 9 - CONCENTRATION IN REVENUE to the financial statements,
Digica, Inc. recognized thirty-nine percent of its revenue from or as a result
of one client in the year ended June 30, 2005. A loss of this client could have
an adverse effect on the Company. As discussed in Note 11 to the financial
statements, Digica, Inc. was acquired by BPO Management Services in January 2006
and now operates as a wholly owned subsidiary.
/s/ Kelly & Company
Kelly & Company
Costa Mesa, California
September 1, 2006
F-78
DIGICA, INC.
BALANCE SHEET
JUNE 30, 2005
- -------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $103,450
Accounts receivable - trade 86,049
Advances - related parties 19,983
Prepaid expenses 5,858
----------------
Total current assets 215,340
Equipment, net of accumulated depreciation of $19,863 61,411
----------------
Total assets 276,751
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable-trade $172,578
Accrued liability 6,000
Current portion of long term debt 5,403
Current portion of capital leases 3,778
Deferred income 131,065
----------------
Total current liabilities 318,824
Long term debt, less current portion 11,466
Capital leases, less current portion 5,514
Payable to prior parent 33,115
----------------
TOTAL LIABILITIES 368,919
----------------
Commitments and contingencies
Stockholders' deficit:
Common stock, no stated value, 100 shares authorized;
100 shares issued and outstanding at June 30, 2005 1
Accumulated deficit (92,169)
----------------
TOTAL STOCKHOLDERS' DEFICIT (92,168)
================
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $276,751
================
The accompanying notes and independent accountants' report
should be read with these financial statements.
F-79
DIGICA, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2005
- -------------------------------------------------------------------------------------------
June 30, 2005
-------------------
Revenue $1,924,157
Cost of revenue 1,099,997
-------------------
Gross profit 824,160
Selling, general and administrative 234,245
Compensation costs 362,414
Occupancy costs 273,849
-------------------
Loss from operations (46,348)
Interest expense (6,498)
-------------------
NET LOSS $(52,846)
===================
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $(528.46)
===================
WEIGHTED NUMBER OF COMMON SHARES OUTSTANDING 100
===================
The accompanying notes and independent accountants' report
should be read with these financial statements.
F-80
DIGICA, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------------------
Common Stock Accumulated
Shares Amount Deficit Total
--------------------------------------------------------------
BALANCE AT JUNE 30, 2004 100 $ 1 $ (39,323) $ (39,322)
Net loss - - (52,846) (52,846)
--------------------------------------------------------------
BALANCE AT JUNE 30, 2005 100 $ 1 $ (92,169) $ (92,168)
==============================================================
The accompanying notes and independent accountants' report
should be read with these financial statements.
F-81
DIGICA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
For the
Year Ended
June 30, 2005
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (52,846)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation 14,392
Decrease (increase) in assets:
Accounts receivable - trade 220,539
Other receivables 1,116
Officer loans (7,261)
Prepaid license 22,268
Prepaid expenses and other assets 15,019
Decrease in liabilities:
Accounts payable - trade (44,329)
Deferred income (36,838)
-----------------
CASH PROVIDED BY OPERATING ACTIVITIES 132,060
-----------------
CASH FLOW USED IN INVESTING ACTIVITIES:
Purchase of equipment (10,634)
-----------------
CASH USED IN INVESTING ACTIVITIES (10,634)
-----------------
CASH FLOW USED IN FINANCING ACTIVITIES:
Payment on capital leases and long term debt (19,316)
-----------------
CASH USED IN FINANCING ACTIVITIES (19,316)
-----------------
102,110
NET INCREASE IN CASH
CASH, BEGINNING OF YEAR 1,340
-----------------
CASH, END OF YEAR $ 103,450
=================
The accompanying notes and independent accountants' report
should be read with these financial statements.
F-82
DIGICA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the
Year Ended
June 30, 2005
-----------------
Cash paid during the fiscal year for;
Interest paid $ 6,498
Income taxes paid -
NON-CASH INVESTING AND FINANCING ACTIVITIES
For the
Year Ended
June 30, 2005
-----------------
Equipment acquired on capital leases:
Equipment acquired $ 9,292
Capitalized leases ($9,292)
The accompanying notes and independent accountants' report
should be read with these financial statements.
F-83
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Digica, Inc. ("the Company") is a New York corporation that operates as
a corporation doing business in New Jersey. The Company provides
information technology outsourcing services to a variety of middle
market companies. The Company operates it business from a data center
located in Branchburg, New Jersey. Its services include full service
data processing, data storage and information support. The Company was
acquired from a foreign parent by its current shareholders in February
2002. The Company's current shareholders sold all of the outstanding
shares of the Company to BPO Management Services in January 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue only when all of the following criteria
have been met:
o Persuasive evidence of an arrangement exists
o Delivery has occurred or services have been rendered;
o The fee for the arrangement is fixed or determinable; and
o Collectibility is reasonably assured.
PERSUASIVE EVIDENCE OF AN ARRANGEMENT
The Company documents all terms of an arrangement in a written contract
signed by the customer prior to recognizing revenue.
DELIVERY HAS OCCURRED OR SERVICES HAVE BEEN PERFORMED
The Company performs all services or delivers all products prior to
recognizing revenue. Monthly services are considered to be performed
ratably over the term of the arrangement. Professional consulting
services are considered to be performed when the services are complete.
Equipment is considered delivered upon delivery to a customer's
designated location.
THE FEE FOR THE ARRANGEMENT IS FIXED OR DETERMINABLE
Prior to recognizing revenue, a customer's fee is either fixed or
determinable under the terms of the written contract. Fees for most
monthly services, professional consulting services, and equipment sales
are fixed under the terms of the written contract. Fees for certain
services are variable based on an objectively determinable factor such
as usage. Those factors are included in the written contract such that
the customer's fee is determinable. The customer's fee is negotiated at
the outset of the arrangement.
F-84
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION, CONTINUED
COLLECTIBILITY IS REASONABLY ASSURED
The Company determines that collectibility is reasonably assured prior
to recognizing revenue. Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by management. New
customers are subject to a credit review process, which evaluates the
customer's financial position and ultimately its ability to pay. The
Company does not enter into arrangements unless collectibility is
reasonably assured at the outset. Existing customers are subject to
ongoing credit evaluations based on payment history and other factors.
If it is determined during the arrangement that collectibility is not
reasonably assured, revenue will be recognized on a cash basis.
USE OF ESTIMATES
Preparing the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial statements include some amounts that are based on
management's best estimates and judgments. The most significant
estimates are the allowance for uncollectible accounts receivable, the
estimation of fixed asset useful lives, and the determination of the
valuation reserves on the United States income tax assets. These
estimates may be adjusted as more current information becomes available,
and any adjustment could be significant.
PUSH DOWN ACCOUNTING
The current shareholders of the Company acquired all of the outstanding
common shares from its former parent company in February 2002 for one
British pound. The Company allocated that purchase price to the assets
and liabilities of the Company at the date of acquisition. The sum of
the amounts assigned to assets acquired and liabilities assumed exceeded
the cost of the acquired entity ("excess"). As required by Statement on
Financial Accounting Standards ("SFAS") No. 144 that excess was
allocated as a pro rata reduction of the amounts that otherwise would
have been assigned to certain of the acquired assets based on their fair
value. Accordingly, the amount assigned to equipment that was acquired
was reduced to zero.
F-85
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CASH
The Company considers deposits that can be redeemed on demand and
investments that have original maturities of less than three months,
when purchased, to be cash equivalents. As of June 30, 2005, the
Company's cash was deposited in one financial institution.
At June 30, 2005, the Company had $ $8,812 on deposit that exceeded
United States (FDIC) federally insurance limit of $100,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires management to disclose the estimated fair value of certain
assets and liabilities defined by SFAS No. 107 as financial instruments.
Financial instruments are generally defined by SFAS No. 107 as cash and
cash equivalents, evidence of ownership interest in equity, or a
contractual obligation that both conveys to one entity a right to
receive cash or other financial instruments from another entity and
imposes on the other entity the obligation to deliver cash or other
financial instruments to the first entity.
At June 30, 2005, the Company's financial instruments are cash, accounts
receivable - trade, accounts payable - trade, notes payable, and
long-term debt. The recorded values of cash, accounts receivable -
trade, and accounts payable - trade and accrued liabilities approximate
their fair values based on their short-term nature. The recorded values
of capital leases and note payable approximate their fair values, as
interest approximates market rates.
ACCOUNTS RECEIVABLE - TRADE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are stated at the amount the Company expects
to collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional
allowances would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain
outstanding after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
accounts receivable. The Company had no allowance for doubtful accounts
at June 30, 2005.
F-86
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EQUIPMENT
Equipment is recorded at cost. Expenditures for major additions and
improvements are capitalized, and minor replacements, maintenance, and
repairs are charged to expense as incurred. When equipment is retired or
otherwise disposed of, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is
provided over the estimated useful lives of the related assets using the
straight-line method for financial statement purposes. The Company uses
other depreciation methods (generally accelerated) for tax purposes
where appropriate. The estimated useful lives for significant property
and equipment categories are as follows:
Computer equipment 5 years
Vehicles 5 years
The Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash
flows expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets. The factors considered
by management in performing this assessment include current operating
results, trends and prospects, the manner in which the property is used,
and the effects of obsolescence, demand, competition, and other economic
factors. Based on this assessment there was no impairment at June 30,
2005.
DEFERRED INCOME -AMOUNTS BILLED IN ADVANCE
The Company recognizes revenues as earned. Amounts billed in advance of
the period in which service is rendered are recorded as a liability
under "Deferred income."
INCOME TAX
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. Deferred tax assets, including tax loss and credit
carryforwards, 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.
Deferred income tax
F-87
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
expense represents the change during the period in the deferred tax
assets and deferred tax liabilities. The components of the deferred tax
assets and liabilities are individually classified as current and
non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax
assets will not be realized.
CONTINGENCIES
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The
Company's management and its legal counsel assess such contingent
liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may
result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well
as the perceived merits of the amount of relief sought or expected to be
sought therein.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the
Company's financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably
possible, or is probable but cannot be estimated, then the nature of the
contingent liability, together with an estimate of the range of possible
loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the guarantees would be
disclosed.
LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss
applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. The Company had no common
stock equivalents outstanding during the year ended June 30, 2005.
SALES TAXES
The Company reports sales taxes as part of revenue and cost (the gross
method) which for the year ended June 30, 2006 amounted to $365.
F-88
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
ADVERTISING
Advertising and sales promotion costs are expensed as incurred. The
Company had no advertising expense for the year ended June 30. 2005.
SHIPPING AND HANDLING COSTS
The Company's shipping and handling costs are included in cost of sales
for the year ended June 30, 2005.
3. RELATED PARTIES - ADVANCES
The amounts due from two officers, who are sole shareholders, are
without interest and collateral and were settled in sale of the Company
in January 2006 (Note 13)
4. EQUIPMENT
The following is a summary of equipment, at cost less accumulated
depreciation, at June 30, 2005:
Computer equipment $ 52,110
Vehicle 29,164
---------------------
Total equipment 81,274
Less: accumulated depreciation 19,863
---------------------
EQUIPMENT, NET $ 61,411
=====================
Depreciation expense for the year ended June 30, 2005 amounted to
$14,392.
5. NOTE PAYABLE
A note payable to Chrysler Financial incurs
interest at an annual percentage rate of
13.99%, has monthly principal and interest
payments of $619, and is collateralized by a
vehicle, with any unpaid balance due in March
2008. The unpaid balance at of June 30, 2005
is: $ 16,869
Less: amount due within one year 5,403
---------------------
$ 11,466
NOTE PAYABLE, DUE AFTER ONE YEAR
=====================
Future maturities of long term debt are as follows at June 30:
2006 $ 5,403
2007 6,216
2008 5,250
2009 -
2010 and thereafter -
F-89
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
The Company incurred interest costs of $6,492 in the year ended June 30,
2005 including the amount representing interest on capital lease
obligations, all of which was charged to operations.
6. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under agreements that are
classified as capital leases. The cost of equipment under capital leases
is included in the balance sheet as equipment and was $11,883 at June
30, 2005. Accumulated amortization of the leased equipment at June 30,
2005 was $1,666. Amortization of assets under capital leases is included
in depreciation expense.
The future minimum lease payments required under the capital leases and
the present value of the net minimum lease payments as of June 30, 2005,
are as follows:
Year ending June 30:
2006 $ 4,778
2007 4,778
2008 1,291
--------------------
Total minimum lease payments 10,847
Less: amount representing interest (1,555)
--------------------
Present value of net minimum lease payments 9,292
Less: current maturities of capital lease obligations (3,778)
--------------------
LONG-TERM CAPITAL LEASE OBLIGATIONS $ 5,514
====================
7. DEFERRED INCOME
Revenue under agreements for future services is deferred and recognized
over the term of the agreements (typically less than one year) on a
straight-line basis. At June30, 2005 deferred income totaled $131,065,
which is recognizable within one year and is included as a current
liability on the accompanying balance sheet. Deferred income includes
$106,753 from the Company's former parent. As of September 1, 2006, all
of the deferred income that was present at June 30, 2005 has been
recognized.
F-90
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
8. INCOME TAXES
There is no current or deferred income tax provision due to the
Company's losses.
For the year ended June 30, 2005 the Company incurred a net operating
loss and, accordingly, no provision for income taxes has been recorded.
In addition, no benefit for income taxes has been recorded due to the
uncertainty of the realization of any tax assets. At June 30, 2005, the
Company had approximately $240,542 of federal net operating losses. The
net operating loss carryforwards, if not utilized, will begin to expire
in 2018 for federal purposes.
The components of the Company's deferred tax assets are as follows:
Deferred tax assets (liabilities):
Additional tax basis in fixed assets $ 66,181
Net operating loss carryforwards 81,784
---------------------
Total deferred tax assets 147,965
Less: valuation allowance (147,965)
---------------------
NET DEFERRED TAX ASSETS -
=====================
For financial reporting purposes, the Company has incurred a loss in
each period since its change in control in February 2003. Based on the
available objective evidence, including the Company's recent history of
losses, and the net operating loss limitations relating to the changes
in ownership control in February 2003 and again in January 2006,
management believes it is more likely than not that the net deferred tax
assets will not be fully realizable. Accordingly, the Company provided
for a full valuation allowance against its net deferred tax assets at
June 30, 2005.
The Tax Reform Act of 1986 limits the use of net operating loss in the
case of an "ownership change" of a corporation. An "ownership change"
has occurred due to the sales of all of the Company's shares in February
2003 and again in January 2006. An ownership change, as defined by the
tax code, may severely restrict utilization of the Company's loss
carryforwards to the point that they may never be utilized.
Reconciliation of the effective tax rate to the U.S. statutory rate is
as follows:
Tax expense at U.S. statutory rate (34.0)%
Change in valuation allowance 34.0%
---------------------
Effective income tax rate -%
=====================
F-91
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- -------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
FINANCIAL RESULTS, LIQUIDITY AND MANAGEMENT'S PLAN
As shown in the accompanying financial statements, the Company has
incurred recurring losses from operations, and as of June 30, 2005, the
Company's current liabilities exceeded its current assets by $103,484
and its total liabilities exceeded its total assets by $92,168. These
factors raise substantial doubt about the Company's ability to continue
as a going concern. Management has instituted a cost reduction program
and worked to increase revenue and the gross margin on new business and
in the rewriting of annual contracts with existing clients. Management
believes these factors will contribute toward achieving profitability.
The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going
concern.
OPERATING LEASES
The Company has an operating lease for its facilities. Future minimum
lease payments are as follows at June 30:
2006 $ 114,044
2007 117,458
2008 120,998
2009 124,641
2010 and after 344,374
-------------------
TOTAL MINIMUM LEASE PAYMENTS $ 821,515
===================
For the year ended June 30, 2005, rental expense was $157,435.
CONCENTRATION OF VENDORS
The Company made approximately 24% of its purchases from one vendor in
the year ended June 30, 2005. If the Company were unable to obtain
services from the current vendor, the Company believes that the impact
on its financial statements from such an uncertainty would be minimal.
The Company has not experienced any such disruption in the provision of
services from the vendor as of June 30, 2005.
CONCENTRATION IN REVENUE
In the year ended June 30, 2005, the Company's four largest customers
accounted for 26%, 14%, 13% and 11% of revenue.
The Company has a subcontract arrangement with its former parent to
provide certain services to the former parent's customers. This
agreement expires June 30, 2008. During the year ended June 30, 2005 the
Company realized revenue of $503,822 (26% of total revenue) under this
subcontract arrangement. In addition, the Company realized revenue of
$263,261 (13% of total revenue) from providing services directly to its
former parent as a customer.
F-92
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES, CONTINUED
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade accounts
receivable. The Company provides business process and information
technology outsourcing services in Canada and the United States.
Exposure to losses on trade accounts receivable is principally dependent
on the individual customer's financial conditions, as credit sales are
not collateralized. The Company monitors its
9. COMMITMENTS AND CONTINGENCIES, CONTINUED
CONCENTRATION OF CREDIT RISK, CONTINUED
exposure to credit losses and writes off those accounts receivable that
it deems to be not collectible. The Company had three customers that
accounted for 27%, 26%, and 18% of the accounts receivable that combined
represented 71% of the Company's accounts receivable as of June 30,
2005.
CLAIMS AND LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings that
arise in the ordinary course of its business activities. Management
believes that any liability that may ultimately result from the
resolution of these matters will not have a material adverse effect on
the financial condition or results of operations of the Company.
10. LOSS PER SHARE
Basic and diluted net loss per share are computed using the
weighted-average number of common shares outstanding. There is no
dilutive effect of potential common shares as there are none that were
outstanding during the year. The computations of basic and diluted net
loss per share for the year ended June 30, 2005 is as follows
Net loss from continuing operations $ 52,846
------------------
Basic and diluted weighted-average shares 100
------------------
Net loss per share from continuing operations:
Basic $ 528.46
==================
Diluted $ 528.46
==================
F-93
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
11. 401(K) SAVINGS PLAN
The Company maintains a 401-K savings plan for all full-time employees.
Employees are eligible to participate in the Company sponsored plan if
they have been employed for one year after their employment hire date.
Generally, employees can defer up to a maximum of $15,000 of their gross
salary in the plan annually. The Company's mandatory employer matching
contribution is equal to 100% of the employee contribution to a maximum
of 4% of the employee's gross wages. The Company's contributions for the
year ended June 30, 2005 amounted to $11,325 and are included in
"Compensation costs".
12. SOFTWARE LICENSE
In 2003, the Company acquired software license pertaining to technology
incorporated into certain of the Company's service products. The Company
paid $100,000 for the license upon entering into the agreement. The
Company determined that the technological life of the product that it
licensed was three years. The license provided for the use of up to a
maximum of 4,636 licensed users. The Company determined that it was
appropriate to allocate the license acquisition costs over the total
licenses it used during the three year period ended June 30, 2005. The
total licenses used during the three year period was 1,392, and the
total acquisition cost was charged to expense pro rata. The Company
expensed $22,268 during the year ended June 30, 2005.
13. SUBSEQUENT EVENT
In January 2006, the Company was acquired by BPO Management Services
("BPOMS") through a stock purchase agreement. Under the terms of the
stock purchase agreement, BPOMS paid the Company's shareholders $400,000
in cash and issued 500,000 shares of BPOMS common stock, in exchange for
all outstanding shares of the Company.
F-94
DIGICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND
FOR THE YEAR ENDED JUNE 30, 2005
- --------------------------------------------------------------------------------
13. SUBSEQUENT EVENT, CONTINUED
The following table summarizes the fair values of the Company's assets
acquired and liabilities assumed at the date of acquisition. The
purchase price allocation herein is based on BPOMS management's
preliminary assessment of the fair value of both the assets acquired and
liabilities assumed.
Current assets $ 210,213
Property, plant, and equipment 420,369
Other noncurrent assets 53,098
Identifiable intangible assets 218,206
-------------------
Total assets acquired $ 901,886
-------------------
Current liabilities $ 377,660
Other noncurrent liabilities 36,559
Long-term debt 8,470
-------------------
TOTAL LIABILITIES ASSUMED $ 422,689
-------------------
NET ASSETS ACQUIRED $ 479,197
===================
Acquired identifiable intangible assets in the amount of $217,453 were
assigned to customer relationships, with an estimated useful life of 6
years with no residual value.
F-95
FROSTIAK & LESLIE
CHARTERED ACCOUNTANTS INC.
Larry H. Frostiak, FCA, CFP, TEP
Kenneth T. Leslie, CA
Myles L. Pouteau, CA, TEP, CAFA
- --------------------------------------------------------------------------------
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF NOVUS IMAGING SOLUTIONS INC. :
We have audited the balance sheet of Novus Imaging Solutions Inc. as at
September 30, 2005 and the statements of income and retained earnings and cash
flows for the year then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at September 30, 2005 and the
results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
Winnipeg, Manitoba /s/ Frostiak & Leslie
August 3, 2006 Chartered Accountants Inc.
200 - 1700 Corydon Avenue, Winnipeg, Manitoba, Canada R3N OK1
Tel: 204-487-4449 Fax: 204-488-8658
www.cafinancialgroup.com
F-96
NOVUS IMAGING SOLUTIONS INC.
BALANCE SHEET
As at September 30, 2005, with comparative figures for 2004
======================================================================================================================
2005 2004
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 483,860 $ 141,778
Accounts receivable 149,768 182,297
Inventory (Note 2) 51,999 79,049
Prepaid expenses 6,275 15,832
------------ ------------
691,902 418,956
Capital assets (Note 3) 185,611 206,530
Intangibles (Note 4) 13,571 15,862
Future income taxes - 300
- ----------------------------------------------------------------------------------------------------------------------
$ 891,084 $ 641,648
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 34,040 $ 30,269
Loans and notes payable (Note 5) 110,271 153,675
Management fees payable 363,000 226,000
------------ ------------
507,311 409,944
Shareholder loans (Note 6) 378,567 226,559
------------ ------------
885,878 636,503
Share capital (Note 7) 100 100
Retained earnings 5,106 5,045
------------ ------------
5,206 5,145
Lease commitments (Note 9)
Related party transactions (Note 10)
Significant events (Note 11)
- ----------------------------------------------------------------------------------------------------------------------
$ 891,084 $ 641,648
======================================================================================================================
See accompanying notes to financial statements.
Approve on behalf of the Board:
/s/ illegible Director
- --------------------------------
Director
- --------------------------------
F-97
NOVUS IMAGING SOLUTIONS INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
Year ended September 30, 2005, with comparative figures for 2004
======================================================================================================================
2005 2004
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Sales and other revenue $ 1,422,732 $ 1,301,419
Cost of sales 668,855 657,837
------------ ------------
Gross profit 753,877 643,582
Operating expenses (Schedule 1) 294,368 330,659
------------ ------------
Income from operations 459,509 312,923
Other items
Management fees (457,000) (310,000)
Gain on disposal of assets - 2,500
Gain (loss) on foreign exchange (2,148) 2,385
------------ ------------
(459,148) (305,115)
------------ ------------
Income before income taxes 361 7,808
Provision for income taxes
Current income taxes - -
Future income taxes 300 1,100
------------ ------------
Net income for the year 61 6,708
Retained earnings (deficit), beginning of year 5,045 (1,663)
- ----------------------------------------------------------------------------------------------------------------------
Retained earnings, end of year $ 5,106 $ 5,045
======================================================================================================================
See accompanying notes to financial statements.
F-98
NOVUS IMAGING SOLUTIONS INC.
STATEMENT OF CASH FLOWS
Year ended September 30, 2005, with comparative figures for 2004
======================================================================================================================
2005 2004
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Operating activities
Net income for the year $ 61 $ 6,708
Items not involving a current outlay of cash
Amortization 51,012 53,222
Future income taxes 300 1,100
------------ ------------
51,373 61,030
Net change in non-cash working capital balances
Accounts receivable 32,529 (56,229)
Inventory 27,050 (19,441)
Prepaid expenses 9,557 4,233
Accounts payable 3,770 1,719
Loans and notes payable (43,404) 27,905
Management fees payable 137,000 140,000
------------ ------------
217,875 159,217
------------ ------------
Investing activities
Purchases of capital assets (27,801) (47,695)
------------ ------------
Financing activities
Repayments of long term debt - (5,749)
Advances (to) from shareholders 152,008 (70,876)
------------ ------------
152,008 (76,625)
------------ ------------
Increase in cash 342,082 34,897
Cash, beginning of year 141,778 106,881
- ----------------------------------------------------------------------------------------------------------------------
Cash, end of year (Note 8) $ 483,860 $ 141,778
======================================================================================================================
See accompanying notes to financial statements.
F-99
NOVUS IMAGING SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and reflect the following
policies:
a) Accounting estimates and assumptions
The preparation of financial statements in accordance with
Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses
during the reported period. These estimates are reviewed
periodically, and, as adjustments become necessary, they are
reported in earnings in the period in which they become known.
b) Credit risk management
The company is exposed to credit risk on the accounts receivable
from its customers. In order to reduce its credit risk, the
company reviews a new customer's credit history before extending
credit and conducts regular reviews of its existing customers'
credit performance. An allowance for doubtful accounts is
established based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The
company does not have a significant exposure to any individual
customer or counter party.
c) Inventory
Inventory is valued at the lower of cost and net realizable
value. An inventory write-down of $21,000 is included in cost of
sales for the September 30, 2005 fiscal period.
d) Amortization
Capital assets are stated at cost less accumulated amortization.
Capital assets are amortized using the following rates:
Computer hardware 30 % declining balance
Computer hardware (purchased
after March 22, 2004) 45 % declining balance
Furniture and fixtures 20 % declining balance
Production equipment 20 % declining balance
Goodwill 10 years straight line
Leasehold improvements are amortized on a straight line basis
over the 27 month term remaining on the lease assigned to the
corporation on September 29, 2000.
F-100
NOVUS IMAGING SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
- --------------------------------------------------------------------------------
e) Revenue recognition
Revenue recognition policy is the deferral method of accounting
wherein revenue contributions are matched to expenses in the
period in which the expenses are incurred. Revenue received in
advance of incurring expenses are deferred.
f) Future income taxes
Future income taxes have been recorded to reflect the cumulative
available capital cost allowance on capital assets in excess of
amounts available for financial statement purposes. The future
tax asset on this timing difference has been recorded at current
corporate income tax rates.
2. INVENTORY
2004
2005 (unaudited)
------------ ------------
Raw materials $ 26,779 $ 32,073
Finished goods 25,220 46,976
------------ ------------
$ 51,999 $ 79,049
============ ============
3. CAPITAL ASSETS
2004
2005 (unaudited)
------------------------------ ------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------------ -------------- ------------ --------------
Computer hardware $ 109,805 $ 77,741 $ 106,042 $ 64,403
Furniture and fixtures 66,702 44,845 66,702 39,381
Machinery and equipment 331,195 199,505 307,157 169,587
Leasehold improvements 54,748 54,748 54,748 54,748
------------ -------------- ------------ --------------
$ 562,450 $ 376,839 $ 534,649 $ 328,119
============ ============== ============ ==============
Net book value $ 185,611 $ 206,530
=========== ===========
F-101
NOVUS IMAGING SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
- --------------------------------------------------------------------------------
4. INTANGIBLES
2004
2005 (unaudited)
------------------------------ ------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------------ -------------- ------------ --------------
Goodwill $ 22,917 $ 11,458 $ 22,917 $ 9,167
Incorporation costs 2,112 - 2,112 -
------------ -------------- ------------ --------------
$ 25,029 $ (11,458) $ 25,029 $ (9,167)
============ ============== ============ ==============
Net book value $ 13,571 $ 15,862
=========== ===========
5. LOANS AND NOTES PAYABLE
2004
2005 (unaudited)
------------ ------------
$199,920 RBC Government guaranteed loan, being repaid
at $2,380 per month plus interest at RBC
prime plus 1.25 percent $ 57,120 $ 85,680
$74,168 RBC demand operating loan, being repaid at
$1,237 per month plus interest, payable at
RBC prime plus 1.50 percent 53,151 67,995
------------ ------------
$ 110,271 $ 153,675
============ ============
All loans are repayable on demand. The indebtedness is secured by a
chattel mortgage, general security agreement, guarantee and postponement
of claim in the amount of $200,000 and proceeds of life insurance in the
amount of $330,000 on the principal of the company.
6. SHAREHOLDER LOANS
The amounts due to the shareholders are non-interest bearing, with no
specific terms of repayment.
2004
2005 (unaudited)
------------ ------------
Ashley Ryan Inc. $ 378,567 $ 215,567
Toni Baker - 10,992
------------ ------------
$ 378,567 $ 226,559
============ ============
F-102
NOVUS IMAGING SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
- --------------------------------------------------------------------------------
7. SHARE CAPITAL
The company's authorized share capital consists of an unlimited number
of the following classes of shares:
Class A common voting shares
Class B common non-voting shares
Class A preference voting shares
Class B preference non-voting shares
Class C preference voting shares
Issued and outstanding:
2004
2005 (unaudited)
------------ ------------
100 Class A common voting shares $ 100 $ 100
8. STATEMENT OF CASH FLOWS
The statement of cash flows includes the following:
Interest paid of $12,002 in 2005 ($12,113 in 2004)
Interest on long-term debt of NIL in 2005 ($248 in 2004)
9. LEASE COMMITMENTS
The company has a lease for the rental of premises. The company
negotiated the lease for a term of 5 years commencing January 1, 2003
and expiring December 31, 2007. The minimum monthly lease payment is
$6,361.53 per month.
The minimum annual lease payments for each of the next two years are as
follows:
2006 $ 76,338
2007 19,085
-------------
Total minimum lease payments $ 95,423
=============
10. RELATED PARTY TRANSACTIONS
During the current fiscal year, the corporation paid management fees of
$94,000 to Ashley Ryan Inc., a corporation related by virtue of common
ownership.
11. SIGNIFICANT EVENTS
The corporation is currently in the process of a potential share sale,
which will result in a change in control.
F-103
NOVUS IMAGING SOLUTIONS INC.
OPERATING EXPENSES
================================================================================
SCHEDULE 1
Years ended September 30, 2005, with comparative figures for 2004
- --------------------------------------------------------------------------------
2004
2005 (unaudited)
- --------------------------------------------------------------------------------
Advertising $ 1,502 $ 3,957
Amortization 51,012 53,222
Business and property taxes 5,274 5,190
Donations 630 2,500
Insurance 3,839 3,671
Interest and bank charges 12,002 12,113
Interest on long-term debt - 248
Meals and entertainment 333 711
Office and miscellaneous 13,923 10,952
Professional fees 4,079 5,262
Rent 89,989 89,467
Repairs and maintenance 19,861 13,108
Salaries and employee benefits 48,620 83,325
Supplies 4,726 7,164
Telephone and telecommunications 8,468 8,887
Travel 7,600 8,012
Utilities 22,510 22,870
- --------------------------------------------------------------------------------
$ 294,368 $ 330,659
================================================================================
F-104
APPENDIX G
PREFERRED STOCK DESCRIPTION
The following are the proposed terms of the three series of preferred
stock to be created by netGuru, Inc. in connection with the merger transaction.
The proposed terms are subject to appropriate adjustments to take into account
the reverse stock split and other capitalization changes that may occur prior to
the closing of the merger transaction and are also subject to any changes that
may be required by applicable Nasdaq rules.
ARTICLE I SERIES A PREFERRED STOCK
The designated powers, preferences and relative participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof, of the Series A Preferred Stock are as follows.
(1) DESIGNATION AND AMOUNT. The shares of such series shall be
designated "Series A Preferred Stock" (the "SERIES A PREFERRED STOCK") and the
number of shares constituting such series shall be Two Million Two Hundred
Twenty Thousand (2,220,000).
(2) DIVIDENDS. The holders of Series A Preferred Stock shall be
entitled to receive an eight percent (8%) per annum paid in kind dividend in
accordance with the following terms:
(a) Unless the context otherwise requires, the terms defined
in this subsection (2) of Article I herein shall have, for all purposes of
Article I, the meanings herein specified (with terms defined in the singular
having comparable meanings when used in the plural).
"ANNUAL PER SHARE PIK DIVIDEND AMOUNT" shall mean a fraction of
one share of Series A Preferred Stock equal to eight percent (8%) per annum of
one share of the Series A Preferred Stock.
"BUSINESS DAY" shall mean a day other than a Saturday, a Sunday
or any other day on which banking institutions in Los Angeles, California are
authorized or obligated by law to close.
"HOLDER" shall mean the record holder of one or more shares of
Series A Preferred Stock, as shown on the books and records of the Corporation.
"PIK DIVIDENDS" shall mean the paid-in-kind dividends as set
forth in subparagraph 2(b) below.
"PIK DIVIDEND PAYMENT DATE" shall mean March 31, June 30,
September 30, and December 31, of each year during the PIK Dividend Payment
Period.
"PIK DIVIDEND PAYMENT PERIOD" shall mean the period from, and
after, the Series A Initial Issue Date, to and including the date that the
Series A Preferred Stock is converted to Common Stock or otherwise redeemed.
"PIK DIVIDEND PERIOD" shall mean the period from, and after, the
Series A Initial Issue Date, to, but not including, the first PIK Dividend
Payment Date and thereafter, each quarterly period, including any PIK Dividend
Payment Date to, but not including, the next PIK Dividend Payment Date.
"PIK RECORD DATE" shall mean the date that is five Business Days
prior to any PIK Dividend Payment Date.
"SERIES A INITIAL ISSUE DATE" shall mean the date that shares of
Series A Preferred Stock are first issued by the Corporation.
G-1
(b) The record holders of Series A Preferred Stock on each
PIK Record Date shall receive on each PIK Dividend Payment Date during the PIK
Dividend Payment Period per share dividends in additional fully paid and
nonassessable shares of Series A Preferred Stock legally available for such
purpose (such dividends being herein called "PIK DIVIDENDS"). PIK Dividends
shall be paid by delivering to the record holders of Series A Preferred Stock a
number of shares of Series A Preferred Stock equal to (i) the number of shares
of Series A Preferred Stock held by such holder on the applicable PIK Record
Date, multiplied by (ii) twenty-five percent (25%) of the Annual Per Share PIK
Dividend Amount. The Corporation shall issue fractional shares of Series A
Preferred Stock to which holders may become entitled pursuant to this
subparagraph 2(b).
(c) Prior to each PIK Record Date immediately preceding each
PIK Dividend Payment Date, the Board of Directors of the Corporation shall
declare PIK Dividends on the Series A Preferred Stock in accordance with
subparagraph 2(b) above, payable on the next PIK Dividend Payment Date. PIK
Dividends on shares of Series A Preferred Stock shall accrue and be cumulative
from the later of (i) the Series A Initial Issue Date and (ii) the date of
issuance of such shares, notwithstanding the failure of the Board of Directors
to declare and/or issue PIK Dividends with respect to any PIK Dividend Period.
PIK Dividends shall be cumulative and payable in arrears during the PIK Dividend
Payment Period on each PIK Dividend Payment Date, commencing on the first PIK
Dividend Payment Date subsequent to the Series A Initial Issue Date, and for
shares issued as PIK Dividends, commencing on the first PIK Dividend Payment
Date after such shares are issued. If any PIK Dividend Payment Date occurs on a
day that is not a Business Day, any accrued PIK Dividends otherwise payable on
such PIK Dividend Payment Date shall be paid on the next succeeding Business
Day. PIK Dividends shall be paid on each PIK Dividend Payment Date to the
holders of record of the Series A Preferred Stock as their names shall appear on
the share register of the Corporation on the PIK Record Date immediately
preceding such PIK Dividend Payment Date. PIK Dividends on account of arrears
for any past PIK Dividend Periods may be declared and paid at any time to the
holders of record on the PIK Record Dates applicable to such past PIK Dividend
Periods.
(d) Notwithstanding anything contained herein to the
contrary, no dividends on shares of Series A Preferred Stock shall be declared
by the Board of Directors of the Corporation or paid or set apart for payment by
the Corporation at such time if such declaration or payment shall be restricted
or prohibited by law.
(e) It is intended that the Series A Preferred Stock not
constitute "preferred stock" within the meaning of Section 305 of the Internal
Revenue Code of 1986, as amended, and the Treasury Regulations promulgated
thereunder, and neither the Corporation nor the Holders shall treat the Series A
Preferred Stock as such. Accordingly, payment of any and all PIK Dividends to be
made hereunder or under any other transaction document by the Corporation to or
for the benefit of any Holder is intended to be made free and clear of, and
without deduction for, U.S. federal income and withholding taxes ("U.S. TAXES").
If the Corporation shall be required by law to deduct any such U.S. Taxes from
or in respect of any PIK Dividends to be paid hereunder by the Corporation to or
for the benefit of any Holder, then (a) the Holder shall pay to the Corporation
the amount of such U.S. Taxes not to exceed ten percent (10%) of the fair market
value of such PIK Dividend on the date such PIK Dividend is distributed in
accordance with this Article I (the "FAIR MARKET VALUE"), and (b) upon payment
by the applicable Holder the Corporation shall pay to or for the benefit of the
applicable Holder, in addition to such PIK Dividend, an additional amount (the
"TAX GROSS-UP AMOUNT"), in cash, as necessary so that after making all required
deductions on account of U.S. Taxes (including deductions applicable to
additional sums required to be paid or deposited under this subparagraph 2(e))
the amount received by such Holder (disregarding the payment made by such Holder
to the Corporation pursuant to this sentence) shall be equal to the sum that
would have been so received had no such deductions been made. If a Holder is
required to pay any U.S. Taxes (other than U.S. Taxes determined on a net income
basis) with respect to any PIK Dividends (as a result of the Corporation's
failure to withhold such U.S. Taxes or otherwise) in excess of ten percent (10%)
of the Fair Market Value of such PIK Dividends, the Corporation shall indemnify
and hold harmless such Holder from any such U.S. Taxes in an amount equal to the
Tax Gross-Up Amount, and if the Corporation is required to pay any such U.S.
Taxes with respect to any PIK Dividends, the Holder shall indemnify and hold
harmless the Corporation from any such U.S. Taxes in an amount up to ten percent
(10%) of the Fair Market Value of such PIK Dividends.
G-2
(f) The amount to be paid by the Corporation under Section
2(e) above shall be reduced by the amount of any credit, against any other tax
due in any other jurisdiction, available to the Holder or its affiliates by
reason of the payment of U.S. Taxes pursuant to Section 2(e) above. In no event
shall the Corporation be liable for any U.S. Taxes required to be deducted from
or in respect of any PIK Dividends by reason of any change in applicable law
after the Series A Initial Issue Date (which shall be the responsibility of the
Holder). Each Holder shall, if requested in writing by the Corporation, promptly
provide the Corporation with a properly completed Form W-8 BEN or Form W-8 IMY
(or successor forms), as applicable, including, if applicable, the eligibility
of such Holder for a reduced rate of withholding pursuant to an applicable
treaty.
(3) VOTING RIGHTS.
The holder of each share of Series A Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which each such share of Series A Preferred Stock could be converted on the
record date set for the vote or written consent of shareholders and, except as
otherwise required by law or this Article I, shall have voting rights and powers
equal to the voting rights and powers of the Common Stock (voting together with
the Common Stock as a single class). The holder of each share of Series A
Preferred Stock shall be entitled to notice of any shareholders' meeting in
accordance with the bylaws of the Corporation and shall vote with holders of the
Common Stock upon any matter submitted to a vote of shareholders, except those
matters required by law or by this Designation of Rights to be submitted to a
class vote. Fractional votes shall not, however, be permitted, and any
fractional voting rights resulting from the above formula (after aggregating all
shares of Common Stock into which shares of Series A Preferred Stock held by
each holder could be converted) shall be rounded to the nearest whole number
(with one-half rounded upward to one). Each holder of Common Stock shall be
entitled to one (1) vote for each share of Common Stock held.
In addition to any other rights provided by law, the Corporation
shall not, without first obtaining the approval (by vote or written consent) of
the holders of not less than a majority of the total number of outstanding
shares of the Series A Preferred Stock voting as a single class, cause any
Liquidation Event as defined below. Each of the following shall be deemed a
"LIQUIDATION EVENT" for purposes of the preceding sentence: (a) the sale, lease
or other transfer of all or substantially all of the assets of the Corporation;
(b) the merger or consolidation of the Corporation into or with any other
corporation resulting in the transfer of more than 50 percent of the voting
power of the Corporation; and (c) the acquisition in any manner or form,
including through the issuance of debt and/or stock and/or payment of cash, of
all or substantially all of the assets or business or capital stock or ownership
interest of another entity or business.
The Series A Preferred Stock holders, voting together as a
single class, shall be entitled to elect two (2) two members of the Board of
Directors of the Corporation at each meeting or pursuant to each consent of the
Corporation's shareholders for the election of directors.
G-3
(4) LIQUIDATION, DISSOLUTION OR WINDING UP.
4.1 For purposes hereof, the "SERIES A ORIGINAL PURCHASE
PRICE" is $1.00 per share of Series A Preferred Stock. In the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, then after the payment in full of the Series C Liquidation
Preference to the holders of the Series C Preferred Stock and the distribution
of the assets or surplus of the funds of the Corporation with respect thereto,
pursuant to Article III herein, the holders of Series A Preferred Stock then
outstanding shall be entitled to receive, and prior to and in preference of any
distribution of any of the assets or surplus of the funds of the Corporation to
the holders of the Common Stock or any junior or other preferred stock
subsequently designated (other than Series C Preferred Stock), including,
without limitation, the Series B Preferred Stock as provided for in Article II,
by reason of their ownership thereof, an amount equal to the Series A Original
Purchase Price per share (as adjusted for stock splits, stock dividends,
recapitalizations and the like) plus an amount equal to all accrued and unpaid
dividends thereon. if any, without interest, and no more (all of the preceding
collectively, the "SERIES A LIQUIDATION PREFERENCE"). If the assets of the
Corporation available for distribution to the holders of Series A Preferred
Stock shall be insufficient to permit such payment in full to the holders of
Series A Preferred Stock, then the entire assets or remaining assets of the
Corporation available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock based on the number of shares held by
each holder of Series A Preferred Stock.
4.2 After the payment of all preferential amounts required
to be paid to the holders of the Series C Preferred Stock then issued and
outstanding upon the dissolution, liquidation or winding up of the Corporation,
and then after the payment of all preferential amounts required to be paid to
the holders of the Series A Preferred Stock then issued and outstanding upon the
dissolution, liquidation or winding up of the Corporation, and then after the
payment of all preferential amounts required to be paid to the holders of any
junior series of Preferred Stock then issued and outstanding upon the
dissolution, liquidation or winding up of the Corporation, any remaining assets
and funds of the Corporation available for distribution to the Corporation's
stockholders shall be distributed ratably among the holders of the Common Stock.
4.3 For purposes of this Article I, a "liquidation,
dissolution or winding-up" means: any liquidation, dissolution or winding-up,
either voluntary or involuntary, of the Corporation, (ii) a merger or
consolidation of the Corporation with or into any other corporation or
corporations as a result of which the stockholders of this Corporation
immediately prior to the consummation of the merger or consolidation hold less
than 50% of the voting securities of the surviving entity, or (iii) the sale,
transfer or lease of all or substantially all of the assets of the Corporation.
(5) NO REDEMPTION RIGHTS. The Series A Preferred Stock shall not be
subject to redemption, whether at the option of either the Corporation or any
holder of the Series A Preferred Stock.
(6) CONVERSION RIGHTS.
6.1 OPTIONAL CONVERSION. Each share of Series A Preferred
Stock will be convertible, at the option of the holder thereof at the office of
the Corporation or any transfer agent for the Series A Preferred Stock, into one
share of Common Stock.
6.2 AUTOMATIC CONVERSION OF SERIES A PREFERRED STOCK. Each
share of Series A Preferred Stock will be converted automatically into such
number of shares of Common Stock as equals the number of shares issuable upon
optional conversion, under Section 6.1 of this Article I above, immediately
prior to the closing of a firmly underwritten public offering pursuant to a
registration statement (other than a registration statement relating either to
the sale of securities to employees of the Corporation pursuant to a stock
option, stock purchase or similar plan or a transaction pursuant to Rule 145
under the Securities Act of 1933 ("SECURITIES Act")) under the Securities Act
covering the Corporation's Common Stock, which results in aggregate gross cash
proceeds (prior to underwriters' commissions and expenses) to the Corporation of
at least $10,000,000 and which has a public offering price of not less than
$5.00 per share (as appropriately adjusted for stock splits, combinations,
reclassifications and the like).
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6.3 MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon the conversion of the Series A Preferred Stock, and
any fractional shares of Common Stock shall be rounded up to the next whole
number. Before any holder of Series A Preferred Stock will be entitled to
convert the same into shares of Common Stock, he or she will surrender the
certificate or certificates therefor duly endorsed, at the office of the
Corporation or of any transfer agent for the Series A Preferred Stock and he or
she will give written notice to the Corporation stating the name or names in
which he or she wishes the certificate or certificates for shares of Common
Stock to be issued. The Corporation, as soon as practicable thereafter, will
issue and deliver at such office to such holder or to his or her nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which he or she will be entitled as aforesaid. Such conversion will be deemed
to have been made immediately prior to the close of business on the date of
notice of conversion provided by the holder to the Corporation, and the person
or persons entitled to receive the shares of Common Stock issuable upon
conversion will be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
6.4 ADJUSTMENT FOR SUBDIVISIONS OR COMBINATIONS OF COMMON
STOCK. In the event the Corporation at any time or from time to time alters the
effective date of the initial sale of the Series A Preferred Stock, effects a
subdivision or combination of its outstanding Common Stock into a greater or
lesser number of shares without a proportionate and corresponding subdivision or
combination of its outstanding shares of the Series A Preferred Stock, then the
number of shares into which each share of Series A Preferred Stock is
convertible will be decreased or increased proportionately.
(7) NO IMPAIRMENT. The Corporation, whether by amendment of this
Article I or through any reorganization, transfer of assets, merger,
dissolution, issue or sale of securities or any other voluntary action, will not
avoid or seek to avoid the observance or performance of any terms to be observed
or performed under this Article I by the Corporation, but all times in good
faith will assist in the carrying out all actions necessary or appropriate to
protect the conversion rights of the holders of Series A Preferred Stock against
impairment.
(8) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders or any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation will mail to each
holder of Series A Preferred Stock at least five (5) days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or rights, and the
amount and character of such dividend, distribution or right.
(9) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
at all times will reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series A Preferred Stock such number of its shares of Common Stock as
from time to time would be required to effect the conversion of all then
outstanding shares of Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all then outstanding shares of Series A Preferred Stock, in
addition to such other remedies as may be available to the holders of Series A
Preferred Stock for such failure, the Corporation will take such corporate
action as, in the opinion of its counsel, may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as will
be sufficient for such purpose.
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(10) NOTICES. Any notices required by the provisions of this Article
I to be given to the holders of shares or Series A Preferred Stock shall be
given in writing and shall be conclusively deemed effectively given to persons
located in the United States five (5) days after deposit in the United States
mail, by registered or certified mail postage prepaid, or upon actual receipt if
given by any other method or to persons located outside of the United States,
addressed to such holder at his address appearing on the books of the
Corporation.
(11) RECAPITALIZATIONS. If at any time, or from time to time, there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Article I), provision shall be made so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of such
shares of such Series A Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock issued upon conversion of such Series A Preferred Stock would have
been entitled on such recapitalization. In any such case, appropriate
adjustments shall be made in the application of the provisions of this Article I
with respect to the rights of the holders of the Series A Preferred Stock after
the recapitalization to the end that the provisions of this Article I shall be
applicable after that event in as nearly an equivalent manner as may be
practicable.
(12) RANKING. Except for Series C Preferred Stock which shall rank
senior to all Preferred Stock with respect to the payment of dividends and the
distribution of assets, the Series A Preferred Stock shall rank senior to all
other series of the Corporation's Preferred Stock as to the payment of dividends
and the distribution of assets. Further, so long as any shares of Series A
Preferred Stock are outstanding, no new class or series of stock shall hereafter
be created or authorized which is entitled to dividends or shares in
distribution of assets on a parity with or in priority to the Series A Preferred
Stock, nor shall there be created or authorized any securities convertible into
shares of any such stock, unless the holders of record of not less than
two-thirds of the number of shares of the Series A Preferred Stock then
outstanding (as a single class separate from the holders of all other classes of
stock) shall vote therefore in person or by proxy at the meeting of stockholders
at which the creation or authorization of such new class of stock or such
convertible securities is considered.
(13) AMENDMENT. This Article I shall not be further amended in any
manner which would materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series A Preferred Stock, voting separately as a class.
(14) FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to receive dividends, participate in distributions
and to have the benefit of all other rights of holders of Series A Preferred
Stock.
ARTICLE II SERIES B PREFERRED STOCK
The designated powers, preferences and relative participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof, of the Series B Preferred Stock are as follows.
(1) DESIGNATION AND AMOUNT. The shares of such series shall be
designated "Series B Preferred Stock" (the "SERIES B PREFERRED STOCK") and the
number of shares constituting such series shall be Two Million (2,000,000).
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(2) DIVIDENDS. The holders of Series B Preferred Stock shall not be
entitled to receive any dividends.
(3) VOTING RIGHTS. The holder of each share of Series B Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which each such share of Series B Preferred Stock could be
converted on the record date set for the vote or written consent of shareholders
and, except as otherwise required by law or this Article II, shall have voting
rights and powers equal to the voting rights and powers of the Common Stock
(voting together with the Common Stock as a single class). The holder of each
share of Preferred Stock shall be entitled to notice of any shareholders'
meeting in accordance with the bylaws of the Corporation and shall vote with
holders of the Common Stock upon any matter submitted to a vote of shareholders,
except those matters required by law or by this Designation of Rights to be
submitted to a class vote. Fractional votes shall not, however, be permitted,
and any fractional voting rights resulting from the above formula (after
aggregating all shares of Common Stock into which shares of Series B Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half rounded upward to one). Each holder of Common Stock
shall be entitled to one (1) vote for each share of Common Stock held.
(4) LIQUIDATION, DISSOLUTION OR WINDING UP.
4.1 For purposes hereof, the "SERIES B ORIGINAL PURCHASE
PRICE" is $1.00 per share of Series B Preferred Stock. In the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, then after the payment in full of the Series C Liquidation
Preference to the holders of the Series C Preferred Stock and the distribution
of the assets or surplus of the funds of the Corporation with respect thereto,
pursuant to Article IIIof this Designation of Rights, and thereafter, after the
payment in full of the Series A Liquidation Preference to the holders of the
Series A Preferred Stock and the distribution of the assets or surplus of the
funds of the Corporation with respect thereto, pursuant to Article I herein, the
holders of Series B Preferred Stock then outstanding shall then be entitled to
receive, by reason of their ownership thereof, an amount equal to the Series B
Original Purchase Price per share (as adjusted for stock splits, stock
dividends, recapitalizations and the like). If the assets of the Corporation
available for distribution to the holders of Series B Preferred Stock shall be
insufficient to permit such payment in full to the holders of Series B Preferred
Stock, then the entire assets or remaining assets of the Corporation available
for distribution shall be distributed ratably among the holders of the Series B
Preferred Stock based on the number of shares held by each holder of Series B
Preferred Stock.
4.2 After the payment of all preferential amounts required
to be paid to the holders of the Series C Preferred Stock then issued and
outstanding upon the dissolution, liquidation or winding up of the Corporation,
and then thereafter the payment of all preferential amounts required to be paid
to the Series A Preferred Stock then issued and outstanding upon the
dissolution, liquidation or winding up of the Corporation, and then thereafter
the payment of all preferential amounts required to be paid to the Series B
Preferred Stock then issued and outstanding upon the dissolution, liquidation or
winding up of the Corporation, and then after the payment of all preferential
amounts required to be paid to the holders of any junior series of Preferred
Stock then issued and outstanding upon the dissolution, liquidation or winding
up of the Corporation, any remaining assets and funds of the Corporation
available for distribution to the Corporation's stockholders shall be
distributed ratably among the holders of the Common Stock.
(5) NO REDEMPTION RIGHTS. The Series B Preferred Stock shall not be
subject to redemption, whether at the option of either the Corporation or any
holder of the Series B Preferred Stock.
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(6) CONVERSION RIGHTS.
6.1 OPTIONAL CONVERSION. Each share of Series B Preferred
Stock will be convertible, at the option of the holder thereof at the office of
the Corporation or any transfer agent for the Series B Preferred Stock, into one
share of Common Stock.
6.2 AUTOMATIC CONVERSION OF SERIES B PREFERRED STOCK. Each
share of Series B Preferred Stock will be converted automatically into such
number of shares of Common Stock as equals the number of shares issuable upon
optional conversion, under Section 6.1 of Article II above, immediately prior to
the closing of a firmly underwritten public offering pursuant to a registration
statement (other than a registration statement relating either to the sale of
securities to employees of the Corporation pursuant to a stock option, stock
purchase or similar plan or a transaction pursuant to Rule 145 under the
Securities Act of 1933 ("SECURITIES Act")) under the Securities Act covering the
Corporation's Common Stock, which results in aggregate gross cash proceeds
(prior to underwriters' commissions and expenses) to the Corporation of at least
$10,000,000 and which has a public offering price of not less than $5.00 per
share (as appropriately adjusted for stock splits, combinations,
reclassifications and the like).
6.3 MECHANICS OF CONVERSION. As necessary, fractional shares
of Common Stock shall be rounded up to the next whole number and issued upon the
conversion of the Series B Preferred Stock. Before any holder of Series B
Preferred Stock will be entitled to convert the same into shares of Common
Stock, he or she will surrender the certificate or certificates therefor duly
endorsed, at the office of the Corporation or of any transfer agent for the
Series B Preferred Stock and he or she will give written notice to the
Corporation stating the name or names in which he or she wishes the certificate
or certificates for shares of Common Stock to be issued. The Corporation, as
soon as practicable thereafter, will issue and deliver at such office to such
holder or to his or her nominee or nominees, a certificate or certificates for
the number of shares of Common Stock to which he or she will be entitled as
aforesaid. Such conversion will be deemed to have been made immediately prior to
the close of business on the date of notice of conversion provided by the holder
to the Corporation, and the person or persons entitled to receive the shares of
Common Stock issuable upon conversion will be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
6.4 ADJUSTMENT FOR SUBDIVISIONS OR COMBINATIONS OF COMMON
STOCK. In the event the Corporation at any time or from time to time alters the
effective date of the initial sale of the Series B Preferred Stock, effects a
subdivision or combination of its outstanding Common Stock into a greater or
lesser number of shares without a proportionate and corresponding subdivision or
combination of its outstanding shares of the Series B Preferred Stock, then the
number of shares into which each share of Series B Preferred Stock is
convertible will be decreased or increased proportionately.
(7) NO IMPAIRMENT. The Corporation, whether by amendment of this
Article II or through any reorganization, transfer of assets, merger,
dissolution, issue or sale of securities or any other voluntary action, will not
avoid or seek to avoid the observance or performance of any terms to be observed
or performed under this Article II by the Corporation, but all times in good
faith will assist in the carrying out all actions necessary or appropriate to
protect the conversion rights of the holders of Series B Preferred Stock against
impairment.
(8) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders or any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation will mail to each
holder of Series B Preferred Stock at least five (5) days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or rights, and the
amount and character of such dividend, distribution or right.
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(9) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
at all times will reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series B Preferred Stock such number of its shares of Common Stock as
from time to time would be required to effect the conversion of all then
outstanding shares of Series B Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all then outstanding shares of Series B Preferred Stock, in
addition to such other remedies as may be available to the holders of Series B
Preferred Stock for such failure, the Corporation will take such corporate
action as, in the opinion of its counsel, may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as will
be sufficient for such purpose.
(10) NOTICES. Any notices required by the provisions of this Article
II to be given to the holders of shares or Series B Preferred Stock shall be
given in writing and shall be conclusively deemed effectively given to persons
located in the United States five (5) days after deposit in the United States
mail, by registered or certified mail postage prepaid, or upon actual receipt if
given by any other method or to persons located outside of the United States,
addressed to such holder at his address appearing on the books of the
Corporation.
(11) RECAPITALIZATIONS. If at any time, or from time to time, there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
Article II), provision shall be made so that the holders of the Series B
Preferred Stock shall thereafter be entitled to receive upon conversion of such
shares of such Series B Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock issued upon conversion of such Series B Preferred Stock would have
been entitled on such recapitalization. In any such case, appropriate
adjustments shall be made in the application of the provisions of this Article
II with respect to the rights of the holders of the Series B Preferred Stock
after the recapitalization to the end that the provisions of Article II shall be
applicable after that event in as nearly an equivalent manner as may be
practicable.
(12) RANKING. The Series B Preferred Stock shall rank junior to
Series C Preferred Stock and Series A Preferred Stock as to the distribution of
assets, and the Series B Preferred Stock shall rank senior to all other series
of the Corporation's Preferred Stock (other than Series C Preferred Stock and
Series A Preferred Stock which shall be senior at all times to the Series B
Preferred Stock with respect to the distribution of assets and the payment of
dividends) as to the distribution of assets. Further, so long as any shares of
Series B Preferred Stock are outstanding, except for the Series C Preferred
Stock and the Series A Preferred Stock which shall rank senior to the Series B
Preferred Stock, no new class or series of stock shall hereafter be created or
authorized which is entitled to shares in distribution of assets on a parity
with or in priority to the Series B Preferred Stock, nor shall there be created
or authorized any securities convertible into shares of any such stock, unless
the holders of record of not less than two-thirds of the number of shares of the
Series B Preferred Stock then outstanding (as a single class separate from the
holders of all other classes of stock) shall vote therefore in person or by
proxy at the meeting of stockholders at which the creation or authorization of
such new class of stock or such convertible securities is considered.
Notwithstanding any provision in this Article II to the
contrary, however, no approval by the holders of Series B Preferred Stock shall
be required with respect to any changes that are made to the rights,
preferences, and privileges of Series B Preferred Stock if such changes are
substantially similar to the changes to the rights, preferences and privileges
to the Series A Preferred Stock that have been approved by a vote in person or
by proxy of two-thirds of the number of shares of the Series A Preferred Stock
then outstanding (as a single class separate from the holders of all other
classes of stock).
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(13) AMENDMENT. This Article II shall not be further amended in any
manner which would materially alter or change the powers, preferences or special
rights of the Series B Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series B Preferred Stock, voting separately as a class.
(14) FRACTIONAL SHARES. Series B Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to receive dividends; participate in distributions
and to have the benefit of all other rights of holders of Series B Preferred
Stock.
(15) OBSERVER SEAT. The majority of the outstanding shares of Series
B Preferred Stock shall have the right to appoint a representative (the "SERIES
B REPRESENTATIVE") who shall have the right to attend all meetings of the
Corporation's Board of Directors in a nonvoting observer capacity, to receives
notice of such meetings and to receive the information provided by the
Corporation to the Board of Directors; provided, however, that the Corporation
may require as a condition precedent to the right to exercise such observer
rights under this subsection (15) that each person proposing to attend any
meeting of the Corporation's Board of Directors and each person to have access
to any of the information provided by the Corporation to the Board of Directors
shall agree to hold in confidence and trust and to act in a fiduciary manner
with respect to all information so received during such meetings or otherwise;
and, provided further, that the Corporation reserves the right to require the
Series B Representative to execute a nondisclosure agreement in a form
reasonably acceptable to the Corporation and which provides that such Series B
Representative shall not disclose or use any trade secrets of the Corporation.
Notwithstanding the foregoing, holders of Series B Preferred Stock shall have no
rights under this subsection (15) during any period in which any holder of
Series B Preferred Stock is serving as a director of the Corporation.
ARTICLE III SERIES C PREFERRED STOCK
The designated powers, preferences and relative participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof, of the Series C Preferred Stock are as follows.
(1) DESIGNATION AND AMOUNT. The shares of such series shall be
designated "Series C Preferred Stock" (the "SERIES C PREFERRED STOCK") and the
number of shares constituting such series shall be Thirty Million (30,000,000).
(2) DIVIDENDS. The holders of Series C Preferred Stock shall be
entitled to receive a monthly dividend out of the retained earnings of the
Corporation in accordance with the following terms:
(a) Unless the context otherwise requires, the terms defined
in this subsection (2) of Article III herein shall have, for all purposes of
Article III, the meanings herein specified (with terms defined in the singular
having comparable meanings when used in the plural).
"MONTHLY PER SHARE SERIES C DIVIDEND AMOUNT" shall mean for each
one share of Series C Preferred Stock an amount derived from the following
formula: (i) during each of the first 12 months following the date of issuance
of the relevant shares of Series C Preferred Stock, the product of (a) the
Series C Original Issue Price per share divided by one dollar, which quotient is
(b) multiplied by $.00750; (ii) during each of the next succeeding 36 months
thereafter, the product of (a) the Series C Original Issue Price per share
divided by one dollar, which quotient is (b) multiplied by $.03180; and (iii)
from and after the 48th month following the date of issuance of the relevant
shares of Series C Preferred Stock, such shares shall bear no dividend.
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"BUSINESS DAY" shall mean a day other than a Saturday, a Sunday
or any other day on which banking institutions in Los Angeles, California are
authorized or obligated by law to close.
"HOLDER" shall mean the record holder of one or more shares of
Series C Preferred Stock, as shown on the books and records of the Corporation.
"SERIES C DIVIDENDS" shall mean the cash dividends as set forth
in subparagraph 2(b) below.
"SERIES C DIVIDEND PAYMENT DATE" shall mean the first day of
each calendar month of each year during the Series C Dividend Payment Period.
"SERIES C DIVIDEND PAYMENT PERIOD" shall mean the period from,
and including, the Initial Issue Date, to and including the date that the Series
C Preferred Stock is redeemed.
"SERIES C DIVIDEND PERIOD" shall mean the period from, and
including, the Initial Issue Date, to, but not including, the first Series C
Dividend Payment Date and thereafter, each monthly period, including any Series
C Dividend Payment Date to, but not including, the next Series C Dividend
Payment Date.
"SERIES C INITIAL ISSUE DATE" shall mean the date that shares of
Series C Preferred Stock are first issued by the Corporation.
"SERIES C RECORD DATE" shall mean the date that is five Business
Days prior to any Series C Dividend Payment Date.
(b) The record holders of Series C Preferred Stock on each
Series C Record Date shall receive on each Series C Dividend Payment Date during
the Series C Dividend Payment Period per share dividends legally available for
such purpose (such dividends being herein called "SERIES C DIVIDENDS"). Series C
Dividends shall be paid by delivering to the record holders of Series C
Preferred Stock the cash dividend per share then due.
(c) Prior to each Series C Record Date immediately preceding
each Series C Dividend Payment Date, the Board of Directors of the Corporation
shall declare Series C Dividends on the Series C Preferred Stock in accordance
with subparagraph 2(b) above, payable on the next Series C Dividend Payment
Date. Series C Dividends on shares of Series C Preferred Stock shall accrue and
be cumulative from the date of issuance of such shares, notwithstanding the
failure of the Board of Directors to declare and/or pay such Series C Dividends
with respect to any Series C Dividend Period. Series C Dividends shall be
cumulative and payable in arrears during the Series C Dividend Payment Period on
each Series C Dividend Payment Date, commencing on the first Series C Dividend
Payment Date. If any Series C Dividend Payment Date occurs on a day that is not
a Business Day, any accrued Series C Dividends otherwise payable on such Series
C Dividend Payment Date shall be paid on the next succeeding Business Day.
Series C Dividends shall be paid on each Series C Dividend Payment Date to the
holders of record of the Series C Preferred Stock as their names shall appear on
the share register of the Corporation on the Series C Record Date immediately
preceding such Series C Dividend Payment Date. Series C Dividends on account of
arrears for any past Series C Dividend Periods may be declared and paid at any
time to the holders of record on the Series C Record Dates applicable to such
past Series C Dividend Periods.
(d) Notwithstanding anything contained herein to the
contrary, no dividends on shares of Series C Preferred Stock shall be declared
by the Board of Directors of the Corporation or paid or set apart for payment by
the Corporation at such time if such declaration or payment shall be restricted
or prohibited by law.
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(e) Dividends on the Series C Preferred Stock shall be
payable in preference and prior to any payment of any dividend on any other
series of Preferred Stock or on the Common Stock of the Corporation. No
dividends or other distributions (other than those payable solely in the Common
Stock or Series A Preferred Stock of the Corporation) may be declared or paid on
any shares of Common Stock or Series A Preferred Stock of the Corporation during
any fiscal year of the Corporation until all declared dividends on the Series C
Preferred Stock for the fiscal year in question are paid or set apart for
payment
(3) VOTING RIGHTS.
The holder of each share of Series C Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Series C
Preferred Stock held on the record date set for the vote or written consent of
shareholders and, except as otherwise required by law or this Article III, shall
have voting rights and powers equal to the voting rights and powers of the
Common Stock (voting together with the Common Stock as a single class). The
holder of each share of Series C Preferred Stock shall be entitled to notice of
any shareholders' meeting in accordance with the bylaws of the Corporation and
shall vote with holders of the Common Stock upon any matter submitted to a vote
of shareholders, except those matters required by law or by this Designation of
Rights to be submitted to a class vote. Fractional votes shall not, however, be
permitted, and any fractional voting rights resulting from the above formula
(after aggregating all shares of Common Stock into which shares of Series C
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half rounded upward to one). Each holder of
Common Stock shall be entitled to one (1) vote for each share of Common Stock
held.
In addition to any other rights provided by law, the Corporation
shall not, without first obtaining the approval (by vote or written consent) of
the holders of not less than a majority of the total number of outstanding
shares of the Series C Preferred Stock voting as a single class, cause any
"liquidation, dissolution or winding-up" as such term is defined in subsection
4.3 of Article I herein.
(4) LIQUIDATION, DISSOLUTION OR WINDING UP.
4.1 For purposes hereof, the "SERIES C ORIGINAL ISSUE PRICE"
shall mean the original issuance price per share upon which each share of Series
C Preferred Stock was issued as determined by the Board with respect to each
such issuance (as adjusted for any stock dividends, combinations or splits with
respect to such shares). For purposes hereof, the "SERIES C REDEMPTION PRICE" is
125% of the Series C Original Issue Price. In the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, the
holders of Series C Preferred Stock then outstanding shall be entitled to
receive, and prior to and in preference of any distribution of any of the assets
or surplus of the funds of the Corporation to the holders of the Common Stock,
Series A Preferred Stock and Series B Preferred Stock, or any junior or other
preferred stock subsequently designated by reason of their ownership thereof, an
amount equal to the Series C Redemption Price per share (as adjusted for stock
splits, stock dividends, recapitalizations and the like) plus an amount equal to
all accrued and unpaid dividends thereon. if any, together with interest on the
accrued but unpaid dividends at 10% percent per annum, and no more (all of the
preceding collectively, the "SERIES C LIQUIDATION PREFERENCE".) If the assets of
the Corporation available for distribution to the holders of Series C Preferred
Stock shall be insufficient to permit such payment in full to the holders of
Series C Preferred Stock, then the entire assets or remaining assets of the
Corporation available for distribution shall be distributed ratably among the
holders of the Series C Preferred Stock based on the number of shares held by
each holder of Series C Preferred Stock.
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4.2 After the payment of all preferential amounts required
to be paid to the holders of the Series C Preferred Stock then issued and
outstanding upon the dissolution, liquidation or winding up of the Corporation,
and then after the payment of all preferential amounts required to be paid to
the holders of Series A Preferred Stock then issued and outstanding upon the
dissolution, liquidation or winding up of the Corporation, and then thereafter,
the payment of all preferential amounts required to be paid to the holders of
Series B Preferred Stock then issued and outstanding upon the dissolution,
liquidation or winding up of the Corporation, and then thereafter any junior
Series of Preferred Stock then issued and outstanding upon the dissolution,
liquidation or winding up of the Corporation, any remaining assets and funds of
the Corporation available for distribution to the Corporation's stockholders
shall be distributed ratably among the holders of the Common Stock.
(5) REDEMPTION RIGHTS. The Series C Preferred Stock may be redeemed
in full or in part, to the extent it may lawfully do so, at the Corporation's
election from time to time and subject to the following:
5.1 The Corporation may redeem the number of shares of
Series C Preferred Stock specified in a declaration by the Board of directors
(the "REDEMPTION NOTICE") delivered to the holders of Series C Preferred Stick
and which Redemption Notice will specify the date of payment (each a "REDEMPTION
DATE"), by paying in cash therefore a sum equal to the Series C Redemption Price
per share of such Series C Preferred Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares) plus any dividends declared
but unpaid (the "REDEMPTION PRICE"). Shares of Series C Preferred Stock shall be
redeemed on a pro rata basis among all of the issued and outstanding shares of
Series C Preferred Stock determined as of the date that the Redemption Notice is
sent to the holders of Series C Preferred Stock.
5.2 SURRENDER OF CERTIFICATE. The holder of any shares of
Series C Preferred Stock redeemed pursuant to the redemption rights herein shall
not be entitled to receive payment for such shares until such holder shall cause
to be delivered to the Corporation's principal office or such other place as the
corporation may specify, (i) the certificates representing such shares of Series
C Preferred Stock and (ii) transfer instrument(s) satisfactory to the
corporation and sufficient to transfer such shares of Series C Preferred Stock
to the Corporation free of any adverse interest.
5.3 EFFECT OF REDEMPTION. From and after the Redemption
Date, unless there shall have been a default in payment of the Redemption Price,
all rights of the holders of shares of the Series C Preferred Stock designated
for redemption in the Redemption Notice as holders of such Series of Preferred
Stock (except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever.
5.4 PAYMENT FOR SHARES. If the funds of the Corporation
legally available for redemption of shares of Series C Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of such
Series C Preferred Stock to be redeemed on such date, those funds which are
legally available will be used to redeem the maximum possible number of such
shares ratably among the holders of such shares to be redeemed based upon the
holdings of such Series C Preferred Stock. The shares of Series C Preferred
Stock not redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of shares of Series C
Preferred Stock, such funds will immediately be used to redeem the balance of
the shares which the Corporation has become obligated to redeem on any
Redemption Date, but which it has not redeemed.
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(6) NO IMPAIRMENT. The Corporation, whether by amendment of this
Article III or through any reorganization, transfer of assets, merger,
dissolution, issue or sale of securities or any other voluntary action, will not
avoid or seek to avoid the observance or performance of any terms to be observed
or performed under this Article III by the Corporation, but all times in good
faith will assist in the carrying out all actions necessary or appropriate to
protect the liquidation rights of the holders of Series C Preferred Stock
against impairment.
(7) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders or any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation will mail to each
holder of Series C Preferred Stock at least five (5) days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or rights, and the
amount and character of such dividend, distribution or right.
(8) NOTICES. Any notices required by the provisions of this Article
III to be given to the holders of shares or Series C Preferred Stock shall be
given in writing and shall be conclusively deemed effectively given to persons
located in the United States five (5) days after deposit in the United States
mail, by registered or certified mail postage prepaid, or upon actual receipt if
given by any other method or to persons located outside of the United States,
addressed to such holder at his address appearing on the books of the
Corporation.
(9) RANKING. The Series C Preferred Stock shall rank senior to all
other series of the Corporation's Preferred Stock as to redemption, payment of
dividends and the distribution of assets. Further, so long as any shares of
Series C Preferred Stock are outstanding, no new class or series of stock shall
hereafter be created or authorized which is entitled to dividends or shares in
distribution of assets on a parity with or in priority to the Series C Preferred
Stock, nor shall there be created or authorized any securities convertible into
shares of any such stock or which provide for mandatory redemption rights, nor
shall the Corporation redeem any shares of Common Stock or Preferred Stock
(other than Series C Preferred Stock) or any other preferred stock to be created
hereafter by the Corporation, unless the holders of record of not less than
two-thirds of the number of shares of the Series C Preferred Stock then
outstanding (as a single class separate from the holders of all other classes of
stock) shall vote therefore in person or by proxy at the meeting of stockholders
at which the creation or authorization of such new class of stock or such
convertible securities is considered.
(10) AMENDMENT. This Article III shall not be further amended in any
manner which would materially alter or change the powers, preferences or special
rights of the Series C Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series C Preferred Stock, voting separately as a class.
(11) FRACTIONAL SHARES. Series C Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to receive dividends, participate in distributions
and to have the benefit of all other rights of holders of Series C Preferred
Stock.
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APPENDIX H
NETGURU, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
2006 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 28, 2006
The undersigned stockholder of netGuru, Inc. ("Company") hereby
constitutes and appoints Bruce K. Nelson and Koushik Dutta, and either of them,
with the power to appoint his substitution as attorney, agent and proxy, to
appear, attend and vote, all of the shares of common stock of the Company
standing in the name of the undersigned on the record date at the 2006 Annual
Meeting of Stockholders of the Company to be held at the Company's offices
located at 22700 Savi Ranch Parkway, Yorba Linda, California 92887, on November
28, 2006, at 10:00 a.m. Pacific time, and at any adjournments and postponements
thereof, upon the proposals listed on the reverse side and in the discretion of
the proxy holder on such other business as may properly come before the meeting,
or any adjournments or postponements thereof.
(continued and to be signed on the reverse side)
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ANNUAL MEETING OF STOCKHOLDERS OF
NETGURU, INC.
NOVEMBER 28, 2006
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
Please detach along perforated line and mail in the envelope provided.
________________________________________________________________________________
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR ALL NOMINEES" FOR THE
ELECTION OF DIRECTORS AND "FOR" PROPOSALS 2 THROUGH 6.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK
YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
________________________________________________________________________________
1. To elect five nominees to the Company's board of directors, to hold
office until the next annual meeting of stockholders or until their
respective successors are elected or appointed and qualified, as
follows:
NOMINEES:
[ ] FOR ALL NOMINEES 0 Amrit K. Das
0 Santanu K. Das
[ ] WITHHOLD AUTHORITY 0 Benedict A. Eazzetta
FOR ALL NOMINEES 0 D. Dean McCormick III
0 Stanley W. Corbett
[ ] FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here: [X]
2. To approve, subject to and conditioned upon approval and consummation
of proposals 3, 4, 5 and 6, the issuance of shares of Company common
stock pursuant to the terms of the Agreement and Plan of Merger dated
as of August 29, 2006, among BPO Management Services, Inc. ("BPOMS"),
the Company, and BPO Acquisition Corp., as a result of which BPOMS
stockholders would hold approximately 90% of the Company's equity
interests that would be outstanding immediately following the
consummation of the merger on a fully-diluted basis but excluding most
new equity or equity-based securities, if any, issued by the Company or
BPOMS after August 29, 2006.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
3. To approve, subject to and conditioned upon approval and consummation
of proposals 2, 4, 5 and 6, the sale and transfer of the Company's
interest in Research Engineers Ltd., the Company's majority-owned India
subsidiary, and certain additional assets and liabilities, to Das
Family Holdings, a privately-held California corporation controlled by
affiliates of the Company ("DFH"), pursuant to the terms of a Purchase
Agreement dated as of August 29, 2006, between DFH and the Company.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
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4. To amend the Company's certificate of incorporation in order to change
its name to "BPO Management Services, Inc.," subject to approval and
consummation of proposals 2, 3, 5 and 6.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
5. To amend the Company's certificate of incorporation in order to
consummate a reverse stock split within a range to be determined by the
Company's board of directors from 1-for-4 to 1-for-30, with any
fractional shares that would otherwise be issuable as a result of the
split being rounded up to the nearest share.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
6. To amend the Company's certificate of incorporation in order to
increase the total number of shares of preferred stock authorized for
issuance from 5,000,000 to 5,000,000 plus the number of preferred
shares needed to accommodate the creation of the three series of
preferred stock for which the BPOMS preferred stock would be exchanged
in the merger transaction, subject to
approval and anticipated consummation of proposals 2, 3, 4 and 5.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
IF NO DIRECTION IS PROVIDED, THIS PROXY WILL BE VOTED AS RECOMMENDED BY THE
BOARD OF DIRECTORS.
________________________________________________________________________________
To change the address on your account, please check the box at right and [ ]
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this method.
________________________________________________________________________________
Signature of Stockholder _____________________________ Date: __________________
Signature of Stockholder _____________________________ Date: __________________
NOTE: Please sign exactly as your name or names appear on this proxy. When
shares are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
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