Exhibit 99.2
EARNOUT AGREEMENT
THIS EARNOUT AGREEMENT (this "Agreement") is entered into as of
February 15, 2006, by and among Edgewater Technology, Inc., a Delaware
corporation ("Purchaser"), National Decision Systems, Inc., a New Jersey
corporation (the "Company") and the undersigned stockholders of the Company
(each such person is individually referred to as a "Stockholder" and such
persons are collectively referred to as the "Stockholders").
RECITALS
WHEREAS, pursuant to a Stock Purchase Agreement dated of even date
herewith, by and among Purchaser, the Company and the Stockholders (the
"Purchase Agreement"), Purchaser is acquiring the Shares from the Stockholders,
with the Stockholders receiving the Purchase Price as a consequence thereof; and
WHEREAS, Section 1.2(c) of the Purchase Agreement provides that any and
all payments pursuant to this Agreement constitute and are considered a part of
the Purchase Price; and
WHEREAS, Section 7.2 of the Purchase Agreement provides that it is a
condition precedent to the obligation of the Company and the Stockholders to
consummate the transactions contemplated by the Purchase Agreement that
Purchaser shall have entered into one or more counterparts of this Agreement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged by the parties hereto and in
consideration of the premises, the representations, warranties, covenants and
agreements contained herein and subject to the conditions contained herein, the
parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined in this Section
1 or otherwise in this Agreement shall have the meanings ascribed thereto in the
Purchase Agreement.
"30 Day Trailing Average" shall mean the average 4:00 p.m. share price
of the Common Stock of Purchaser for the thirty (30) consecutive trading days
ending on the last business day immediately prior to the date any Earnout Shares
are to be issued to the Selling Stockholders, as reported on the NASDAQ.
"Agent" shall mean Richard Foudy.
"Business Day" means any day, other than Saturday, Sunday or a federal
holiday, and shall consist of the time period from 12:01 a.m. through 12:00
midnight (Eastern time).
"Cash Consideration" means the dollar amount equal to the cash portion
of the Initial Earnout, the cash portion of the Second Earnout, or the cash
portion of the Third Earnout.
"Certificate" means the certificate to be delivered by Purchaser, and
executed by an executive of Purchaser, reflecting the Earnout Consideration and
the applicable calculations relating thereto.
"Company's EBITDA" means the dollar amount equal to the sum of the
Company's earnings before interest, taxes, depreciation and amortization for the
appropriate Earnout Period based on the Financial Statements for that period,
calculated in accordance with GAAP.
"Company's Initial EBITDA" means the Company's EBITDA during the
Initial Earnout Period.
"Company Initial EBITDA Differential" means the excess of the Company
Initial EBITDA over $2,000,000.00. If the Company Initial EBITDA Differential
shall exceed $2,280,000.00, the amount of such excess is referred to as "Excess
Initial EBITDA" and shall not be counted as Company Initial EBITDA Differential.
"Company's Second EBITDA" means the sum of (i) the Company's EBITDA
during the Second Earnout Period, and (ii) the Excess Initial EBITDA, if any.
"Company Second EBITDA Differential" means the excess of (i) the
Company Second EBITDA over (B) $2,000,000.00. If the Company Second EBITDA
Differential shall exceed $2,280,000.00, the amount of such excess shall not be
counted as Company Second EBITDA Differential.
"Company Third EBITDA Differential" means the excess of (i) the
Company's Second EBITDA over (ii) the Third Company's EBITDA Minimum Threshold.
"Determination Date" means the date that Purchaser delivers the
Financial Statements to the Agent; provided, however, that such date shall not
be later than ninety (90) days following the end of the applicable Earnout
Period.
"Earnout Consideration" means the Cash Consideration and the Earnout
Shares, as the case may be.
"Earnout Periods" means the Initial Earnout Period and the Second
Earnout Period.
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"Earnout Shares" means the Initial Earnout Shares, the Second Earnout
Shares and the Third Earnout Shares.
"Excess Initial EBITDA" means the amount, if any, by which the
Company's Initial EBITDA is in excess of the Initial Company EBITDA Maximum
Threshold.
"Financial Statements" means Company income statements, which will be
prepared by Purchaser in accordance with GAAP.
"Initial Company's EBITDA Minimum Threshold" means $2,000,000.
"Initial Earnout" means the dollar amount equal to the product of (i)
the Company's Initial EBITDA Differential multiplied by (ii) 1.535.
"Initial Earnout Period", means the twelve (12)-months period
commencing on the Closing Date.
"Initial Earnout Shares" means the portion of the Initial Earnout paid
to the Stockholders in Shares.
"Notice Form" has the meaning set forth in Section 3(a)(iii).
"Second Company's EBITDA Minimum Threshold" means $2,000,000.
"Second Earnout" means the dollar amount equal to the product of (i)
Company's Second EBITDA Differential multiplied by (ii)1.627.
"Second Earnout Period" means the twelve (12)-months period commencing
on the first anniversary of the Closing.
"Second Earnout Shares" means the portion of the Second Earnout paid to
the Stockholders in Shares.
"Shares" means shares of the Purchaser's Common Stock.
"Third Company's EBITDA Minimum Threshold" means $4,700,000.
"Third Earnout" means the dollar amount equal to the product of (i)
Company's Third EBITDA Differential multiplied by (ii) 1.00.
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"Third Earnout Shares" means the portion of the Third Earnout paid to
the Stockholders in Shares.
2. Calculation of the Earnout Consideration. Subject to the provisions
set forth below, the Stockholders (in accordance with Schedule A attached
hereto) shall be eligible to receive the Earnout Consideration, pursuant to and
in accordance with the payment and review procedures in Section 3 below.
(i) If Company's Initial EBITDA is equal to or in excess
of the Initial Company's EBITDA Minimum Threshold,
the Stockholders shall be entitled to receive the
Initial Earnout. In no event shall the value of the
Initial Earnout (including any Initial Earnout
Shares) exceed Three Million Five Hundred Thousand
($3,500,000.00) Dollars.
(ii) If the Company's Second EBITDA is in excess of the
Second Company's EBITDA Minimum Threshold, the
Stockholders shall be entitled to receive the Second
Earnout. In no event shall the value of the Second
Earnout (including any Second Earnout Shares) exceed
Three Million Seven Hundred Ten Thousand
($3,710,000.00) Dollars.
(iii) If the Company's Third EBITDA is in excess of the
Third Company's EBITDA Minimum Threshold, the
Stockholders shall be entitled to receive the Third
Earnout.
(iv) Purchaser shall pay to the Stockholders eighty (80%)
percent of the Initial Earnout and the Second
Earnout, if any, in the form of Cash Consideration,
and twenty (20%) percent in the form of Initial
Earnout Shares or Second Earnout Shares, valued at
the 30 Day Trailing Average.
(v) Purchaser shall pay to the Stockholders seventy (70%)
percent of the Third Earnout, if any, in the form of
Cash Consideration and thirty (30%) percent in the
form of Third Earnout Shares valued at the 30 Day
Trailing Average.
(vi) The Earnout Shares shall be subject to the terms and
conditions of the Restriction Agreement, provided,
however, that any transfer restrictions imposed on
the Shares shall lapse thirty six (36) months from
the date of the Closing.
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3. Payment and Review Procedures.
(a) Delivery of the Certificate and the Reviewed Financial
Statements. On the Determination Date, Purchaser will deliver
the following items to the Agent (except with respect to
Section 3(a)(iii) which shall be delivered by the Agent to the
Purchaser):
(i) the Certificate;
(i) a notice form that will require the Agent to
designate the bank account, address and other
necessary information that will enable Purchaser to
deliver the Cash Consideration (the "Cash Notice
Form");
(ii) a notice form providing the Purchaser with such
necessary information to enable the Purchaser to
deliver the Earnout Shares to the Stockholders (the
"Share Notice Form", and with the Cash Notice Form,
collectively, the "Notice Form").
(iii) a copy of the Financial Statements from which the
calculations in the Certificate were derived; and/or
(iv) a letter denoting that no payment is due with respect
to the Earnout Consideration, if applicable.
(b) Payment Without Objection. If the Agent does not object to any
of the calculations in the Certificate or the Financial
Statements from which such calculations were derived in
accordance with the objection procedures in subsection (c)
below, then on or before the eleventh (11th) Business Day
following the Purchaser's receipt of the Notice Form,
Purchaser will promptly pay the Earnout Consideration by
delivering to the Stockholders and the Company the Cash
Consideration and Earnout Shares reflected in the Certificate.
(c) Objection Procedures and Payment Thereafter. If the Agent has
any objection to the calculation of the Earnout Consideration
in the Certificate or the Financial Statements from which such
calculation was derived, then the Agent shall deliver a
detailed statement describing such objections to Purchaser
within ten (10) Business Days after receiving the Certificate.
Purchaser and the Agent will use reasonable efforts to resolve
any such objections themselves. If the parties do not obtain a
final resolution within ten (10) Business Days after Purchaser
has received the statement of objections, then Purchaser and
the Agent will select an accounting firm mutually acceptable
to them to resolve any remaining objections (the "Referee").
If Purchaser and the Agent are unable to agree on the choice
of a Referee, the Boston, Massachusetts office of Grant
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Thornton, LLP shall act as the Referee. The determination of
any Referee so selected as to any objections of the Agent or
Purchaser will be set forth in writing and will be conclusive
and binding upon the parties. Within five (5) Business Days,
Purchaser will revise the Certificate as appropriate to
reflect the resolution of any objections thereto pursuant to
this Section 3(c) by the Referee. Following resolution of the
objection and on or before the tenth (10th) Business Day
following receipt of the Notice Form, Purchaser will promptly
pay to the Stockholders the Earnout Consideration by
delivering the Cash Consideration and Earnout Shares in
accordance with the amounts shown on such revised Certificate.
(d) Review of Materials. Purchaser will make the work papers and
back-up materials used in preparing the Certificate available
to the Agent and its accountants and other representatives at
reasonable times and upon reasonable notice at any time
during: (i) the review by the Agent of the Certificate; and
(ii) the resolution by the parties of any objections thereto.
4. Termination of Purchaser's Obligations and Responsibilities.
Notwithstanding any other provision of this Agreement, following the completion
of the Second Earnout Period Purchaser's obligations, responsibilities,
covenants, agreements and liabilities pursuant to this Agreement shall terminate
on the earlier of either of the following situations: (i) payment in accordance
with Section 3(b) above; (ii) delivery of the letter by Purchaser denoting that
no payment is due with respect to the Earnout Consideration and no objection by
the Agent pursuant to Section 3(c) above; or (iii) resolution of objections to
the Certificate by the Referee in accordance with Section 3(c) above and
delivery of the Earnout Consideration thereafter based upon the Referee's
findings and conclusions.
5. Company Operations. During the Earnout Periods, (i) the compensation
and benefits of the Company's employees shall be managed and structured in
accordance with the Company's historical business practices, and any increases
in compensation of the Company's employees to reflect appropriate upward
adjustments relating to Purchaser's employee benefits (in the aggregate), shall
be appropriately reflected at the Closing, and (ii) no direct and indirect
selling expenses or general and administrative expenses of Purchaser shall be
allocated to the Company, unless set forth in Exhibit 5 attached hereto or
otherwise agreed to in writing by the Purchaser and the Agent.
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6. Miscellaneous.
(a) No Third Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the parties
named herein and their respective successors and permitted
assigns.
(b) Entire Agreement. This Agreement, together with the Purchase
Agreement (and the Exhibits and Schedules thereto), and any
certificates or other documents delivered thereunder,
supersedes all prior agreements, understandings or
representations by or among the parties hereto, written or
oral, that may have related in any way to the subject matter
thereof.
(c) Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties named herein and
their respective successors and permitted assigns. No party
may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written
approval of the other party.
(d) Counterparts. This Agreement may be executed in one or more
counterparts (including execution by facsimile), each of which
shall be deemed an original but all of which together will
constitute one and the same instrument.
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
(f) Notices. Notices shall be delivered to the parties at the
addresses set forth in Section 10.6 of the Purchase Agreement.
All communications required or permitted hereunder shall be
provided in accordance with and pursuant to Section 10.6 of
the Purchase Agreement.
(g) Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of
Delaware without giving effect to any choice or conflict of
law provision or rule that would cause the application of the
laws of any jurisdiction other than the State of Delaware.
(h) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing
and signed by all of the parties hereto. No waiver by any
party of any covenant or agreement hereunder shall be deemed
to extend to any prior or subsequent default or breach of
covenant or agreement hereunder or affect in any way any
rights arising by virtue of any prior or subsequent such
occurrence.
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(i) Severability. Any term 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.
(j) Expenses. Purchaser shall pay all costs and expenses incurred
or to be incurred by them in negotiating and preparing this
Agreement and carrying out the transactions contemplated
thereby. The Stockholders shall be solely responsible for and
bear all of their own respective expenses, including without
limitation, expenses of legal counsel, accountants, finders,
financial advisors incurred at any time in connection with
pursuing or consummating this Agreement and the transactions
contemplated thereby. Notwithstanding the foregoing, Purchaser
and the Stockholders will share the fees and expenses of the
Referee equally.
(k) Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the
parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement. Any reference to
any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word
"including" shall mean without limitation. The parties intend
that each representation, warranty, and covenant contained
herein shall have independent significance. If any party has
breached any representation, warranty, or covenant contained
herein in any respect, then the fact that there exists another
representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of
specificity) which the party has not breached shall not
detract from or mitigate the fact that the party is in breach
of the first representation, warranty, or covenant.
(l) Specific Performance. Each of the parties acknowledges and
agrees that the other parties would be damaged irreparably in
the event any of the provisions of this Agreement are not
performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties agrees that the
other parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the
terms and provision hereof in any action instituted in any
court of the United States or any state thereof having
jurisdiction over the parties and the matter in addition to
any other remedy to which they may be entitled, at law or in
equity.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
EDGEWATER TECHNOLOGY, INC.
By: /s/ Kevin R. Rhodes
-------------------------------------
Title: Chief Financial Officer
-------------------------------------
NATIONAL DECISION SYSTEMS, INC.
By: /s/ Richard J. Foudy
-------------------------------------
Title: President
-------------------------------------
THE STOCKHOLDERS:
/s/ Richard J. Foudy
---------------------------------------------
Richard J. Foudy
/s/ Mark Manfredi
---------------------------------------------
Mark Manfredi
/s/ Mark Farrell
---------------------------------------------
Mark Farrell
/s/ Joanne Wortman
---------------------------------------------
Joanne Wortman
/s/ Dan MacAndrew
---------------------------------------------
Dan MacAndrew
/s/ Sundar Ranganathan
---------------------------------------------
Sundar Ranganathan
/s/ Kenneth Allard
---------------------------------------------
Kenneth Allard
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Exhibit 5
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Expenses to be allocated to the Company's operations:
1. All direct expenses related to the Company employees' participation in the
Purchaser's benefits programs will be allocated to the Company, as such benefits
programs are outlined in the Purchaser's then existing human resources/employee
Manual.
2. All incremental direct costs related to adding the Company's operations onto
Purchaser's insurance policies will be allocated to the Company, and such
expense will not exceed $36,000 per annum.
3. Direct marketing costs associated with revenue generation programs for the
Company will be allocated to the Company, including but not limited to
advertising, production of marketing materials, participation in trade shows and
production of case studies.
4. Direct costs and expenses incurred to recruit and hire any new employees or
engage new independent contractors for the Company will be allocated to the
Company.
5. Direct costs for legal fees incurred to represent the Company on any legal
matters will be allocated to the Company.
6. Direct costs for sales commissions, regardless of the sales personnel's
affiliation with Purchaser or the Company, derived from revenue generated by the
Company will be allocated to the Company.
7. Direct costs for salary, fringe and taxes for the use of any of the
Purchaser's personnel who are directed to work on an engagement for the Company,
for the duration of time directed to perform such work, will be allocated to the
Company.
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