-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ScAZ8MBCH1GAuggIdkRrGOdww7ai4v94qIKGr29uynIm86wdqGVKmcS4M8C24vDm KsTIBtUBhsz8RO6XuR96HQ== 0000950130-97-000829.txt : 19970304 0000950130-97-000829.hdr.sgml : 19970304 ACCESSION NUMBER: 0000950130-97-000829 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970303 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER GENERATED SOLUTIONS INC CENTRAL INDEX KEY: 0001018761 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 133208358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09297 FILM NUMBER: 97549592 BUSINESS ADDRESS: STREET 1: 1675 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124083800 MAIL ADDRESS: STREET 1: 1675 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10019 S-1/A 1 AMENDMENT #4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1997 REGISTRATION NO. 333-09297 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- COMPUTER GENERATED SOLUTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- DELAWARE 7379 13-3208358 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION INCORPORATION OR NUMBER) ORGANIZATION) 1675 BROADWAY NEW YORK, NEW YORK 10019 (212) 408-3800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- PHILIP FRIEDMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPUTER GENERATED SOLUTIONS, INC. 1675 BROADWAY NEW YORK, NEW YORK 10019 (212) 408-3800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- COPIES TO: DENNIS J. FRIEDMAN, ESQ. GERALD S. TANENBAUM, ESQ. CHADBOURNE & PARKE LLP CAHILL GORDON & REINDEL 30 ROCKEFELLER PLAZA 80 PINE STREET NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10005 (212) 408-5100 (212) 701-3000 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MARCH 3, 1997 3,540,000 SHARES [LOGO] COMPUTER GENERATED SOLUTIONS, INC. COMMON STOCK ----------- Of the 3,540,000 shares of Common Stock offered hereby, 2,900,000 shares are being issued and sold by Computer Generated Solutions, Inc. (the "Company") and 640,000 shares are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price of the Common Stock will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "CGSI." Immediately after this offering, Philip Friedman, the Company's President and Chief Executive Officer, will own approximately 66.0% of the outstanding shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option). See "Principal and Selling Stockholders." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS - -------------------------------------------------------------------------------- Per Share........................ $ $ $ $ Total (3) ....................... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information concerning indemnification of the Underwriters and for other information. (2) Before deducting expenses of the offering payable by the Company estimated at $850,000. (3) The Company has granted an option to the Underwriters exercisable within 30 days of the date hereof, to purchase up to 531,000 additional shares of Common Stock for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are offered severally by the Underwriters when, as and if delivered to and accepted by them, subject to their right to withdraw, cancel or reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of the certificates representing the shares of Common Stock will be made against payment on or about , 1997 at the office of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York, NY 10281. ----------- OPPENHEIMER & CO., INC. FURMAN SELZ The date of this Prospectus is , 1997. [LOGO] COMPUTER GENERATED SOLUTIONS, INC. ACS OPTIMA PRODUCTS & SERVICES INFORMATION IT OUTSOURCING SYSTEMS AND SUPPORT SERVICES SERVICES PROFESSIONAL HELP SERVICES DESK TRAINING CALL MANAGEMENT THE "COMPOSITE SOLUTION" The "Composite Solution" allows the Company to utilize its products and services to create customized solutions for its clients and to provide multiple entry points into the client's organization. PROFESSIONAL SERVICES The Company provides a variety of professional services, delivered on a project basis or through staff augmentation, to address clients' systems requirements, ranging from strategy and design through development and implementation to maintenance and support. The Company has been designated by IBM as one of six current national "Business Partners" for its Year 2000 engagements. TRAINING The Company provides, through more than 3560 course offerings, comprehensive technical and end user training to its clients' programmers, system administrators, operations personnel and management. ACS OPTIMA PRODUCTS & SERVICES The Company provides comprehensive, integrated business information systems specifically designed for the apparel industry. The Company's solution includes its ACS Optima Software and a number of fully integrated complementary products licensed to the Company that allow apparel manufacturers to manage all phases of the production process, from planning and design to manufacturing, inventory control, distribution and financial reporting. HELP DESK The Company provides on-site and remote help desk services, primarily through IBM and AT&T, to major companies that have outsourced technical support for their internal IT systems. CALL MANAGEMENT The Company provides call management services that facilitate the entire call management process, including call receiving, inbound and outbound telemarketing, data collection and overflow services. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, or the context otherwise requires, all information in this Prospectus (i) gives effect to the amendment and restatement of the Company's certificate of incorporation and by- laws and certain other related actions regarding the conversion of the Company from S corporation to C corporation and the restructuring of the Company's capital stock, all of which will take place immediately prior to the consummation of this offering and is more fully described below under "The Company," and (ii) assumes the Underwriters' over-allotment option is not exercised. THE COMPANY Computer Generated Solutions, Inc. offers its clients a Composite Solution for their information technology ("IT") requirements. The Composite Solution is based on a modular approach which allows the Company to utilize its products and services to create customized solutions for its clients. Products and services provided by the Company range from the ACS Optima Software (as defined) bundled with IBM AS/400 hardware and related support services, to professional services, technical training, full service on-site and remote help desk support and call management services. The marketing of many of the Company's products and services is enhanced through its strategic and other relationships with recognized leaders in the IT industry, including International Business Machines Corporation ("IBM") and AT&T Corp. ("AT&T"). IBM and AT&T accounted for, in the aggregate, approximately 40% of the Company's total revenues in 1996. The Company is a leading supplier of integrated business information systems to the apparel industry. Its solution includes its proprietary ACS Optima software and a number of fully integrated complementary products licensed to the Company (the "ACS Optima Software"), a comprehensive, integrated business information system specifically designed for the apparel industry. The Company provides the ACS Optima Software to many leading United States apparel manufacturers. Representative examples of the Company's ACS Optima Software clients include several divisions of Polo Ralph Lauren Corporation ("Polo Ralph Lauren"), Quicksilver, Inc. ("Quicksilver") and Fritzi of California ("Fritzi"). These representative clients accounted for, in the aggregate, approximately 14% of the Company's total revenues in 1996. The Company also provides a variety of professional services, delivered on a project basis or through staff augmentation, to address clients' systems requirements, ranging from strategy and design through development and implementation to maintenance and support. The Company provides these professional services primarily to clients in the financial, entertainment and communications industries. Representative examples of the Company's clients for professional services include Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Merrill Lynch & Co., Inc. ("Merrill Lynch") and EMI Music Publishing ("EMI Music"). These representative clients accounted for, in the aggregate, approximately 4% of the Company's total revenues in 1996. Through its technical training services, the Company provides approximately 350 comprehensive technical and end-user training classes to its clients' personnel in many leading-edge technologies, including Visual Basic, PowerBuilder, Visual C++ and Sybase. To meet the Company's needs for technical resources, the Company maintains a national proprietary database consisting of technical profiles and resumes of approximately 30,000 professionals. The Company believes that this database, its existing technical staff and other software tools enable it to offer its clients the technical resources necessary to meet their IT requirements and address the challenges of creating "Year 2000" compliant systems. Pursuant to an agreement between IBM and the Company entered into in November 1996, the Company has been designated by IBM as one of six current national "Business Partners" for its "Year 2000" engagements. IBM will utilize the Company and its personnel to meet certain resource requirements for IBM and IBM clients in connection with its "Year 2000" engagements. To date, the Company has not recognized any revenues in connection with this agreement. 3 The Company provides a complete range of IT outsourcing support services, including on-site and remote help desks and integrated call management centers staffed and managed by the Company's personnel. In providing these services, the Company uses sophisticated tools that enable it to serve as the transparent extension of its clients' technical support infrastructure. These services provide the Company's clients with immediate access to skilled technical personnel and a cost-effective solution to their IT outsourcing support needs. Representative examples of the Company's IT outsourcing support clients include IBM and AT&T. The Company was advised by IBM that, effective January 1, 1997, call management services previously provided by the Company to IBM would be provided directly by IBM with IBM personnel as a part of its worldwide call center strategy to support IBM's "core" business functions. The Company recognized revenues of approximately $8.7 million for providing these services to IBM in 1996, representing approximately 15% of the Company's total revenues. In January 1997, the Company and IBM agreed to extend a separate agreement whereby the Company will continue to provide help desk services to IBM and its customers for an additional three-year term. All of the Company's contracts are generally cancellable by the client at any time or, with respect to some of the Company's larger contracts, including those with IBM, on 30 to 90 days notice. At January 31, 1997, the Company had 690 employees operating through facilities located in New York, Atlanta, Chicago, Dallas, Los Angeles, Tampa and Rochester, MN. The Company's total revenue increased from $12.2 million in 1992 to $57.5 million in 1996. THE OFFERING Common Stock offered by the Company................ 2,900,000 shares Common Stock offered by the Selling Stockholders... 640,000 shares Common Stock to be outstanding after the offering.. 12,700,000 shares (1) Use of proceeds.................................... Repayment of certain indebtedness, including approximately $2.5 million of indebtedness owed to Philip Friedman, the Company's President and Chief Executive Officer, fund distributions to the Company's existing stockholders of the cumulative amount of the Company's undistributed taxable earnings for the entire period it was an S corporation (approximately $4.8 million at December 31, 1996) and for general corporate purposes, including working capital, potential strategic acquisitions, strategic business partnerships and future product enhancements. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. CGSI
- -------- (1) Excludes 1,270,000 shares of Common Stock to be reserved for issuance under the Company's 1997 Long-Term Incentive Plan. The Company currently anticipates that options to purchase 587,500 shares of Common Stock will be granted immediately prior to consummation of this offering. See "Management--1997 Long Term Incentive Plan." 4 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA(1): Revenues: Services, software license and maintenance fees................... $ 6,270 $ 8,514 $19,962 $31,704 $47,846 Hardware............................ 5,919 17,489 4,748 4,243 9,641 ------- ------- ------- ------- ------- Total revenues.................... 12,189 26,003 24,710 35,947 57,487 Direct costs: Services, software license and maintenance fees................... 3,751 5,186 12,988 22,970 35,734 Hardware............................ 5,112 15,796 3,882 3,007 8,123 ------- ------- ------- ------- ------- Total direct costs................ 8,863 20,982 16,870 25,977 43,857 ------- ------- ------- ------- ------- Gross profit......................... 3,326 5,021 7,840 9,970 13,630 Selling, general and administrative expenses............................ 1,973 2,916 4,725 6,690 9,995 Compensation amounts to S corporation stockholders........................ 1,232 1,950 3,041 1,502 760 Amortization of cost in excess of fair value of assets purchased...... -- -- 213 320 320 ------- ------- ------- ------- ------- 3,205 4,866 7,979 8,512 11,075 ------- ------- ------- ------- ------- Operating income (loss).............. 121 155 (139) 1,458 2,555 Interest expense..................... -- -- 77 473 540 ------- ------- ------- ------- ------- Income (loss) before income taxes.... 121 155 (216) 985 2,015 Income taxes......................... 31 39 60 33 169 ------- ------- ------- ------- ------- Net income (loss).................... $ 90 $ 116 $ (276) $ 952 $ 1,846 ======= ======= ======= ======= ======= PRO FORMA (UNAUDITED) Historical income before income taxes................................ $ 2,015 Pro forma provision for income taxes(2).............................. 829 ------- Pro forma net income................................................. $ 1,186 ======= Pro forma net income per share(3).................................... $ 0.12 =======
DECEMBER 31, 1996 ---------------------- ACTUAL AS ADJUSTED(4) ------- -------------- BALANCE SHEET DATA: Working capital....................................... $ 3,023 $27,866 Total assets.......................................... 13,776 36,133 Short-term debt, including current portion of capital lease obligations.................................... 2,670 164 Long-term debt, including capital lease obligations... 2,617 471 Stockholders' equity.................................. 3,254 30,263
- -------- (1) For all periods shown, the Company was treated as an S corporation for income tax purposes. Therefore, the Company's historical statements of operations data do not include a provision for U.S. federal income taxes. (2) Adjusted for all periods to record a provision for income taxes as if the Company had been a C corporation. See "The Company." (3) Computed by dividing pro forma net income by the weighted average number of shares of Common Stock outstanding during the periods. Pro forma net income per share for the year ended December 31, 1996 is based on the weighted average number of shares of Common Stock of the Company outstanding prior to this offering, after giving effect to the stock split described in Note 12 of Notes to Financial Statements and increased by the sale of approximately 441,700 shares of Common Stock assuming an offering price of $12.00 per share ($10.87, net of underwriting discount and expenses), the proceeds of which would be necessary to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders. See "Use of Proceeds." Supplemental pro forma net income per share is $0.14 for the year ended December 31, 1996 and is based on the weighted average number of shares of Common Stock of the Company outstanding prior to this offering after giving effect to the stock split described in Note 12 of Notes to Financial Statements and increased by the sale of approximately 869,800 shares of Common Stock assuming an offering price of $12.00 per share ($10.87, net of underwriting discount and expenses), the proceeds of which would be necessary to repay bank and stockholder indebtedness and to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders. See "Use of Proceeds." (4) Adjusted to reflect this offering and the use of a portion of the net proceeds therefrom to repay bank and stockholder indebtedness and to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders (see "Use of Proceeds") and the recording of a deferred tax asset of $295,000 as a result of becoming subject to Federal and additional state and local income taxes. 5 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully by prospective investors in evaluating the Company and its business before purchasing any of the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth below and the matters set forth in this Prospectus generally. DEPENDENCE ON COMPUTER INDUSTRY TRENDS AND MOVEMENT TOWARDS OUTSOURCING The Company's future success is dependent upon the continuation of a number of trends in the computer industry, including the migration by IT end-users to multivendor and multisystem computing environments, the overall increase in the sophistication and interdependency of computing technology and a focus by IT managers on cost-efficient solutions. The Company believes these trends have resulted in an increased demand for support service providers that have the ability to deliver a broad range of IT and support services and a movement by many clients towards outsourcing. The Company's business and growth will depend in large part on the movement toward outsourcing IT services continuing. There can be no assurance that these trends will continue, as organizations may elect to perform such services in-house or that the trends, should they continue, will not serve as an inducement to other companies to enter the Company's market. A significant reversal of these trends could have a material adverse effect on the Company's financial condition and results of operations. See "Business--Industry Background." DEPENDENCE ON SIGNIFICANT RELATIONSHIPS; ABSENCE OF LONG-TERM CONTRACTS The Company's largest client, IBM, accounted for 35% of the Company's revenues for 1996. The Company was advised by IBM that, effective January 1, 1997, call management services previously provided by the Company to IBM would be provided directly by IBM with IBM personnel as a part of its worldwide call center strategy to support IBM's "core" business functions. The Company recognized revenues of approximately $8.7 million for providing these services to IBM in 1996, representing approximately 15% of the Company's revenues. Client contract terms vary depending on the nature of the engagement, and there can be no assurance that a client will renew a contract when it terminates. In addition, the Company's contracts are generally cancellable by the client at any time or, with respect to some of the Company's larger contracts, including those with IBM, on 30 to 90 days notice, and clients may unilaterally reduce their use of the Company's services under such contracts without penalty. The termination or significant reduction of its business relationship with any of its significant clients would have a material adverse effect on the Company's financial condition and results of operations. See "Business." ABILITY TO ATTRACT AND RETAIN QUALIFIED PROJECT MANAGERS AND OTHER TECHNICAL EXPERTS The Company's future success will depend, in part, on its ability to hire and retain adequately trained project and resource managers, systems analysts, business analysts, programming staff and other technical experts who can fulfill the increasingly sophisticated needs of its clients. The Company's on- going need for technical expert resources arises from (i) increased demand for the Company's services, (ii) turnover, which is generally high in the industry, and for the Company, was approximately 55% in 1996 (excluding personnel associated with the call management contract with IBM which is no longer in effect) and (iii) client requests for programmers trained in the newest software technologies. Competition for highly skilled employees in the information systems and services and IT outsourcing support services industry is intense. In particular, competition is intense for the limited number of qualified project managers and professionals with certain specialized skills, such as a working knowledge of certain leading software products. The Company enters into non-competition agreements and does not enter into employee contracts with its project managers and technical experts. There can be no assurance that the Company will be successful in attracting and retaining the qualified personnel it requires to continue its growth. 6 EXTREMELY COMPETITIVE INDUSTRY The industry in which the Company operates is extremely competitive, highly fragmented and subject to rapid changes. While many companies provide information systems and services and IT outsourcing support services, management believes that no one company is dominant. There are numerous and varied providers of such services, including firms specializing in call center operations, temporary staffing and personnel placement companies, general management consulting firms, divisions of large hardware and software companies and niche providers of IT services, many of which compete in only certain markets. The Company competes with and faces potential competition from a number of companies that have significantly greater financial, technical and marketing resources, greater name recognition and a more established client base than the Company. In addition, many of the services offered by the Company historically have been provided, and could in the future be provided, by the in-house personnel of its clients. The Company believes that its ability to compete depends, in part, on a number of factors, including the ability of the Company to hire, retain and motivate a significant number of highly skilled employees and the development by others of products and services that are competitive with the Company's products and services. Management believes that price is not the primary factor in a client's determination to purchase ACS Optima Software and related services but that product functionality and methodology for implementation are the principal competitive considerations. The Company believes that the principal competitive factors in its professional services business include the nature of the services offered, quality of service, responsiveness to customer needs, business experience and technical expertise. With respect to its IT outsourcing support services, the Company competes primarily on the basis of quality of service and price, and the Company could be adversely affected by the price at which others offer comparable IT outsourcing support services. Many of the Company's larger clients purchase IT outsourcing support services primarily from a limited number of preferred vendors. The Company has experienced and continues to anticipate significant pricing pressure from these clients in order to remain competitive. Although the Company believes that it can meet its client's demands for information systems and services and IT outsourcing support services, there can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with any new competitors. FLUCTUATIONS IN OPERATING RESULTS The Company's revenue and operating results historically have varied from quarter to quarter and may continue to vary in the future due to a combination of factors, including (i) the timing and amount of significant orders from the Company's clients, (ii) the Company's success in developing, introducing and shipping ACS Optima Software enhancements and new versions of ACS Optima Software, (iii) pricing actions by the Company or its competitors, (iv) the requirements of the Company's business partners and (v) general economic conditions. A high percentage of the Company's operating expenses, particularly personnel and rent, are relatively fixed in advance of any particular quarter. As a result, unanticipated variations in employee utilization rates may cause significant variations in operating results in any particular quarter. An unanticipated termination of a major project, a client's decision not to pursue a new project or proceed to succeeding stages of a current project, or the completion during a quarter of several major client projects could require the Company to pay underutilized employees and therefore have a material adverse effect on the Company's results of operation and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." In addition, ACS Optima Software and related systems integration sales, which accounted for approximately 38% of the Company's revenues in 1996, are specifically designed for the apparel industry, and the Company may experience substantial period-to-period fluctuations or a downturn in future operating results relating to ACS Optima Software due to general apparel industry conditions and overall economic conditions. INTERNAL EXPANSION AND ACQUISITION RISKS The Company's continued growth through internal expansion is dependent on the Company's ability to generate additional revenue from existing and new clients. The Company believes that internal expansion also 7 will depend on the Company's ability to obtain and develop new products and services, including those related to the "Year 2000" problem, and there can be no assurance that the Company will be able to obtain or develop such products or services. Part of the Company's strategy in enhancing its professional service revenues is to provide solutions to its customers' "Year 2000" problems through products and services, including professional resources. There can be no assurance that any products for "Year 2000" will be accepted by the Company's clients or that the Company will recognize any revenues from such products or related professional resources. See "Business--Information Systems and Services--Professional Services." As part of its business strategy, the Company intends to expand by acquiring IT solutions, outsourcing support, consulting and systems integration businesses in attractive markets or which have desirable client relationships. While the Company from time to time evaluates acquisition opportunities, it has not entered into any definitive agreement or understanding with respect to any particular acquisition. The success of this strategy depends not only upon the Company's ability to identify and acquire businesses on a cost-effective basis, but also upon its ability to integrate acquired operations into its organization effectively, to retain and motivate key personnel and to retain clients of acquired firms. In addition, the Company expects to experience competition for acquisitions, and there can be no assurance that suitable acquisition candidates will be available, that acquisitions can be completed on reasonable terms or that the Company will have access to adequate funds to effect any desired acquisition. In addition, as part of its business strategy, the Company intends to expand internationally. The Company's success in expanding internationally will be affected by, and any future international operations will be subject to, certain additional risks, including general economic and political conditions in each applicable country, the effect of any applicable foreign tax structures, tariff and trade regulations, difficulties in obtaining local licenses, the difficulty of managing an organization spread over various jurisdictions and geographical regions and compliance with a variety of changing local laws and regulations. In addition, legislation in foreign countries may not always provide adequate protection for the Company's proprietary intellectual property rights. International operations may also subject the Company's operating results to the effects of fluctuations in foreign currency exchange rates. RISKS ASSOCIATED WITH MANAGEMENT OF A LARGE AND RAPIDLY CHANGING BUSINESS The Company has experienced significant growth, which has placed and, if sustained, will continue to place a substantial strain on its operational, administrative and financial resources. The Company's ability to effectively manage growth of its staff and facilities will require it to continue to improve its operational, financial and other internal systems, and to train, motivate and manage its project managers and other technical experts. If the Company's management is unable to manage growth effectively or its employees are unable to achieve anticipated performance levels, such occurrences could have a material adverse effect on the Company's financial condition and results of operations. RELIANCE ON KEY EXECUTIVES The Company's success depends to a significant extent upon the continued services of its executive officers and other key management and sales personnel, in particular Philip Friedman, the Company's President and Chief Executive Officer. The Company has no employment contracts with any of its employees and maintains key man insurance on Philip Friedman in the amount of only $500,000. The unavailability of the continuing services of any of its executive officers and other key management and sales personnel could have an adverse effect on the Company's financial condition and results of operations. See "Management." DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS The Company's success is dependent, in part, upon its proprietary intellectual property rights. The Company relies on contractual arrangements, such as trade secrets and non-disclosure agreements, and copyright and trademark law to protect its proprietary intellectual property. While the Company holds registered copyrights with respect to certain modules of the ACS Optima Software, generally enters into confidentiality agreements 8 with its employees, consultants, clients and potential clients and limits access to and distribution of its confidential and proprietary data, there can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. The Company's business includes the development of custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to the client. Although the Company believes that its products and services do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future. RISK OF EMERGENCY INTERRUPTION OF HELP DESK AND CALL MANAGEMENT OPERATIONS The Company's operations are dependent upon the ability to protect its help desk and call management operations and its information databases against damage that may be caused by fire, power failure, telecommunications failures, unauthorized intrusion, computer viruses and other emergencies. At its facilities, the Company has taken precautions to protect itself and its customers from events that could interrupt delivery of the Company's services. These precautions include off-site storage of backup data, fire protection and physical security systems. Notwithstanding such precautions, there can be no assurance that a fire, natural disaster, human error, equipment malfunction or inadequacy or other event would not result in a prolonged interruption in the Company's ability to provide services to its clients. Such an event could have a material adverse effect on the Company's financial condition and results of operations. In addition, at its clients' facilities, protecting help desk and call management operations is the responsibility of its clients. While management believes that its clients have taken precautions similar to those taken by the Company at its facilities, there can be no assurance that this will continue to be the case. To the extent such precautions are not taken, this could have a material adverse effect on the Company's financial condition and results of operations. CONTROLLING STOCKHOLDER; ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK Upon consummation of this offering, Philip Friedman, the Company's President and Chief Executive Officer, and his brother Victor Friedman, the Company's Executive Vice President (collectively, the "Principal Stockholders"), will beneficially own 66.0% and 6.2%, respectively, of the outstanding shares of Common Stock. As a result, Philip Friedman will be able to control the outcome of matters requiring a stockholder vote, including electing directors, adopting or amending certain provisions of the Company's Certificate of Incorporation (as defined) and By-Laws (as defined) and approving or preventing certain mergers or other similar transactions, such as a merger involving the Company or a sale of substantially all of the Company's assets (including transactions that could give holders of the Common Stock the opportunity to realize a premium over the then-prevailing market price for their shares). Therefore, purchasers of Common Stock offered hereby will become minority stockholders of the Company and will be unable to control the management or business policies of the Company. Moreover, subject to contractual restrictions and general fiduciary obligations, the Company is not prohibited from engaging in transactions with its management, the Principal Stockholders or entities in which such persons are interested. The Certificate of Incorporation also provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms and certain super majority voting provisions. The Company's Certificate of Incorporation does not provide for cumulative voting in the election of directors and, as a result, Philip Friedman will be able to elect all the directors. Furthermore, the Company is subject to Section 203 of the Delaware General Corporation Law. The existence of these provisions, together with the stock ownership of the Principal Stockholders, would be expected to have an anti-takeover effect, including possibly discouraging takeover attempts that might result in a premium over the market price for the shares of Common Stock. See "Description of Capital Stock" and "Principal and Selling Stockholders." The Company's Certificate of Incorporation authorizes the issuance of "blank check" preferred stock ("Preferred Stock") with such designations, rights and preferences as may be determined from time to time by the Board of Directors. In the event of issuance, such Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. In 9 addition, the issuance of Preferred Stock may adversely affect the voting and dividend rights, rights upon liquidation and other rights of the holders of Common Stock (including the purchasers of Common Stock in this offering). Although the Company has no present intention to issue any shares of such Preferred Stock, the Company retains the right to do so in the future. ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that, following this offering, an active trading market for the Common Stock will develop or be sustained or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiations among the Company and the Representatives (as defined) and will not necessarily be indicative of the market price of the Common Stock after this offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. In addition, the market price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, changes in earnings estimates by securities analysts, general trends in the technology and emerging growth company sectors and other factors. The securities markets have experienced significant price and volume fluctuations from time to time in recent years that often have been unrelated or disproportionate to the operating performance of particular companies and which have particularly affected the market price of equity securities of technology companies. These broad fluctuations may adversely affect the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of substantial amounts of Common Stock in the public market after this offering could adversely affect the prevailing market price of the shares of Common Stock offered hereby and the Company's ability to raise additional capital through additional public offerings of equity securities. In addition to the 3,540,000 shares of Common Stock offered hereby, as of the date of this Prospectus, there are 9,160,000 shares of Common Stock outstanding, all of which are "restricted" shares (the "Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"), and are held by the Principal Stockholders. Beginning 180 days after the date of this Prospectus, upon the expiration of certain lock-up agreements with the Underwriters, the Restricted Shares will first become eligible for sale in the public market subject to certain volume and other resale restrictions pursuant to Rule 144 under the Securities Act. The Principal Stockholders are also entitled to certain rights with respect to the registration under the Securities Act of shares held by them. See "Certain Relationships and Related Party Transactions." In addition, after this offering, the Company intends to file a registration statement under the Securities Act to register 1,270,000 shares of Common Stock reserved for issuance upon the exercise of options or awards of restricted stock that may be granted under the 1997 Long-Term Incentive Plan. See "Management--1997 Long-Term Incentive Plan," "Principal and Selling Stockholders" and "Shares Eligible for Future Sale." NO DIVIDENDS The Company anticipates that, for the foreseeable future, all earnings, if any, will be retained for the operation and expansion of its business and that it will not pay dividends after the payment of the dividends to the Company's Principal Stockholders as described under "The Company." See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION The purchasers of the shares of Common Stock will experience immediate dilution after this offering. See "Dilution." In addition, an aggregate of 1,270,000 shares of Common Stock are reserved for issuance under the Company's 1997 Long-Term Incentive Plan, which shares, when and if issued, may cause additional dilution to the purchasers of Common Stock offered hereby. The Company currently anticipates that options to purchase 587,500 shares of Common Stock at the initial public offering price will be granted immediately prior to consummation of this offering. 10 THE COMPANY The Company was founded in April 1984. Prior to this offering, Philip Friedman and his brother Victor Friedman owned 90% and 10%, respectively, of the common stock. Since its incorporation, the Company has been treated for federal income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and the Company's earnings have been taxed for federal and certain state income tax purposes directly to its stockholders rather than to the Company. See Note 13 to the financial statements of the Company. The Company will terminate its S corporation status effective as of the day preceding the consummation of this offering (the "S Termination Date"). As a result, the Company will have a final S short year ending on and including the day preceding the S Termination Date. On and after the S Termination Date, the Company will no longer be treated as an S corporation and, accordingly, will be fully subject to federal, state and local income taxes. Upon consummation of this offering, the Company plans to distribute to its stockholders of record immediately prior to this offering the cumulative amount of its undistributed earnings for the entire period that it was an S corporation (i.e., from inception through the day preceding the S Termination Date), which earnings have been or will be taxed to such stockholders for federal and certain state income tax purposes. As of December 31, 1996, the cumulative balance of such undistributed S period taxable earnings was approximately $4.8 million. To this amount will be added, for purposes of calculating the amount of the distribution, the taxable earnings of the Company from January 1, 1997 to the day prior to the S Termination Date (less any distributions made by the Company during such period). Should there be any adjustments to the Company's federal taxable income that result in a shifting of income from taxable years in which the Company was an S corporation to subsequent non-S corporation taxable years of the Company, or vice versa, the stockholders of record immediately prior to this offering shall pay to the Company (in the former circumstance) or the Company shall pay to such stockholders (in the latter circumstance), the amount of federal, state and local income taxes, including penalties and interest, incurred by the Company or the stockholders, as the case may be, as a result of such adjustment to income (without regard to any tax benefit that the stockholders may realize from an increase in the basis of their Common Stock that results from such adjustment); provided that the stockholders' obligation to the Company cannot exceed the amount of the income that was shifted from an S corporation year to a non-S corporation year less the federal, state and local income taxes incurred by the stockholders with respect to such income. To the extent that any such amount is paid to a stockholder after the date which is one year from the S Termination Date, such amount will be increased in an amount, if any, necessary to reimburse such stockholder for taxes required to be paid by him as a result of his receipt of such amount (as so increased). The cost to the Company of any such payment could exceed the amount of the savings realized by the Company as a result of such adjustment to income. The stockholders of record immediately prior to this offering will also indemnify and hold harmless the Company from any federal and New York state income tax liabilities (including interest and penalties) that result from the failure of the Company to qualify as an S corporation for any year or years ending on or prior to December 31, 1996 or for the period from January 1, 1997 through the day prior to the S Termination Date. Prior to the consummation of this offering, the Company will also adopt an amended and restated certificate of incorporation (the "Certificate of Incorporation") and by-laws (the "By-Laws"). The Certificate of Incorporation will provide for "blank check" Preferred Stock, a Board of Directors that will be divided into three classes of directors serving staggered three-year terms and certain super majority voting provisions. See "Description of Capital Stock." Also immediately prior to this offering, the Company will effect a 1,300.42 for one stock split of its existing common stock, following which the Company's current stockholders, Philip Friedman and Victor Friedman, will exchange such common stock on a one-for-one basis for Common Stock. The Company is incorporated in the State of Delaware and maintains its principal executive offices at 1675 Broadway, New York, New York 10019. The Company's telephone number is (212) 408-3800. 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $31.5 million (or approximately $37.4 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and estimated offering expenses and assuming an initial offering price of $12.00 per share. The Company intends to use the net proceeds (i) to repay all outstanding indebtedness (a) owed to Philip Friedman in the aggregate amount of approximately $2.5 million, which indebtedness is payable upon demand and bears interest at 10.0%, (b) under the Company's revolving credit facility ($2.1 million as of December 31, 1996), which indebtedness bears interest at the bank's prime rate (8.25% at December 31, 1996) and matures in May 1997, and (c) under the Company's term loan ($133,000 outstanding as of December 31, 1996), which indebtedness bears interest at 1.25% per annum above such prime rate and matures in June 1997, (ii) to distribute to its stockholders of record immediately prior to this offering the cumulative amount of the Company's undistributed taxable earnings for the entire period that it was an S corporation (approximately $4.8 million at December 31, 1996) and (iii) for general corporate purposes, including working capital, potential strategic acquisitions, strategic business partnerships and future product enhancements. While the Company from time to time evaluates acquisition opportunities, it has not entered into any definitive agreement or understanding, and is currently not participating in any negotiations, with respect to any particular acquisition. The Company currently anticipates that any acquisition would be of a business similar or complementary to the business currently conducted by the Company. The Company will not receive any proceeds from the sale of the Common Stock by the Selling Stockholders. DIVIDEND POLICY The Company has not paid any cash dividends on its common stock in the last three years ended December 31, 1996. The Company intends to retain its earnings for reinvestment in the Company and, therefore, does not anticipate paying any dividends on the Common Stock in the foreseeable future, other than the payment of the dividend to the Company's Principal Stockholders as described under "The Company." Subject to any restrictions in any future financing agreements, any future determination as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, capital requirements and other factors deemed relevant by the Board of Directors. 12 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Company as of December 31, 1996, (ii) the pro forma capitalization of the Company adjusted to give effect to (a) the declaration of an S corporation distribution to its then existing stockholders representing all of its previously earned and undistributed S corporation taxable earnings through December 31, 1996, (b) the expected repayment of subordinated indebtedness owed to Philip Friedman using a portion of the net proceeds from the sale by the Company of the 2,900,000 shares of Common Stock offered hereby and, (c) the recording of a deferred tax asset of $295,000 as a result of becoming subject to Federal and additional state and local income taxes and (iii) the pro forma capitalization of the Company as adjusted to give effect to the sale by the Company of the 2,900,000 shares of Common Stock offered hereby after deducting the estimated underwriting discount and estimated offering expenses payable by the Company and the anticipated application by the Company of the estimated net proceeds therefrom. See "Use of Proceeds" and "Certain Transactions."
DECEMBER 31, 1996 -------------------------------------- PRO FORMA ACTUAL(1) PRO FORMA (1) AS ADJUSTED(1) --------- ------------- -------------- (IN THOUSANDS) Short-term debt, including current por- tion of capital lease obligations...... $2,670 $9,616 $ 164 ====== ====== ======= Long-term debt, including capital lease obligations............................ $ 471 $ 471 $ 471 ------ ------ ------- Subordinated debt-stockholder........... 2,146 -- -- ------ ------ ------- Stockholders' equity: Preferred Stock, $.001 par value, 1,000,000 shares authorized, no shares issued and outstanding........ -- -- -- Common Stock, $.001 par value, 25,000,000 shares authorized, 9,800,000 shares issued and outstand- ing actual; and 12,700,000 shares is- sued and outstanding as adjusted(2).. 10 10 13 Additional paid-in capital............ 77 77 27,083 Retained earnings (deficit)........... 3,167 (1,388) 3,167 ------ ------ ------- Total stockholders' equity.......... 3,254 (1,251) 30,263 ------ ------ ------- Total capitalization................ $5,871 $ (780) $30,734 ====== ====== =======
- -------- (1) After giving effect to the proposed stock split and subsequent exchange discussed under "The Company." (2) Issued and outstanding shares do not include 1,270,000 shares of Common Stock reserved for issuance under the Company's 1997 Long-Term Incentive Plan. The Company currently anticipates that options to purchase 587,500 shares of Common Stock will be granted immediately prior to consummation of this offering. See "Management--1997 Long-Term Incentive Plan." 13 DILUTION As of December 31, 1996, the net tangible book value of the Company was approximately $2.8 million or $0.28 per share of Common Stock. "Net tangible book value per share" represents the total amount of tangible assets of the Company reduced by the amount of total liabilities and divided by the number of shares of Common Stock outstanding after giving effect to the stock split described in Note 12 of Notes to Financial Statements. After giving effect to the sale by the Company of 2,900,000 shares of Common Stock in this offering, at an assumed initial public offering price of $12.00 per share and after deducting the estimated underwriting discount and offering expenses, the net tangible book value of the Company at December 31, 1996 would have been approximately $29.7 million or $2.34 per share of Common Stock. This represents an immediate increase in net tangible book value of approximately $2.06 per share of Common Stock to existing stockholders and an immediate dilution of approximately $9.66 per share of Common Stock to new investors in this offering. Dilution per share represents the difference between the price per share paid by new investors and the net tangible book value per share immediately after this offering. The following table illustrates the per share dilution: Assumed initial public offering price per share................... $12.00 Net tangible book value per share as of December 31, 1996....... $0.28 Increase in net tangible book value per share attributable to new investors.................................................. 2.06 ----- Net tangible book value per share after this offering............. 2.34 ------ Net tangible book value per share dilution to new investors....... $ 9.66 ======
The following table sets forth, as of December 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share of Common Stock paid by existing stockholders and by new investors purchasing shares of Common Stock in this offering:
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION -------------------------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------- ---------------------- ------- ------------- Existing stockholders... 9,800,000 77.2% $ 87,000 0.3% $ 0.01 New investors........... 2,900,000 22.8 34,800,000 99.7% $12.00 ------------- -------- ----------- ----- Total................. 12,700,000 100.0% $34,887,000 100.0% ============= ======== =========== =====
- -------- (1) The foregoing table does not reflect the sale of Common Stock by the Selling Stockholders. Sales by the Selling Stockholders in this offering will reduce the number of shares held by existing stockholders to 9,160,000 or approximately 72.1% of the total number of shares of Common Stock outstanding after this offering (9,160,000 or approximately 69.2%, if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares to be purchased by the new investors to 3,540,000. After this offering, the new investors will own 27.9% of the total number of shares of Common Stock outstanding after this offering (4,071,000 or approximately 30.8%, if the Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." (2) The foregoing table does not give effect to 1,270,000 shares of Common Stock to be reserved for issuance under the Company's 1997 Long-Term Incentive Plan, which shares, when and if issued, may cause additional dilution to new investors. The Company currently anticipates that options to purchase 587,500 shares of Common Stock at the initial public offering price will be granted immediately prior to consummation of this offering. See "Management--1997 Long Term Incentive Plan" and "Risk Factors--Immediate and Substantial Dilution." 14 SELECTED FINANCIAL DATA The following selected financial data of the Company as of and for the years ended December 31, 1995 and 1996 are derived from the financial statements of the Company which were audited by Ernst & Young LLP, independent auditors. The report of such auditors with respect to such financial statements appear elsewhere in this Prospectus. The following selected financial information of the Company as of and for the years ended December 31, 1992, 1993 and 1994 are derived from the financial statements of the Company which were audited by BDO Seidman, LLP, independent auditors. The report of such auditors with respect to the financial statements for the year ended December 31, 1994 appears elsewhere in this Prospectus. Historical results are not necessarily indicative of future results. The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation," "Capitalization" and the Company's financial statements and notes thereto included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ---------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1): Revenues: Services, software license and maintenance fees................... $ 6,270 $ 8,514 $19,962 $31,704 $47,846 Hardware............................ 5,919 17,489 4,748 4,243 9,641 ------- ------- ------- ------- ------- Total revenues.................... 12,189 26,003 24,710 35,947 57,487 Direct costs: Services, software license and maintenance fees................... 3,751 5,186 12,988 22,970 35,734 Hardware............................ 5,112 15,796 3,882 3,007 8,123 ------- ------- ------- ------- ------- Total direct costs................ 8,863 20,982 16,870 25,977 43,857 Gross profit......................... 3,326 5,021 7,840 9,970 13,630 Selling, general and administrative expenses............................ 1,973 2,916 4,725 6,690 9,995 Compensation amounts to S corporation stockholders........................ 1,232 1,950 3,041 1,502 760 Amortization of cost in excess of fair value of assets purchased...... -- -- 213 320 320 ------- ------- ------- ------- ------- 3,205 4,866 7,979 8,512 11,075 ------- ------- ------- ------- ------- Operating income (loss).............. 121 155 (139) 1,458 2,555 Interest expense..................... -- -- 77 473 540 ------- ------- ------- ------- ------- Income (loss) before income taxes.... 121 155 (216) 985 2,015 Income taxes......................... 31 39 60 33 169 ------- ------- ------- ------- ------- Net income (loss).................... $ 90 $ 116 $ (276) $ 952 $ 1,846 ======= ======= ======= ======= ======= PRO FORMA (UNAUDITED): Historical income before income taxes................................ $ 2,015 Pro forma provision for income taxes(2).............................. 829 ------- Pro forma net income................................................. $ 1,186 ======= Pro forma net income per share(3).................................... $ 0.12 ======= DECEMBER 31, ---------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital...................... $ 549 $ 953 $ 1,296 $ 1,943 $ 3,023 Total assets......................... 3,092 6,454 7,727 11,653 13,776 Short-term debt, including current portion of capital lease obliga- tions............................... 608 -- 2,272 4,088 2,670 Long-term debt, including capital lease obligations................... 476 934 2,383 2,625 2,617 Stockholders' equity................. 364 480 456 1,408 3,254
- ------- (1) For all periods shown, the Company was treated as an S corporation for income tax purposes. Therefore, the Company's historical statements of operations data do not include a provision for U.S. federal income taxes. (2) Adjusted for all periods to record a provision for income taxes as if the Company had been a C corporation. See "The Company." (3) Computed by dividing pro forma net income by the weighted average number of shares of Common Stock of the Company outstanding during the periods. Pro forma net income per share for the year ended December 31, 1996 is based on the weighted average number of shares of Common Stock of the Company outstanding prior to this offering, after giving effect to the stock split described in Note 12 of Notes to Financial Statements and increased by the sale of approximately 441,700 shares of Common Stock assuming an offering price of $12 per share ($10.87, net of underwriting discount and expenses), the proceeds of which would be necessary to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders. see "Use of Proceeds." Supplemental pro forma net income per share is $0.14 for the year ended December 31, 1996 and is based on the weighted average number of shares of Common Stock of the Company outstanding prior to this offering, after giving effect to the stock split described in Note 12 of Notes to Financial Statements and increased by the sale of approximately 869,800 shares of Common Stock assuming an offering price of $12 per share ($10.87, net of underwriting discount and expenses), the proceeds of which would be necessary to repay bank and stockholder indebtedness and to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders. See "Use of Proceeds." 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company derives its revenues principally by providing IT services. The Company's information systems and services include the ACS Optima Software and IBM's AS/400 hardware, as well as a complete range of professional services and training. The Company's IT outsourcing support services consist of on-site and remote help desk and integrated call management services. Information systems and services revenues were 78.0%, 64.0% and 54.0% of total revenue in 1994, 1995 and 1996, respectively. Information systems and services revenues as a percentage of total revenues decreased as a result of the growth in revenues from IT outsourcing support services. The Company achieved 19.1% and 33.6% growth in information systems and services revenue dollars in 1995 and 1996, respectively, principally as a result of the growth of the ACS Optima Software business. In May 1994, the Company purchased the business operations of ACS Software Products Group, which included the ACS Optima Software package. Previously, the Company had been a remarketer of ACS software and had received commission revenues from the sale of ACS software. The excess of the total acquisition cost over the fair value of net assets acquired of $959,000 is amortized on a straight-line basis over three years. In October 1994, the Company enhanced its ability to provide professional services to the financial community when it purchased the business operations of Real-Time Technology, Inc. ("Real-Time"), an information consulting company which provided professional services primarily to the financial community. Real-Time was then owned by Victor Friedman. For the years 1994, 1995 and 1996, substantially all of the Company's information systems and services revenues, other than revenues from sales of hardware and software, were generated on a time plus materials basis. Research and development costs associated with the ACS Optima Software are expensed as incurred and are included in direct costs. In 1994, the Company undertook a focused effort to increase revenues from ACS Optima Software and services and IT outsourcing support services and decrease revenue from hardware sales, which generally have lower margins. As a result, total revenues decreased 5.0% in 1994, but gross profit increased 56.1%. For 1995, revenues excluding hardware revenues, increased 59.0% from 1994 and hardware revenues decreased 11.0%. In 1996, revenues excluding hardware revenues increased 50.9% from 1995 and hardware revenues increased 127.2%. The increase in hardware revenues was the result of increased ACS software sales which usually have an AS/400 hardware component as part of the sale. The Company's IT outsourcing support services have grown significantly since 1993. In 1993, IT outsourcing support services revenue represented only 7.0% of total revenues, compared to 46.0% for 1996. Revenues from the Company's IT outsourcing support business increased 107.0% in 1996. In October 1995, the Company was awarded a contract by IBM to provide its customers with call management support at IBM's Atlanta and Dallas facilities. In 1996, the Company was advised by IBM that, effective January 1, 1997, call management services previously provided by the Company at facilities in Dallas and Atlanta to IBM would be provided directly with IBM personnel by IBM as a part of its worldwide call center strategy to support IBM's "core" business functions. The Company recognized revenues of approximately $8.7 million for providing these services to IBM in 1996, representing approximately 15% of the Company's total revenues. Outsourcing support services revenues from remote help desk and call management services were $5.2 million, $11.0 million and $21.2 million for 1994, 1995 and 1996, respectively. The Company's on-site help desk support services, which were started in mid-1994, provided $1.9 million in revenues for 1995 and $5.4 million for 1996. During 1994 through 1996, IT outsourcing support services revenues were generated on a time plus materials basis. Beginning January 1, 1997, remote help desk services will be billed primarily on a per call basis. The Company, with the consent of its stockholders, has elected to be taxed as an S corporation pursuant to the Code and certain state tax laws. As such, the Company has not been subject to federal and certain state income taxes and the stockholders have included the Company's taxable income or loss in their individual income tax returns. Income taxes in 1994, 1995 and 1996 primarily represent New York City corporate income taxes. The New York City income tax rate is 8.85%. 16 STATEMENT OF OPERATIONS The following table sets forth certain items from the Company's statement of operations as a percentage of total revenues for the periods indicated:
YEARS ENDED DECEMBER 31, ----------------------------- 1994 1995 1996 -------- -------- -------- Revenues: Services, software license and maintenance fees........................................ 80.8 % 88.2% 83.2% Hardware..................................... 19.2 11.8 16.8 -------- -------- -------- Total revenues............................. 100.0 100.0 100.0 Direct costs: Services, software license and maintenance fees........................................ 52.6 63.9 62.2 Hardware..................................... 15.7 8.4 14.1 -------- -------- -------- Total direct costs......................... 68.3 72.3 76.3 -------- -------- -------- Gross profit................................... 31.7 27.7 23.7 Selling, general and administrative............ 19.1 18.6 17.4 Compensation amounts to S Corporation stock- holders....................................... 12.3 4.2 1.3 Amortization of cost in excess of fair value of assets purchased.............................. 0.9 0.9 0.6 -------- -------- -------- 32.3 23.7 19.3 -------- -------- -------- Operating income (loss)........................ (0.6) 4.0 4.4 Interest expense............................... 0.3 1.3 0.9 -------- -------- -------- Income (loss) before income taxes.............. (0.9) 2.7 3.5 Income taxes................................... 0.2 0.1 0.3 -------- -------- -------- Net income (loss).............................. (1.1)% 2.6% 3.2% ======== ======== ========
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. The Company's total revenues increased 59.9% to $57.5 million in 1996 from $35.9 million in 1995. Information systems and services revenues increased 33.3% to $30.8 million in 1996 from $23.1 million in 1995. This was primarily due to an increase in revenues from ACS Optima Software and related systems integration sales of $9.8 million to $22.0 million in 1996 from $12.2 million in 1995. This increase was partially offset by a decrease in revenues from professional services of $2.8 million to $5.9 million in 1996 from $8.7 million in 1995. The decrease in professional services revenues resulted principally from a discontinuance in 1995 of the Company's sales and services of certain financial and distribution software packages. IT outsourcing support revenues increased 107.0% to $26.7 million for 1996 from $12.9 million for 1995, in part due to the start of the Company's call management business in October 1995. The Company recognized revenues of approximately $8.7 million in 1996 for providing call management services to IBM, representing approximately 15% of the Company's total revenues in 1996. Effective January 1, 1997, the Company no longer provides call management services to IBM. The balance of the increase in IT outsourcing support revenues resulted from growth in existing remote help desk services and the expansion of on-site help desk services. Direct Costs. Direct costs, which are comprised primarily of direct salaries, direct benefits and related costs and resale purchases of third party hardware and software, increased 68.8% to $43.9 million (76.3% of revenues) for 1996 from $26.0 million (72.3% of revenues) for 1995. Direct costs increased as a percentage of revenues primarily due to (i) the significant increase in the number of employees associated with the Company's growth in IT outsourcing support revenues and (ii) the resale purchase of third party hardware and software, 17 which increased to $8.9 million for 1996 from $3.0 million for 1995. Gross margins on hardware sales for 1996 were 15.8% as compared to 29.2% in 1995. The decrease in gross margin is principally the result of network hardware sales which generally have lower margins than AS/400 margins. Network hardware sales increased to $3.3 million in 1996 from $1.3 million in 1995. Direct costs which are associated with sales of third party hardware and software are larger as a percentage of revenues than direct costs associated with professional services or IT outsourcing support services. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") consist primarily of indirect salaries and facility costs for administrative, selling and executive personnel, as well as insurance costs, advertising, professional fees and other non-direct costs. SG&A expenses increased 49.4% to $10.0 million (17.4% of revenues) for 1996 from $6.7 million (18.6% of revenues) for 1995. The overall increase in SG&A resulted from the Company supporting its growing infrastructure. Some of the larger increases were selling and administrative salaries ($1.8 million), facility costs (approximately $500,000) depreciation (approximately $175,000), full satisfaction of a dispute with the Pension Benefit Guaranty Corporation (approximately $150,000) and advertising (approximately $100,000). SG&A decreased as a percentage of revenues because certain SG&A costs are fixed and for 1996 were absorbed over a larger revenue base. Compensation Amounts to S Corporation Stockholders. Compensation amounts to S corporation stockholders represent salaries and bonuses paid to stockholders. Compensation amounts to S corporation stockholders decreased approximately $742,000 to approximately $760,000, (1.3% of revenues) for 1996 from $1.5 million (4.2% of revenues) for 1995. For 1996, the Company recorded compensation amounts to S corporation stockholders to reflect the aggregate base salary in effect during 1996. Amortization of Cost in Excess of Fair Value of Assets Purchased. Amortization of cost in excess of fair value of assets purchased, which consists of cost in excess of fair value of assets purchased related to the acquisition of the ACS Software Products Group, was approximately $320,000 for 1996 and 1995. Interest Expense. Interest expense increased to approximately $540,000 (0.9% of revenues) in 1996 from approximately $473,000 (1.3% of revenues) in 1995. This increase was principally the result of increased working capital borrowings used to finance the Company's growth. YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenues. The Company's total revenues increased 45.5% to $35.9 million in 1995 from $24.7 million in 1994. Information systems and services revenues increased 19.1% to $23.1 million in 1995 from $19.4 million in 1994, principally because of revenues associated with the full year effects of the ACS acquisition which was consummated in May of 1994. IT outsourcing support revenues increased 143.3% to $12.9 million in 1995 from $5.3 million in 1994, primarily due to increased revenues realized from existing and additional remote help desk services and the start up of call management and on-site help desk services. Direct Costs. Direct costs increased 54.0% to $26.0 million (72.3% of revenues) for 1995 from $16.9 million (68.3% of revenues) for 1994. Direct costs increased as a percentage of revenues because of the addition of a number of technical personnel in connection with the increase in ACS Optima and IT outsourcing support services revenue, which technical personnel needed to be properly trained, thereby resulting in lower than normal billable production. In addition, the increase in IT outsourcing support services revenue, which generally realize lower margins, also contributed to the increase in direct costs as a percentage of revenues. Finally, during the early part of 1995, the Company completed certain professional services contracts related to AS/400 programming, which generally have higher margins. Selling, General and Administrative Expenses. SG&A expenses increased 41.6% to $6.7 million (18.6% of revenues) for 1995 from $4.7 million (19.1% of revenues) for 1994. The Company incurred an increase of approximately $1.1 million in selling and administrative salaries to support its operational growth and approximately $900,000 of additional SG&A expense related to the Company's move into larger facilities in New York and Atlanta, the expansion of its Los Angeles facility and the opening of its Dallas office. SG&A decreased as a percentage of revenues because certain SG&A costs are fixed and in 1995 were absorbed over a larger revenue base. 18 Compensation Amounts to S Corporation Stockholders. Compensation amounts to S corporation stockholders for annual periods represents annual salaries and year-end bonuses. Such compensation decreased approximately $1.5 million in 1995 to $1.5 million (4.2% of revenues) from $3.0 million (12.3% of revenues) in 1994. A portion of each year's compensation amounts to S corporation stockholders was subsequently loaned to the Company in the form of subordinated debt in the amounts of $1.2 million and approximately $300,000 in 1994 and 1995, respectively. Amortization of Cost in Excess of Fair Value of Assets Purchased. Amortization of cost in excess of fair value of assets purchased increased 50.2% to approximately $320,000 (0.9% of revenues) for 1995 from approximately $213,000 (0.9% of revenues) for 1994. The 1995 balance reflects a full year of amortization. Interest Expense. Interest expense increased to approximately $473,000 (1.3% of revenues) in 1995 from approximately $77,000 (0.3% of revenues) in 1994. This increase is a result of increased working capital borrowings used to finance the Company's growth, as well as interest expense associated with an increase in subordinated debt to stockholders. PRO FORMA STATEMENTS OF OPERATIONS DATA (UNAUDITED) Since 1984, the Company has elected to be taxed as an S corporation pursuant to the Code and certain state tax laws. The pro forma statements of operations differ from the historical statements of operations as a result of an adjustment to record a provision for income taxes on income as if the Company had been a C corporation.
YEAR ENDED DECEMBER 31, 1996 ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Services, software license and maintenance fees....... $47,846 Hardware.............................................. 9,641 ------- Total revenues...................................... 57,487 Direct costs: Services, software license and maintenance fees....... 35,734 Hardware.............................................. 8,123 ------- Total direct costs.................................. 43,857 ------- Gross profit............................................ 13,630 Selling, general and administrative expenses............ 9,995 Compensation amounts to S corporation stockholders...... 760 Amortization of cost in excess of fair value of assets purchased.............................................. 320 ------- 11,075 ------- Operating income........................................ 2,555 Interest expense........................................ 540 ------- Income before income taxes.............................. 2,015 Income taxes............................................ 829 ------- Pro forma net income.................................... $ 1,186 ======= Pro forma net income per share(1)....................... $ 0.12 =======
- -------- (1) Computed by dividing pro forma net income by the weighted number of shares of Common Stock outstanding during the period. Pro forma net income per share for the year ended December 31, 1996 is based on the weighted average number of shares of Common Stock of the Company outstanding prior to this offering, after giving effect to the stock split described in Note 12 of Notes to Financial Statements and increased by the sale of approximately 441,700 shares of Common Stock assuming an offering price of $12 per share ($10.87, net of underwriting discount and expenses), the proceeds of which would be necessary to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders. See "Use of Proceeds." Supplemental pro forma net income per share is $0.14 for the year ended December 31, 1996 and is based on the weighted average number of shares of Common Stock of the Company outstanding prior to this offering after giving effect to the stock split described in Note 12 of Notes to Financial Statements and increased by the sale of approximately 869,800 shares of Common Stock assuming an offering price of $12.00 per share ($10.87, net of underwriting discount and expenses), the proceeds of which would be necessary to repay bank and stockholder indebtedness and to pay the cumulative amount of undistributed taxable earnings to the Company's existing stockholders. See "Use of Proceeds." 19 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited statements of operations data for each of the past eight quarters, as well as the percentage of the Company's total revenues represented by each item. The unaudited financial statements have been prepared on the same basis as the annual information presented elsewhere in this Prospectus and, in management's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of the results for any future period.
QUARTERS ENDED ------------------------------------------------------------------------------ MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1995 1995 1995 1995 1996 1996 1996 1996 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Services, software license and maintenance fees.......................... $6,886 $7,289 $7,808 $9,721 $10,962 $11,944 $12,477 $12,463 Hardware................................... 256 1,063 1,564 1,360 1,474 2,973 2,884 2,310 ------ ------ ------ ------ ------- ------- ------- ------- Total revenues............................ 7,142 8,352 9,372 11,081 12,436 14,917 15,361 14,773 Direct costs: Services, software license and maintenance fees.......................... 4,785 5,066 5,736 7,383 8,242 8,927 9,063 9,502 Hardware................................... 176 545 1,226 1,060 1,172 2,545 2,536 1,870 ------ ------ ------ ------ ------- ------- ------- ------- Total direct costs........................ 4,961 5,611 6,962 8,443 9,414 11,472 11,599 11,372 ------ ------ ------ ------ ------- ------- ------- ------- Gross profit................................ 2,181 2,741 2,410 2,638 3,022 3,445 3,762 3,401 Selling, general and administrative expenses.. 1,421 1,587 1,766 1,916 1,988 2,516 2,630 2,861 Compensation amounts to S corporation stockholders............................... 100 100 100 1,202(/1/) 190 190 190 190 Amortization of cost in excess of fair value of assets purchased........................ 80 80 80 80 80 80 80 80 ------ ------ ------ ------ ------- ------- ------- ------- Operating expenses........................ 1,601 1,767 1,946 3,198 2,258 2,786 2,900 3,131 ------ ------ ------ ------ ------- ------- ------- ------- Operating income (loss)..................... 580 974 464 (560) 764 659 862 270 Interest expense............................ 118 107 122 126 147 148 139 106 ------ ------ ------ ------ ------- ------- ------- ------- Income (loss) before income taxes........... 462 867 342 (686) 617 511 723 164 Income taxes................................ 15 45 11 (38) 54 41 62 12 ------ ------ ------ ------ ------- ------- ------- ------- Net income (loss)........................... $ 447 $ 822 $ 331 $ (648) $ 563 $ 470 $ 661 $ 152 ====== ====== ====== ====== ======= ======= ======= ======= PRO FORMA (UNAUDITED): Historical income before income taxes............................................ $ 617 $ 511 $ 723 $ 164 Pro forma provision for income taxes (2)......................................... 254 210 298 67 ------- ------- ------- ------- Pro forma net income............................................................. $ 363 $ 301 $ 425 $ 97 ======= ======= ======= =======
- -------- (1) Compensation amounts to S corporation stockholders for the fourth quarter of 1995 include discretionary annual bonuses which were expensed in the fourth quarter. Such amounts were approximately $900,000. (2) Adjusted for all periods to record a provision for income taxes as if the Company had been a C corporation. See "The Company." 20
QUARTERS ENDED -------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1995 1995 1995 1995 1996 1996 1996 1996 -------- -------- --------- -------- -------- -------- --------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Services, software license and maintenance fees...... 96.4% 87.3% 83.3% 87.7% 88.1% 80.1% 81.2% 84.4% Hardware............... 3.6 12.7 16.7 12.3 11.9 19.9 18.8 15.6 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Direct costs: Services, software license and maintenance fees...... 67.0 60.7 61.2 66.6 66.3 59.8 59.0 64.3 Hardware............... 2.5 6.5 13.1 9.6 9.4 17.1 16.5 12.7 ----- ----- ----- ----- ----- ----- ----- ----- Total direct costs.. 69.5 67.2 74.3 76.2 75.7 76.9 75.5 77.0 Gross profit............ 30.5 32.8 25.7 23.8 24.3 23.1 24.5 23.0 Selling, general and administrative expenses............... 19.9 19.0 18.8 17.3 16.0 16.9 17.1 19.4 Compensation amounts to S corporation stockholders........... 1.4 1.2 1.1 10.9 1.5 1.3 1.2 1.3 Amortization of cost in excess of fair value of assets purchased....... 1.1 0.9 0.9 0.7 0.6 0.5 0.6 0.5 ----- ----- ----- ----- ----- ----- ----- ----- 22.4 21.1 20.8 28.9 18.1 18.7 18.9 21.2 ----- ----- ----- ----- ----- ----- ----- ----- Operating income (loss)................. 8.1 11.7 4.9 (5.1) 6.2 4.4 5.6 1.8 Interest expense........ 1.6 1.3 1.2 1.1 1.2 1.0 0.9 0.7 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes........... 6.5 10.4 3.7 (6.2) 5.0 3.4 4.7 1.1 Income taxes............ 0.2 0.6 0.1 (0.3) 0.4 0.3 0.4 0.1 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... 6.3% 9.8% 3.6% (5.9)% 4.6% 3.1% 4.3% 1.0% ===== ===== ===== ===== ===== ===== ===== ===== PRO FORMA (UNAUDITED): Historical income before income taxes........................ 5.0% 3.4% 4.7% 1.1% Pro forma provision for income taxes......................... 2.0 1.5 1.9 0.5 ----- ----- ----- ----- Pro forma net income......................................... 3.0% 1.9% 2.8% 0.6% ===== ===== ===== =====
The Company's quarterly operating results have varied and are expected to continue to vary in the future. These fluctuations may be caused by many factors, including, among others: the size and timing of ACS Optima Software and hardware sales; customer order deferrals in anticipation of new ACS Optima Software releases; variation of ACS Optima Software and hardware sales as a percentage of total revenues; timing of introduction or enhancement of products by the Company or its competitors; changes in the Company's operating expenses; personnel changes and general industry and economic conditions. LIQUIDITY AND CAPITAL RESOURCES The Company historically has relied primarily upon cash flows from operations, borrowings under its revolving credit facility and capital lease financings to finance its operations and acquisitions. Net cash provided by (used in) operating activities was ($4.7 million), ($1.3 million) and $2.5 million for 1994, 1995 and 1996, respectively. Net cash used in investing activities for 1994, 1995 and 1996 was approximately $874,000, $579,000 and $683,000, respectively. Cash used in investing activities in 1994 is primarily related to the ACS acquisition and for 1994 and all other periods includes capital expenditures for computer equipment and furniture and fixtures. 21 Net cash provided by (used in) financing activities in 1994, 1995 and 1996 was $3.1 million, $1.5 million and ($2.0 million), respectively. During 1996, the Company repaid the balance of certain acquisition debt and a portion of its notes payable to the bank. The Company's revolving credit facility consists of a revolving line of credit with Bank Leumi Trust Company of New York ("Bank Leumi") providing for outstanding borrowings of up to 80% of eligible accounts receivable with maximum borrowings of up to $7.0 million. The line of credit, which expires in May 1997, is collateralized by a security interest in substantially all of the assets of the Company. The line of credit bears interest at the bank's prime rate (currently 8.25%). At December 31, 1996, the Company had $2.1 million outstanding under the revolving credit facility. Outstanding amounts under the revolving line of credit are also supported by a 10% compensating balance arrangement. A portion of the net proceeds from this offering will be used to repay amounts at such time outstanding under the revolving credit facility. See "Use of Proceeds." The Company also had an outstanding balance of $133,000 at December 31, 1996 on an $800,000 three year term loan with Bank Leumi. The term loan is payable in equal monthly installments of approximately $22,000 and bears interest at 1.25% per annum above the bank's prime rate. Net proceeds from the term loan were used to fund the acquisition of ACS Software Products Group. The term loan contains financial covenants relating to minimum tangible net worth, working capital and a maximum debt-to-equity ratio. A portion of the net proceeds from this offering will be used to repay amounts outstanding under the term loan. See "Use of Proceeds." The Company had an outstanding balance of approximately $2.5 million at December 31, 1996, payable to Philip Friedman, the Company's President and Chief Executive Officer, pursuant to a demand note that bears interest at 10% per annum. A portion of the net proceeds from this offering will be used to repay all amounts outstanding under this demand note. See "Use of Proceeds." Historically, cash flow from operations and borrowings under the revolving credit facility have been sufficient to satisfy the Company's liquidity needs. The Company believes that the net proceeds from the sale of Common Stock offered hereby, together with anticipated cash flow from operations and borrowings under the revolving credit facility, will be sufficient to finance the Company's current operations through approximately the end of 1997; however, as the Company's operations continue to expand, it may require additional funds. In addition, while the Company presently anticipates that capital expenditures for the foreseeable future will be consistent with those incurred on an historical basis, as the Company's operations continue to expand, there can be no assurance that this will be the case. To the extent that additional funds are needed, whether to finance the Company's operations, future acquisitions or capital expenditures, the Company may be required to obtain additional financing through one or more offerings of equity or debt securities, the amendment of the Company's existing revolving credit facility, a new credit facility or any combination of the foregoing. INFLATION In the last three years, inflation has not had a significant impact on the Company. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 31, 1995 and prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations with pro forma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. It is the Company's intention to present such information in accordance with APB 25 as described in (ii) above. 22 BUSINESS The Company offers its clients a Composite Solution for their IT requirements. The Composite Solution is based on a modular approach which allows the Company to utilize its products and services to create customized solutions for its clients. Products and services provided by the Company range from the ACS Optima Software bundled with IBM AS/400 hardware and related support services, to professional services, technical training, full service on-site and remote help desk support and call management services. The marketing of many of the Company's products and services is enhanced through its strategic and other relationships with recognized leaders in the IT industry, including IBM and AT&T. IBM and AT&T accounted for, in the aggregate, approximately 40% of the Company's total revenues in 1996. The Company is a leading supplier of integrated business information systems to the apparel industry. Its solution includes the ACS Optima Software, a comprehensive, integrated business information system specifically designed for the apparel industry. The Company provides the ACS Optima Software to many leading United States apparel manufacturers. Representative examples of the Company's ACS Optima Software clients include several divisions of Polo Ralph Lauren, Quicksilver and Fritzi. These representative clients accounted for, in the aggregate, approximately 14% of the Company's total revenues in 1996. The Company also provides a variety of professional services, delivered on a project basis or through staff augmentation, to address clients' systems requirements, ranging from strategy and design through development and implementation to maintenance and support. The Company provides these professional services to clients primarily in the financial, entertainment and communications industries. Representative examples of the Company's clients for professional services include Morgan Stanley, Merrill Lynch and EMI Music. These representative clients accounted for, in the aggregate, approximately 4% of the Company's total revenues in 1996. Through its technical training services, the Company provides approximately 350 comprehensive technical and end-user training classes to its clients' personnel in many leading-edge technologies, including Visual Basic, PowerBuilder, Visual C++ and Sybase. To meet the Company's needs for technical resources, the Company maintains a national proprietary database consisting of technical profiles and resumes of approximately 30,000 professionals. The Company believes that this database, its existing technical staff and other software tools enable it to offer its clients the technical resources necessary to meet their IT requirements and address the challenges of creating "Year 2000" compliant systems. Pursuant to an agreement between IBM and the Company entered into in November 1996, the Company has been designated by IBM as one of six current national "Business Partners" for its "Year 2000" engagements. IBM will utilize the Company and its personnel to meet certain resource requirements for IBM and IBM clients in connection with its "Year 2000" engagements. To date, the Company has not recognized any revenues in connection with this agreement. The Company provides a complete range of IT outsourcing support services, including on-site and remote help desks and integrated call management centers staffed and managed by the Company's personnel. In providing these services, the Company uses sophisticated tools that enable it to serve as the transparent extension of its clients' technical support infrastructure. These services provide the Company's clients with immediate access to skilled technical personnel and a cost-effective solution to their IT outsourcing support needs Representative examples of the Company's IT outsourcing support clients include IBM and AT&T. The Company was advised by IBM that, effective January 1, 1997, call management services previously provided by the Company to IBM would be provided directly by IBM with IBM personnel as a part of its "core" business functions. The Company recognized revenues of approximately $8.7 million for providing these services to IBM in 1996, representing approximately 15% of the Company's total revenues. In January 1997, the Company and IBM agreed to extend a separate agreement whereby the Company will continue to provide help desk services to IBM and its customers for an additional three-year term. The Company's contracts are generally cancellable by the client at any time or, with respect to some of the Company's larger contracts, including those with IBM, on 30 to 90 days notice. 23 INDUSTRY BACKGROUND Historically, enterprise-wide computing was conducted on proprietary host- based systems operating on mainframes and minicomputers typically supplied by a single vendor. These host-based systems offered centralized data processing and helped automate tasks such as manufacturing, distribution and financial reporting. In the 1980s, the ease-of-use and low cost of personal computers, combined with the increased availability of powerful application software, led to rapid growth in the number of computer users throughout organizations. Computing environments became increasingly varied and included personal computers and workstations from different vendors, as well as traditional minicomputers and mainframes. This transition to distributed computing environments, including client/server architectures, required businesses to seek methods of improving information processing across varying computer hardware and software configurations and to find cost effective ways to ensure that their employees have access to expert technical support. Companies have found it increasingly difficult to service all of their IT needs through in-house personnel. This is due, in part, to rapid technological change that has resulted in information systems that are more complex and varied requiring specialized technical expertise. In addition, as part of the trend towards downsizing and improving return on investment in IT, many companies have decided to outsource portions of their IT services. Additionally, many management information systems ("MIS") departments lack the technical management and support, training capabilities and personnel needed to address the size and complexity of their own IT systems. As a result, in recent years, businesses have relied increasingly on IT service firms to develop, support and strengthen their MIS departments, to train their MIS employees and provide technical support services, including help desks. The IT services industry has grown significantly, and it is estimated that industry revenue will reach approximately $170 billion by the year 2000 in the areas in which the Company offers its services and products. The Company believes that a number of factors have caused and will continue to cause this demand to increase, including: corporate efforts to improve operating efficiencies by reducing costs; the acceleration of technological change; and the rapid growth of both software applications and end-users. These factors will require organizations to fully integrate their existing systems and migrate to enterprise-wide systems. In addition, the Company believes that this industry growth will further drive demand for technically trained personnel to develop and operate such systems. Many businesses have started to outsource IT and support services and are turning over help desk, call management and other support services to third parties. The Company believes that demand for the services provided by IT firms is likely to increase due to the advantages outside consultants bring to their clients, including an ability to train and supply personnel with the skill sets required to utilize new and increasingly complex technology more economically than maintaining the equivalent level of expertise in-house. A specific challenge facing IT users is making their current systems "Year 2000" compliant. As the year 2000 approaches, businesses and governments are beginning to recognize that their current computer systems are incapable of accepting the millennium change and that modification will be necessary when two-year date fields become "00" following the year 1999. Resolution of problems relating to the "Year 2000" may require an analysis and adjustment of millions of lines of affected software code. The systems, solutions and personnel required to assess these problems and implement the proper changes are expected to be a significant factor in driving the industry's high rate of growth through the year 2000. It is estimated that the global cost of assessing and correcting the "Year 2000" problem is in excess of $300 billion. THE COMPOSITE SOLUTION The Company offers its clients a Composite Solution for their IT requirements. The Composite Solution is based on a modular approach which allows the Company to utilize its products and services to create customized solutions for its clients. Products and services provided by the Company range from the ACS Optima Software bundled with IBM AS/400 hardware and related support services, to professional services, technical training, full service on-site and remote help desk support and call management services. The Company believes that its Composite Solution, which enables the Company to offer its clients a single source for an integrated IT solution, 24 gives the Company a marketing advantage since it provides the Company with numerous entry points to service a client's IT requirements. The Company typically establishes its initial relationship with a client by providing one or a limited number of its products and services. As the relationship develops, the Company and the client often will identify additional IT requirements which the Company is able to address with other products and/or services from its portfolio. STRATEGY The Company's objective is to continue its growth and to become a leading provider of a wide variety of information systems and services and IT outsourcing support services. The Company's principal strategies for achieving this objective are as follows: Strengthen its Position as the Provider of the Composite Solution. The Company believes that offering the Composite Solution enables it to implement a leveraged marketing strategy that differentiates it from its competitors. The Company's highly trained technical staff assesses a client's IT requirements and recommends a customized Composite Solution comprised of proprietary and customized products and services. The Company intends to leverage its initial client relationships to develop multiple entry points into the client's organization, giving the Company further opportunity to provide additional services through cross-selling. Additionally, the Composite Solution allows the Company to meet its clients IT requirements and develop and expand its products and services to satisfy the changing needs of its clients. Expand its Presence in the Apparel Industry. The Company intends to further penetrate the apparel industry by leveraging its name recognition, substantial industry expertise and extensive client base. The Company intends to maintain ACS Optima's position as the leading business system for the apparel industry by (i) continuing to upgrade and improve the system's features in response to the changing requirements of its apparel clients and (ii) improving and enhancing systems consulting, integration and outsourcing support services. Become A Leading Provider of "Year 2000" Solutions. The Company believes that over the next five years it will have major opportunities to provide the solutions to rectify the problems created by the millennium change. The Company has been designated by IBM as one of six current national "Business Partners" for IBM's "Year 2000" engagements. As part of an agreement between IBM and the Company, IBM will utilize the Company and the Company's personnel to meet certain resource requirements for IBM and IBM clients in connection with its "Year 2000" engagements. The Company has also entered into agreements to use and market specialized software tools and continually reviews and evaluates additional software tools that are designed to address the challenges facing MIS professionals in creating "Year 2000" compliant systems. The Company believes that its national, proprietary database, consisting of technical profiles and resumes of approximately 30,000 professionals and a personnel search engine, "Skills Finders Plus," enable it to access the technical resources necessary to implement "Year 2000" solutions. Leverage Strategic Alliances and Other Business Relationships. The Company has formed several strategic alliances and other relationships with recognized leaders in the IT industry. IBM. The Company intends to leverage its successful historical relationship with IBM to expand the products and services it currently provides to IBM and other clients. The Company believes that its designation by IBM as one of six current national IBM "Business Partners" for its "Year 2000" engagements will identify the Company as a provider of "Year 2000" solutions to the Company's existing and future clients. The Company believes it can use its agreement with IBM designating it as an IBM National Solution Provider to further enhance its position in the apparel industry. Additionally, the Company believes that its agreement with IBM designating it as an IBM Industry Remarketer for its midrange and mainframe hardware platforms enhances its ability to provide a Composite Solution to its clients. AT&T. Pursuant to an agreement with AT&T, the Company currently provides help desk services to AT&T's clients. The Company intends to introduce to these clients and others the additional services that comprise the Company's Composite Solution. In addition, it is the Company's strategy to establish preferred vendor relationships with AT&T's spin-offs, Lucent Technologies, Inc. and NCR Corp. 25 Others. The Company intends to use its business relationships and agreements with Borland International, Inc. ("Borland"), Lotus Development Corp. ("Lotus"), Microsoft Corporation ("Microsoft") and Oracle Corp. ("Oracle") to further develop core competencies in their computer products and to use them when creating a customized Composite Solution for its clients. In addition, the Company intends to continue to work with Siemens Rolm Communications Inc. ("Siemens Rolm Communications"), a call center switch technology provider, ProAmerica Systems Inc. ("ProAmerica Systems"), a developer of call center software, and Haldeman-Powell Partners, an architectural firm, to provide potential clients with one-stop shopping for all services needed to set up and operate a call center. Leverage Existing Call Management and Help Desk Infrastructure. In 1995, the Company opened a state-of-the-art call management/help desk facility at the Dallas Infomart which will allow it to provide an end-to-end solution to its clients' call management needs. In addition, in October 1996, the Company commenced operations at its new help desk facility located in Tampa. The Company believes that its ability to leverage its call management and help desk infrastructure across multiple clients will significantly reduce the cost of processing a call and further enhance the Company's competitiveness. Further Penetrate AS/400 Market. The Company believes that the AS/400 market has traditionally been under serviced by other IT companies. The Company has developed substantial expertise servicing and developing applications for the AS/400 platform, primarily as a result of its long-term relationship with IBM, as well as through its development of the ACS Optima Software. The Company intends to continue to market its IT services primarily to Fortune 2000 companies, especially to users of the AS/400 platform. Management believes that the Company's experience with the AS/400 enhances its ability to develop new relationships with potential clients whose systems run on AS/400s or other midrange platforms. Expand Geographically. The Company intends to grow both domestically and internationally. Over the past two years, the Company has made a substantial investment in developing its sales and marketing infrastructure and has opened new offices in Chicago, Los Angeles, Atlanta and Dallas. The Company plans to expand its presence in these major markets to enable it to provide elements of the Composite Solution to a larger client base. The Company intends to grow internationally by (i) expanding its relationships with U.S. based clients to provide products and services to their international divisions, particularly in Asia and Europe, (ii) establishing direct relationships with companies overseas, particularly through the marketing of the ACS Optima Software to apparel companies and (iii) working with certain of its strategic alliance partners outside the United States to cross-sell or bundle their services. INFORMATION SYSTEMS AND SERVICES As part of its information systems and services business, the Company provides integrated solutions to the apparel, financial, entertainment and communications industries. As part of its solution to the apparel industry, the Company markets the ACS Optima Software, which is installed in hundreds of United States apparel companies as well as apparel companies in Mexico and Canada. Additionally, the Company offers a wide range of public and private technical and end user training services. ACS Optima Products and Services In order to better respond to changes in fashion trends and to remain profitable in an increasingly competitive industry, apparel manufacturers are under increasing pressure to shorten delivery time cycles and increase efficiency in all areas of their business. The ACS Optima Software package is a comprehensive, integrated business information system, specifically designed for the apparel industry. With a graphical-user-interface ("GUI") that provides "point-and-click" ease of use and an Executive Information System ("EIS") designed for senior management, ACS Optima Software allows apparel manufacturers and importers to manage all phases of the production process, from planning and design to manufacturing, inventory control, distribution and financial reporting. The ACS Optima Software emphasizes "Quick Response" and is specifically designed to shorten delivery cycles. The Company believes the ACS Optima Software provides apparel clients with a complete solution that enhances their competitive position in the marketplace. 26 Described below are selected modules of the ACS Optima Core System and additional modules to the ACS Optima Core System.
ACS OPTIMA CORE SYSTEM DESCRIPTION ---------------------- ----------- Order Management and Distribution A complete order fulfillment function that summarizes essential statistics and helps the apparel industry executive pinpoint areas that need attention. It provides instant access to reports that contain an overview of current gross profit, order patterns, receivable allowances and inventory, shipment and manufacturing data. Import Management/Production A function which facilitates the purchasing and tracking of imported goods. Working with estimated costs, the system creates a purchase order and letter of credit documentation. It also tracks goods through the purchasing and production process and identifies possible delays. Once merchandise is shipped, Import Management tracks and provides the delivery status and anticipated arrival date of the merchandise. Raw Material/Module A function which helps estimate the material and other requirements for production and initiates a procedure to ensure that such products are available. Bill of Material ("BOM")/Fabric Actual Module A function which establishes requirements and then compares standard costs to actual. When goods are produced in multiple locations, the BOM will identify the most cost effective assembly method. Material Requirements Planning A function which determines the earliest date on which production can begin based on a raw materials evaluation. ADDITIONAL MODULES TO THE ACS OPTIMA CORE SYSTEM DESCRIPTION ----------------------------- ----------- FACTS A/P and G/L An accounts payable and general ledger package that is integrated into the ACS Optima Software. Executive Information System An advanced client/server tool that summarizes and displays computer-based information in a concise, meaningful format, statistically or graphically, for the apparel industry executive, specifically in the key business areas of sales, manufacturing, finance and management. EDI/400* Communication tool which allows manufacturers to receive and send information directly to their customers. PKMS* A distribution center management system that gives the apparel industry executive complete control over all warehouse operations, including receiving, stock locating, picking, verifying, packing, manifesting and shipping. Image Info* A function which takes digital pictures of merchandise and creates and produces custom catalogs, style libraries and inventory reports with full color imaging. Quick Image* A function which displays pictures of a garment at the touch of a command key. Pictures are scanned, digitized, indexed and displayed along with other ACS Optima screens. Sales Automation* A lap-top based order system that is used by field representatives to place orders and determine inventory availability. Orders are accurately written, sized, printed for the customer and transmitted to the apparel company in minutes.
-------- * Licensed to the Company. 27 As part of a turn-key system provided by the Company, the initial contract typically includes a combination of hardware, software, systems integration and maintenance. Upon expiration of the initial contract, most clients purchase an extended maintenance contract which includes yearly product upgrades and access to the Company's ACS Optima help desk. Extended maintenance contracts provide the Company with a steady source of recurring annual revenue. The Company has established the "Users Advisory Board," which is comprised of the Company's 25 largest clients utilizing the ACS Optima Software. At meetings held twice a year, the Users Advisory Board provides the Company with valuable input and direction relative to future product enhancement and development. These meetings, which are led by the Company's clients, allow the Company to anticipate and develop solutions for its clients prior to actual need. Professional Services Recognizing the changing IT requirements of its clients, the Company provides a wide range of professional services to a diverse client base focusing on companies in the financial, entertainment and communications industries, including Morgan Stanley, Merrill Lynch and EMI Music. The Company's professional services are delivered on a project basis or, more often, through staff augmentation. The Company's professional services staff provides services to support the full life cycle of computer systems, from strategy and design to development and implementation and finally to maintenance and support, across a wide range of platforms, including mainframe, midrange (AS/400), client/server and personal computers. In addition, the Company's professional services group provides contract programming, consulting and other computer-related professional services primarily to large corporate clients. The Company's technical staff performs a wide variety of tasks to identify, analyze and solve a client's data processing and computing problems. Generally, these services are provided on-site to clients with personnel who do not have the requisite technical skills or to clients with specific projects requiring additional staffing that do not justify permanent personnel increases. The scope of the work performed by the Company ranges from specific, minor tasks of short duration to large, complex tasks that require a large number of consultants. Furthermore, the Company has extensive experience in providing network solutions to its existing client base by providing hardware, software and systems integration services. The Company has developed expertise in document imaging and voice recognition technology and employs certified Lotus, Microsoft and Novell engineers. The Company's business relationships with Borland, Lotus, Microsoft and Oracle enhance the marketability of the Composite Solution and strengthen the skills of its technical staff. In order to become a leading provider of "Year 2000" solutions, the Company has created a "Year 2000" Competency Center to proactively address the issues that its clients face in resolving these problems. The Competency Center is comprised of a select group of the Company's technical professionals who specialize in developing "Year 2000" solutions for organizations and assist clients in making their current systems "Year 2000" compliant. The Company has entered into agreements to market and utilize various software tools in order to provide "Year 2000" solutions to its clients and continually reviews and evaluates additional software tools that can assist the Company's professionals in creating "Year 2000" compliant systems for clients. In this regard, the Company has a use and marketing agreement for an AS/400 specific product that goes beyond diagnosis and is able to partially correct affected software. The Company also has a separate agreement with another company which permits the Company to use and market a suite of tools that are capable of automatically analyzing and locating code that requires conversion and determining the overall magnitude of the date conversion task. In addition, the Company has been designated by IBM as one of six current national "Business Partners" for its "Year 2000" engagements. As a part of an agreement between IBM and the Company, IBM will utilize the Company and its personnel to meet certain resource requirements for IBM and IBM clients in connection with its "Year 2000" engagements. The agreement with IBM does not permit the Company to form a similar subcontracting relationship with another "Year 2000" service provider during its term, although the Company may enter into other engagements and form other relationships in connection with its "Year 2000" initiative. To date, the Company has not recognized any revenues in connection with these agreements. See "Risk Factors--Internal Expansion and Acquisition Risks." 28 Management believes that one of the most critical challenges facing organizations attempting to make their current systems "Year 2000" compliant is the hiring and retaining of technical personnel who are able to rewrite the enormous amounts of computer code in various computer languages. Through its extensive recruitment efforts of technical personnel, management believes it is well positioned to supply clients with large numbers of trained personnel to address their individual "Year 2000" challenges, either on a project or staff augmentation basis. The Company employs a number of tools to meet its clients' staffing needs, including dedicated recruiting personnel, a national proprietary database consisting of technical profiles and resumes of approximately 30,000 technology professionals, dedicated resources to conduct Internet research for qualified personnel and in addition, the Company's world wide web site which includes the "CGS Career Center" which lists and continually updates available positions with the Company and receives thousands of "hits" per month. In addition, the Company maintains a personnel search engine, "Skills Finder Plus," which includes search capabilities to match potential candidates with specific project and Company requirements. Training The Company provides, through more than 350 course offerings, comprehensive technical and end user training to its clients' personnel, including programmers, system administrators, operations personnel and management. In 1996, the Company's instructors provided over 600 computer technology-related classes. The Company emphasizes courses covering advanced technical skills focused on a broad range of software applications and IT and help desk management skills rather than basic introductory skills. Among others, the Company offers courses in Visual Basic, PowerBuilder, Visual C++ and Sybase. The Company is a certified training provider for Borland's Delphi and Lotus Notes. Management believes that its clients are attracted by the Company's broad range of course offerings and highly qualified training professionals as well as its ability to maintain and develop customized courses in leading-edge technologies. The Company believes that because of rapid technological change which has resulted in information systems that are more complex, companies are increasingly relying on third-party providers of IT training. By offering computer technology-related classes, the Company gains access to MIS professionals and is able to introduce other components of the Composite Solution to such professionals. Although client courses are generally provided on-site at a client's facilities using the client's hardware and software, the Company also makes available to clients its New York City training facility. In order to accommodate clients who may be interested in training only a few of their employees, the Company also offers public classes which are prescheduled at selected times at the New York City training facility. These classes are also available to the general public. In addition, computer users can browse the Internet for course offerings and make reservations for classes. IT OUTSOURCING SUPPORT SERVICES To capitalize on the trend towards outsourcing IT services, the Company provides on-site and remote help desk services. In addition, the Company provides services that facilitate the entire call management process, including generic call receiving, inbound and outbound telemarketing, data collection and call overflow services. In providing these services, the Company uses sophisticated tools that enable it to act as the transparent extension of its clients' technical support infrastructures. Help Desk The Company provides on-site and remote help desk services, primarily through IBM and AT&T, to major companies that have outsourced technical support for their internal IT systems. The Company's certified technical specialists provide shrink-wrapped software product support for over 300 products, as well as process 29 engineering which includes systems design and operating system, LAN/WAN and custom software application support. The Company has established a strategic alliance with AT&T to be a preferred provider of help desk support functions to its clients. The Company also provides help desk services to IBM and IBM clients through facilities located in Tampa, Chicago, Atlanta and Rochester, MN. The Company provides technical and product remote support services directly to IBM employees and to IBM customers 24 hours a day, seven days a week. As part of the ACS Optima solution, the Company also provides help desk support to approximately 90 ACS Optima clients from the Company's Atlanta facility. The Company intends to establish additional vendor relationships, such as those with AT&T and IBM, to enable it to continue the expansion of its client base and the Company has opened a new help desk facility in Tampa to meet such expansion. In January 1997, the Company and IBM agreed to extend their agreement under which the Company provides help desk services to IBM and IBM customers for an additional three-year term. This agreement provides that help desk services that were previously billed on a time and material basis will now be billed primarily on a per call basis. The help desk facilities operated by the Company employ current technology in PBX switches, call tracking software, telephone-computer integration, interactive voice response and relational database management systems that are integrated into centrally managed LAN/WANs. The Company utilizes sophisticated call tracking software and systems to provide efficient scheduling of personnel to accommodate fluctuations in call volume. The Company's help desk systems capture and download to permanent databases a variety of information concerning each call for reporting on a daily basis to clients, including number and duration of calls (which are important for billing purposes), response time and results of the call. Summary data and complete databases are made available to the client to enable it to monitor the level of service provided by the Company, as well as to determine whether end- users of its products are encountering recurring problems that require modification. Call Management In October 1995, the Company began providing call management services in order to capitalize on this significant market opportunity and simultaneously provide additional services to its client base as part of its Composite Solution. The Company provides call management services directly to its clients and through a strategic partner. The Company's current call management clients and strategic partners are described below. Teleservices Resources ("TSR"), a division of AMR Corp., and the Company have partnered to provide and operate an extensive call management system for Ryder Truck Rental, Inc. ("Ryder"). TSR is responsible for providing basic call management services to Ryder customers, while the Company, from its facilities in the Dallas Infomart, provides the technical support necessary for over 5,000 Ryder dealerships to be fully integrated into Ryder's call management and reservation system. These services include hardware and software installation and technical support, which allow TSR to efficiently operate the call management system and to enhance the services provided to the Ryder dealerships. In December 1996, the Company entered into an agreement with MCI Telecommunications Corporation ("MCI") to provide call management services to certain of MCI's clients. To date, the Company has not recognized any revenues in connection with this agreement. The Company also has recently entered into an alliance with telephone switchmaker Siemens Rolm Communications, a call-center switch technology provider, ProAmerica Systems and the Dallas architectural firm of Haldeman- Powell Partners, which specializes in the design of call-center space. This alliance will allow the Company to provide its clients, as well as its partners' clients, one-stop shopping for all the services needed to set up and operate a call center. In 1996, the Company established a state-of-the-art call management facility at the Dallas Infomart which has the technology to support over 200 call technicians and process over 4.0 million calls per year for multiple clients. 30 SALES AND MARKETING The Company markets its information systems and services and IT outsourcing support services through the efforts of approximately 30 sales and marketing representatives operating out of its New York, Los Angeles, Dallas, Atlanta and Chicago offices. Sales and marketing representatives are highly experienced in specific areas and are knowledgeable in other areas in which the Company offers its information systems and services and IT outsourcing support services. Sales and marketing efforts utilize an overall team-oriented approach with routine interaction between representatives to effectively market all of the Company's products and services. As part of their compensation, sales and marketing representatives are paid commissions on sales in their area of expertise and additional amounts for introductions that lead to sales of other products and services that comprise the Composite Solution. Management believes that being able to offer multiple services provides the Company with a marketing advantage since it gives the Company numerous entry points to service a customer's information systems and services and IT outsourcing support needs. The Company's sales force utilizes a variety of business development and marketing techniques, including field sales, referrals, telemarketing, the Company's on-line newsletter, presentations, exhibitions, trade shows and meetings with potential clients to market the Composite Solution. The Company's sales and marketing representatives emphasize the Company's ability to offer clients a comprehensive and cost-effective solution to their IT needs. The Company markets the ACS Optima Software to leading apparel manufacturers as a comprehensive, integrated business information system specifically designed for the apparel industry. The Company strategically markets the ACS Optima Software to apparel companies with revenues of $20 million and higher, and the Company uses sales of this product as an entree to provide ongoing support services as well as AS/400 sales and services. The Company markets professional services to a diverse client base, focusing on companies in the financial, entertainment and communications industries with a primary focus in New York and Los Angeles, where a large portion of such industries is located. The Company's marketing efforts for professional services target both the decision makers who are ultimately responsible for appropriating funds for a project and the systems staffs that will be responsible for the project after implementation. The Company's sales and marketing representatives promote the Company's relationships with, among others, IBM, AT&T, Borland, Lotus, Microsoft, Oracle and Siemens Rolm Communications and ProAmerica Systems, and representatives of such companies sometimes join the Company's sales representatives in making joint sales calls. In addition, the Company attempts to use its training services to provide it with insight as to potential clients who are likely to be in need of other IT products or services offered by the Company. RECRUITMENT; HUMAN RESOURCES The Company's future success will depend, in part, on its ability to hire and retain adequately trained project managers, resource managers, systems analysts, business analysts, programming staff and other technical experts who can fulfill the increasingly sophisticated needs of its clients. The Company's on-going need for technical expert resources arise from (i) increased demand for the Company's services, (ii) turnover, which is generally high in the industry, and (iii) client requests for programmers trained in the newest software technologies. The recruitment of skilled project managers and other technical experts is a critical element in the Company's success. The Company devotes significant resources to meeting its personnel requirements. The Company employs recruiters based in its New York, Chicago, Atlanta, Tampa and Los Angeles offices. The Company also maintains a national proprietary database consisting of technical profiles and resumes of approximately 30,000 technology professionals and uses a personnel search engine, "Skills Finder Plus." This database includes search capabilities which match potential candidates with specific project and Company requirements. In addition, the Company has dedicated resources to conduct Internet research for qualified personnel. The Company's world wide web site includes the "CGS Career Center," which lists and continually updates available positions with the Company. 31 At January 31, 1997, the Company had 690 full time employees, comprised of project and resource managers, systems analysts, business analysts, programming staff and other technical professionals and approximately 30 sales and marketing personnel. The Company's professional personnel have a variety of educational backgrounds, including degrees in computer science, business administration, education and engineering. The Company's personnel keep abreast of technological advances and developments through a combination of on-the-job exposure to relevant technology, selected training programs, peer review and discussions and supervision by senior personnel. The Company also keeps abreast of developments by hiring professionals with expertise in technologies that are needed or can be utilized by the Company and its clients. None of the Company's employees is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. COMPETITION The industry in which the Company operates is extremely competitive, highly fragmented and subject to rapid changes. While many companies provide information systems and services and IT outsourcing support services, management believes that no one company is dominant. There are numerous and varied providers of such services, including firms specializing in call center operations, temporary staffing and personnel placement companies, general management consulting firms, divisions of large hardware and software companies and niche providers of IT services, many of which compete in only certain markets. Although the Company believes that the Company's strategic alliances and other relationships provide it with a competitive advantage, the Company competes with and faces potential competition from a number of companies that have significantly greater financial, technical and marketing resources, greater name recognition and a more established client base than the Company. In addition, many of the services offered by the Company historically have been provided, and could in the future be provided, by the in-house personnel of its clients. The Company believes that its ability to compete depends, in part, on a number of factors, including the ability of the Company to hire, retain and motivate a significant number of highly skilled employees and the development by others of products and services that are competitive with the Company's products and services. The Company competes with larger organizations and smaller competitors for highly skilled professionals to fill full-time and project specific positions. Management believes that price is not the primary factor in a client's determination to purchase the ACS Optima Software and related services but that product functionality and methodology for implementation are the principal competitive considerations. The Company believes that the principal competitive factors in its professional services business include the nature of the services offered, quality of service, responsiveness to customer needs, business experience and technical expertise. With respect to its IT outsourcing support services, the Company competes primarily on the basis of quality of service and price, and the Company could be adversely affected by the price at which others offer comparable IT outsourcing support services. Many of the Company's larger clients purchase IT outsourcing support services primarily from a limited number of preferred vendors. The Company has experienced and continues to anticipate significant pricing pressure from these clients in order to remain competitive. Although the Company believes that it can meet its clients' demands for information systems and services and IT outsourcing support services, there can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with any new competitors. INTELLECTUAL PROPERTY RIGHTS The Company's success is dependent, in part, upon its proprietary intellectual property rights. The Company relies on contractual arrangements, such as trade secret and non-disclosure agreements, and copyright and trademark law to protect its proprietary intellectual property rights. While the Company holds registered 32 copyrights with respect to certain modules of the ACS Optima Software, generally enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to and distribution of its confidential and proprietary data, there can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. The Company's business includes the development of custom software applications in connection with specific engagements. Ownership of such software is generally assigned to the client. Although the Company believes that its products and services do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future. FACILITIES The Company's headquarters and principal administrative, sales and marketing operations are located in approximately 21,000 square feet of leased space in New York City under leases expiring in 2005. The Company occupies an aggregate of approximately 34,500 square feet of additional space in Los Angeles, Chicago, Dallas, Tampa and Atlanta under leases expiring at various times throughout the next three years. In addition, pursuant to contracts with its clients, the Company currently occupies additional space which is owned or leased by its clients in Tampa, Rochester, MN, Chicago and Atlanta. The Company leases three IBM midrange computers from IBM Credit Corp. These leases are considered operating leases and, therefore, are not capitalized on the Company's balance sheet. The remainder of the Company's computers and peripheral equipment are owned or leased and treated as owned for accounting purposes because the Company may acquire ownership at the end of the lease agreement upon exercise of a purchase option for a nominal amount. The Company believes that its facilities and equipment are adequate for its current needs. LEGAL PROCEEDINGS The Company is not currently a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's financial condition or results of operations. The Company received a letter on January 23, 1997 (the "January 23rd Letter") from a law firm representing Orbit Industries, Inc., a debtor and debtor-in-possession (the "Debtor") in a pending case under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Case") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). In connection with the Chapter 11 Case, the Company had (prior to the receipt of the January 23rd Letter) filed a motion (the "Motion") with the Bankruptcy Court requesting the payment of certain administrative expense claims pursuant to the terms of a contract between the Company and the Debtor relating to system design and integration of ACS Optima Software. The January 23rd Letter attached a draft and unfiled complaint (the "Draft Complaint") for an action against the Company in the Superior Court of White County, Georgia. The Draft Complaint alleges breach of contract, breach of warranty, fraud and unjust enrichment and requests actual damages in the amount of approximately $600,000 and punitive damages in the amount of $2 million against the Company. The Company and the Debtor have orally agreed to extend the time in which the Debtor must respond to the Motion until March 31, 1997. Similarly, the Debtor has agreed not to file the Draft Complaint at any time prior to March 31, 1997. If the Draft Complaint is filed, the Company intends to vigorously contest the allegations contained therein, and the Company does not believe that the outcome of this matter will have a material adverse effect on the Company's financial condition or results of operations. 33 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following sets forth the names and ages, as of December 31, 1996, of the Company's directors and executive officers and the positions they hold. Within 90 days following consummation of this offering, the Company will appoint Ira Z. Kevelson and John J. Murphy as independent directors to the Board of Directors and within one-year following consummation of this offering, the Company will appoint one additional independent director to the Board of Directors. Such independent directors will not be employees of the Company.
NAME AGE POSITION ---- --- -------- Philip Fried- 48 President, Chief Executive Officer and Director man.......... Victor Fried- 41 Executive Vice President and Director man.......... Fred B. 39 Vice President Finance & Administration, Secretary and Director Schlossberg.. Jay Hakami.... 38 Senior Vice President, Products and Services Robert B. 60 Vice President, Remote Support Services Stratton..... Rhoda Cahan... 53 Vice President, Training Steven J. 41 Vice President, Call Management Carter....... Robert G. Ma- 43 Vice President, Help Desk Services rino.........
PHILIP FRIEDMAN has been President, Chief Executive Officer and a director of the Company since April 1984. In 1995, Mr. Friedman was named New York City Entrepreneur of the Year in the area of Technology Services by the Entrepreneur of the Year Institute sponsored by Ernst & Young LLP, Inc. Magazine and Merrill Lynch. He holds a Bachelor of Science degree in Finance and Economics from the State University of Uzgorod and a Master's degree in Electronic Engineering from Lvov Polytechnical Institute, both in the Ukraine. VICTOR FRIEDMAN has been Executive Vice President and a director of the Company since October 1994. From 1981 until October 1994, Mr. Friedman was the President/CEO of Real-Time Technology, Inc., a company which he founded and which specialized in providing professional services to the financial community. He holds degrees in Liberal Arts and Education from the State University of Uzgorod in the Ukraine. FRED B. SCHLOSSBERG has been Vice President Finance & Administration, Secretary and a director of the Company since April 1992. From June 1978 to April 1992, he was employed by BDO Seidman, LLP where his last position was Senior Audit Manager. Mr. Schlossberg is a Certified Public Accountant in New York State. He holds a Bachelor of Business Administration in accounting from Bernard Baruch College where he graduated magna cum laude. JAY HAKAMI has been Senior Vice President, Products and Services since November 1996 and was a Vice President, Products and Services from 1991 until 1996. Mr. Hakami began his career with the Company in 1989 as a Manager of Sales of Products and Services. He holds a Bachelor of Arts degree in Business Administration from the New York Institute of Technology. ROBERT B. STRATTON has been Vice President, Remote Support Services since 1995. Mr. Stratton has been employed by the Company since 1991 and from 1992 until 1995 was a General Manager of Remote Support Services. He holds an Associates Degree in Liberal Arts from Pace University. RHODA CAHAN has been Vice President, Training since 1995. Ms. Cahan began her career with the Company in 1991 as a Director of Training. She holds a Bachelor of Arts degree in Mathematics from Brown University, a Master of Science degree in Operations Research and Statistics from The Wharton School, University of Pennsylvania and a APC degree in Computer Applications and Information Systems from New York University. 34 STEVEN J. CARTER has been Vice President, Call Management since August 1995. From December 1983 to August 1995 Mr. Carter was employed by IBM, where his last position was Executive of the Strategic Business Unit of Call Management Services. ROBERT G. MARINO has been Vice President, Help Desk Services since 1994. From October 1989 to July 1994, Mr. Marino was employed by Comdisco Computing Services Corp., where his last position was Area Sales Manager. Mr. Marino holds a Bachelor of Arts degree in Business Administration from Rutgers University. IRA Z. KEVELSON has been a member of the firm of Dlugash & Kevelson, certified public accountants since 1980 and the owner of the law firm of Ira Z. Kevelson, attorney-at-law since 1975. Mr. Kevelson is a Certified Public Accountant in New York State and is an attorney admitted to the bar of New York State. He holds a Bachelor of Science degree in Accounting from Brooklyn College and a Juris Doctor degree and LLM in Taxation from New York University School of Law. Mr. Kevelson served as a director from 1983 to 1993 and has agreed to serve as a director after consummation of this offering. JOHN J. MURPHY has been a Senior Vice President of Information Technology for EMI Music Publishing, a division of EMI Music which is a division of Thorn-EMI, a U.K. company. He holds a Bachelor of Science degree from Boston University. Mr. Murphy has agreed to serve as a director after consummation of this offering. In connection with consummation of this offering, the Board of Directors will be divided into three classes. The term of the Class I directors, to be comprised initially of Fred Schlossberg and one of the independent directors, expires in 1998, the term of the Class II directors, to be comprised initially of Victor Friedman and one of the independent directors, expires in 1999, and the term of the Class III directors, to be comprised initially of Philip Friedman and one of the independent directors, expires in 2000. Directors hold office until the annual meeting of the stockholders of the Company in the year in which the term of their class expires and until their successors have been duly elected and qualified. At each meeting of stockholders of the Company, the successors to the class of directors whose term expires will be elected for a three-year term. The next annual meeting of the stockholders of the Company is expected to be held in 1998. Philip Friedman and Victor Friedman are brothers. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee. Upon consummation of this offering, the Board of Directors will create an Audit Committee that, among other things, will make recommendations concerning the engagement of independent auditors, review the results and scope of the annual audit and other services provided by the Company's independent auditors and will review the adequacy of the Company's internal accounting controls. The Audit Committee will consist of two of the independent directors to be appointed after consummation of this offering and Fred B. Schlossberg. Compensation Committee. Upon consummation of this offering, the Board of Directors will create a Compensation Committee that, among other things, will make recommendations to the full Board of Directors concerning salary and bonus compensation and benefits for executive officers of the Company and will administer the Company's 1997 Long-Term Incentive Plan. The Compensation Committee will consist of two of the independent directors to be appointed after consummation of this offering and Philip Friedman. DIRECTOR COMPENSATION Directors who are employees of the Company will receive no additional compensation for their services as members of the Board of Directors or as members of Board committees. Directors who are not employees of the Company will be paid a quarterly fee of $1,000, as well as additional fees of $500 for each meeting of the Board or of a Board committee attended by such director. The Company's directors will be reimbursed for their out-of-pocket expenses incurred in connection with their service as directors, including travel expenses. 35 EXECUTIVE COMPENSATION The following table sets forth compensation paid by the Company during the last three years to the Company's Chief Executive Officer and to the four most highly compensated executive officers (collectively, the "Named Executive Officers"). The Company did not grant any stock options or stock awards to any of the Named Executive Officers during such years and the dollar value of perquisite and other personal benefits, if any, received by each of the Named Executive Officers in each year was less than established reporting thresholds. SUMMARY COMPENSATION TABLE
OTHER ANNUAL NAME AND PRINCIPAL POSITION(S) YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) - ------------------------------ ---- ---------- --------- ------------------- Philip Friedman President and Chief Executive 1996 520,000 -- 5,000 Officer...................... 1995 400,000 830,000 5,000 1994 316,000 2,600,000 5,000 Victor Friedman Executive Vice President..... 1996 240,000 -- 5,000 1995 200,000 72,000 3,000 1994 50,000(/2/) 75,000 -- Fred B. Schlossberg Vice President Finance & 1996 150,000 -- 5,000 Administration, Secretary.... 1995 135,000 25,000 5,000 1994 115,000 30,000 4,000 Jay Hakami Senior Vice President, 1996 295,000 -- 5,000 Products and Services........ 1995 279,000 -- 5,000 1994 193,000 -- 5,000 Robert B. Stratton Vice President, Remote 1996 251,000 -- 5,000 Support Services............. 1995 220,000 -- 1,000 1994 181,000 -- --
- -------- (1) Consists of amounts contributed on behalf of such employees to the Company's 401(k) plan. (2) Victor Friedman was employed by the Company beginning in October 1994. The Company currently anticipates that immediately prior to consummation of this offering it will grant 587,500 options under the 1997 Long-Term Incentive Plan (the "Plan"), consisting of 537,500 incentive stock options and 50,000 nonqualified stock options, to certain officers, key employees and directors of the Company, including 50,000 nonqualified stock options to Victor Friedman, 30,000 incentive stock options to each of Fred B. Schlossberg and Jay Hakami, 20,000 incentive stock options to Robert B. Stratton and 5,000 incentive stock options to each of Ira Z. Kevelson and John J. Murphy. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has never had a Compensation Committee or other committee of the Board of Directors performing similar functions and all matters concerning executive compensation have been addressed by the entire Board of Directors. Decisions concerning compensation of executive officers of the Company were made by the Company's Board of Directors. The Board of Directors will establish a Compensation Committee upon the consummation of this offering. EMPLOYMENT AGREEMENTS The Company does not have employment contracts with any of its executive officers or other employees. 36 1997 LONG-TERM INCENTIVE PLAN The Plan will be adopted by the Company's Board of Directors and approved by the Company's stockholders prior to the consummation of this offering. The Company will reserve an amount of Common Stock equal to 10 percent of the shares of Common Stock outstanding upon consummation of this offering for issuance and/or use as the basis for stock appreciation rights or other units of stock-based incentive compensation under the Plan. Unless sooner terminated by the Board of Directors, the Plan will terminate on the date which is 10 years from the date of its adoption. Upon consummation of this offering, the Plan will be administered by the Compensation Committee of the Board of Directors. The Committee will have the authority and discretion, subject to the provisions of the Plan, to select persons to whom options and other awards under the Plan will be granted, to designate the number of shares to be covered by awards, to specify the type of consideration to be paid to the Company and to establish all of the terms and conditions of each award. The Plan will provide for the grant of stock options and other awards to officers and other key employees of the Company and to its directors. Options granted under the Plan may be incentive stock options or nonqualified stock options. The exercise price for an incentive stock option may not be less than the fair market value of the Company's Common Stock on the date of grant and such options may not be exercisable by the employee (except in the event of death or disability or certain changes in control of the Company) prior to the completion of at least one year of employment subsequent to the grant of the award. Options granted under the Plan shall vest on certain changes in control of the Company (as defined in the Plan) unless the Compensation Committee otherwise determines prior to such change in control, and in such case, the participant will receive cash equal to the value of the option in lieu of exercise thereof. Nonqualified stock options shall have such terms as the Compensation Committee shall determine and that shall not be inconsistent with the Plan. Stock options granted under the Plan may not be transferred other than by will or the laws of descent and distribution or, in the case of nonqualified stock options, by gift. All awards under the Plan may be subject to substantial employment requirements and/or performance measurements and goals. The Compensation Committee shall establish, with respect to each performance-based award, the length of the applicable performance period (which shall be at least two years), performance objectives (which shall be based on revenues, operating income, net income, return on equity or a variation or combination of the foregoing and may vary from participant to participant) and the range of dollar values or number of shares of Common Stock (which shall be subject to maximum limitations) that may be earned by the participant. The Company currently anticipates that immediately prior to consummation of this offering it will grant 587,500 options under the Plan, consisting of 537,500 incentive stock options and 50,000 nonqualified stock options, to certain officers, key employees and directors of the Company at the initial public offering price. 401(k) SAVINGS PLAN The Company has adopted a 401(k) savings plan (the "401(k) Plan"). All employees of the Company are eligible to participate in the 401(k) Plan. Under the 401(k) Plan, eligible employees are permitted to defer up to 10% of their compensation, subject to certain limitations. Currently, the Company matches a discretionary amount between 0% and 50% of an employee's contribution, subject to a maximum contribution equal to 3% of such employee's annual compensation. Salary deferral contributions are fully vested. Matching contributions are fully vested after seven years of service; partial vesting begins after three years of service. Participants or their beneficiaries are entitled to payment of benefits (i) upon retirement at age 65 or early retirement at age 55, (ii) upon death or disability or (iii) upon termination of employment, if the participant elects to receive a distribution of his account balance prior to one of the events listed in (i) or (ii) above. In addition, withdrawals are available upon the participant attaining age 59.5, or for reasons of financial hardship if certain conditions are met. 37 CERTAIN TRANSACTIONS In October 1994, the Company acquired substantially all of the assets and assumed certain liabilities of Real-Time, a computer consulting firm which was owned by Victor Friedman. The purchase price of $252,478 was paid by the issuance of shares of Common Stock to Victor Friedman. Philip Friedman has loaned the Company in the aggregate approximately $2.5 million. This loan is payable on demand and bears interest at 10.0%. The loan will be repaid with a portion of the net proceeds of this offering. See "Use of Proceeds." In addition, Philip Friedman has guaranteed certain of the Company's obligations under the Company's revolving credit facility and term loan. These guarantees will terminate upon consummation of this offering. Upon consummation of this offering, the Company plans to distribute to its stockholders of record immediately prior to the consummation of this offering the cumulative amount of its undistributed taxable earnings for the entire period that it was an S corporation. As of December 31, 1996, the cumulative balance of such undistributed taxable earnings was approximately $4.8 million. The difference between the undistributed taxable earnings of $4.8 million and retained earnings of approximately $3.2 million at December 31, 1996 is principally the result of differences between income tax bases and financial reporting. In addition, the Company's stockholders immediately prior to the consummation of this offering will be entitled to receive from the Company, in the event of certain adjustments to the Company's federal taxable income, the amount of federal, state and local income taxes, including penalties and interest, incurred by them as a result of such adjustment. See "The Company." Pursuant to a Registration Rights Agreement to be entered into immediately prior to the consummation of this offering, among the Company, Philip Friedman and Victor Friedman (the "Registration Rights Agreement"), the Company will, at the request of either Philip Friedman or Victor Friedman (the "Rights Holders"), prepare and file, and use its best efforts to make effective, registration statements under the Securities Act for resales of Common Stock, including underwritten offerings. In addition, pursuant to the Registration Rights Agreement, if the Company proposes to register its securities under the Securities Act, then the Rights Holders have a right (subject to quantity limitations determined by underwriters if the offering involves an underwriting) to request that the Company register such Rights Holders' Common Stock. All fees and expenses incurred in connection with any such registration will be borne by the Company, except for all underwriting discounts and commissions relating to Common Stock sold by the Rights Holders in any such offering, which will be borne by such Rights Holders. The Company has agreed to indemnify the Rights Holders against certain liabilities in connection with any registration effected pursuant to the Registration Rights Agreement, including liabilities under the Securities Act. The Company has agreed to indemnify each of the Selling Stockholders for any liability arising out of their obligations to indemnify, or contribute to losses incurred by, the Underwriters pursuant to the Underwriting Agreement to be entered into among the Company, the Selling Stockholders and the Underwriters in connection with this offering to the fullest extent permitted by law. Mr. Kevelson, who will be appointed to the Board of Directors following consummation of this offering, has, from time to time, provided legal services to the Company. 38 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information, regarding the beneficial ownership of the Common Stock, prior to and after giving effect to this offering, by (i) the directors and four most highly compensated executive officers of the Company, (ii) each person known by the Company to own beneficially more than five percent of the outstanding shares of Common Stock, (iii) all executive officers and directors as a group and (iv) each Selling Stockholder.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) OFFERING(2) ---------------------- ----------------------- NUMBER OF SHARES NAME AND ADDRESS OF BEING BENEFICIAL OWNER(3) NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------- ----------- ------------------ ------------ ---------- Philip Friedman......... 8,820,780 90.0% 444,000 8,376,780 66.0% Victor Friedman......... 979,220 10.0% 196,000 783,220 6.2% Fred B. Schlossberg..... 0 -- 0 0 -- Jay Hakami.............. 0 -- 0 0 -- Robert B. Stratton...... 0 -- 0 0 -- All executive officers and directors as a group (8 Persons)...... 9,800,000 100.0% 640,000 9,160,000 72.1%
- -------- * Less than 1% (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. (2) Excludes options to purchase shares of Common Stock which the Company anticipates will be granted under the Plan to certain officers, key employees and directors immediately prior to consummation of this offering and shares of Common Stock that may be purchased in connection with this offering. See "Management--Executive Compensation" and "Underwriting." (3) Unless otherwise indicated, the business address of each director and executive officer is c/o Computer Generated Solutions, Inc., 1675 Broadway, New York, New York 10019. 39 DESCRIPTION OF CAPITAL STOCK After this offering, the Company's authorized capital stock will consist of 25,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, the terms and provisions of which may be designated by the Board of Directors in the future. The following summary of the Company's capital stock is qualified in its entirety by reference to the Company's Certificate of Incorporation and By-Laws, each of which is filed as an exhibit to the registration statement of which this Prospectus is a part. COMMON STOCK Following this offering, 12,700,000 shares of Common Stock will be issued and outstanding. See "Capitalization." Each holder of Common Stock is entitled to one vote for each share held of record on each matter submitted to a vote of the Company's stockholders. The Company's Principal Stockholders are entitled to certain rights with respect to registration under the Securities Act of shares held by them. See "Certain Transactions." All of the outstanding shares of Common Stock are, and all of the shares of Common Stock sold in this offering will be, when issued and paid for, fully paid and nonassessable. In the event of the liquidation or dissolution of the Company, following any required distribution to the holders of outstanding shares of Preferred Stock, if any, the holders of Common Stock are entitled to share pro rata in any balance of the corporate assets available for distribution to them. The Company may pay dividends if, when and as declared by the Board of Directors from funds legally available therefor. Subject to the preferential rights of the holders of any class of Preferred Stock, holders of shares of Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors out of funds legally available for such purpose. See "Dividend Policy." Holders of Common Stock have no preemptive rights. PREFERRED STOCK Following this offering, no shares of Preferred Stock will be issued and outstanding. Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights, sinking fund provisions, redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of Preferred Stock, in each case without any further action or vote by the stockholders. The Company has no current plans to issue any shares of Preferred Stock of any class or series. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. In addition, the issuance of shares of Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. The issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS AND DELAWARE LAW Certain provisions of the Company's Certificate of Incorporation and By- Laws, as well as certain provisions of Delaware law, may have an anti-takeover effect or may delay, defer or prevent a tender offer or takeover 40 attempt that a stockholder might consider in such stockholder's best interest, including those attempts that might result in a premium over the market price for the shares of Common Stock held by a stockholder. These provisions are in addition to the anti-takeover effect of the substantial ownership and voting power of the Principal Stockholders of the Company. In addition, the Certificate of Incorporation and By-Laws contain certain provisions that may reduce the likelihood of a change in management or voting control of the Company without the consent of the Board of Directors. Delaware Anti-Takeover Law. Section 203 of the Delaware General Corporation Law, as amended ("Section 203"), provides that, subject to certain exceptions specified therein, a Delaware corporation shall not engage in any business combination, including any merger or consolidation with, or any transaction which results in the acquisition of additional shares of the corporation by, an "interested stockholder" for a three-year period following the time at which the stockholder became an "interested stockholder" unless (i) prior to such time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an "interested stockholder," (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time that the transaction commenced (excluding certain shares) or (iii) at or subsequent to such time, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." Except as otherwise specified in Section 203, an "interested stockholder" is defined to include any person that (i) is the owner of 15% or more of the outstanding voting stock of the corporation, (ii) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date on which it is sought to be determined whether such person is an "interested stockholder" or (iii) is an affiliate or associate of any person of the type identified in clause (ii) above. Section 203 defines the term "business combination" to encompass a wide variety of transactions with or caused by an "interested stockholder", including mergers, asset sales and other transactions in which the "interested stockholder" receives or could receive a benefit on other than a pro rata basis with other stockholders. The provisions of Section 203, coupled with the Board of Directors authority to issue Preferred Stock without further stockholder action and the fact that, after giving effect to this offering, 72.1% of the outstanding shares of Common Stock will be held by the Principal Stockholders, could delay or frustrate the removal of incumbent directors or a change in control of the Company. The provisions also could discourage, impede or prevent a merger, tender offer or proxy contest, even if such event would be favorable to the interests of stockholders. The Company's stockholders, by adopting an amendment to the Certificate of Incorporation, may elect not to be governed by Section 203, which election would be effective twelve months after such adoption. Such a change in the Certificate of Incorporation could not be made without the affirmative vote of shares held by Philip Friedman. Neither the Certificate of Incorporation nor the By-Laws exclude the Company from the restrictions imposed by Section 203. These restrictions will not apply to stockholders who were interested stockholders prior to the date of this offering. Classified Board of Directors. The Certificate of Incorporation provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. Each class will consist, as nearly as practical, of one-third of the Board of Directors constituting the entire Board of Directors. As a result, approximately one-third of the Board of Directors will be elected each year. Holders of a majority of the outstanding shares of capital stock of the Company entitled to vote with respect to election of directors may remove directors only for cause. Vacancies on the Board of Directors may be filled only by the remaining directors and not by the stockholders. Stockholder Meetings. The Certificate of Incorporation provides that any action required or permitted to be taken by the stockholders of the Company may be effected only at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. The By- Laws provide that 41 special meetings of stockholders may be called only by the president of the Company and must be called by such officer at the request in writing of a majority of the Board of Directors. Stockholders are not permitted to call a special meeting of stockholders, to require that the president call such a special meeting or to require that the Board of Directors request the calling of a special meeting of stockholders. Advance Notice Provisions. The By-Laws establish an advance notice procedure for stockholders to make nominations of candidates for elections as directors, or to bring other business before an annual meeting of stockholders of the Company. The By-Laws provide that only persons who are nominated by, or at the direction of, the president of the Company or by a stockholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. The By-Laws also provide that at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the president of the Company, the Board of Directors or by a stockholder who has given timely written notice to the Secretary of the Company of such stockholder's intention to bring such business before such meeting. Generally, for notice of stockholder nominations to be made at an annual meeting to be timely under the By-Laws, such notice must be received by the Company not less than 70 days nor more than 90 days prior to the first anniversary of the previous year's annual meeting (or, in the case of a special meeting at which directors are to be elected, not earlier than the 90th day before such meeting and not later than the later of (x) the 70th day prior to such meeting and (y) the 10th day after public announcement of the date of such meeting is first made). Under the By-Laws, a stockholder's notice must also contain certain information specified in the By-Laws. Amendment of Certificate of Incorporation. The stockholders of the Company may not amend or repeal any of the provisions summarized above under "Classified Board of Directors," "Stockholder Meetings" or "Advance Notice Provisions" except upon the affirmative vote of holders of not less than 75% of the outstanding shares of capital stock of the Company entitled to vote thereon. Exculpation and Indemnification. The Certificate of Incorporation provides that no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. The Commission has taken the position that the foregoing provisions will have no effect on claims arising under federal securities laws. The Certificate of Incorporation provides that the Company will indemnify its directors and officers to the fullest extent permissible under Delaware law. These indemnification provisions require the Company to indemnify such persons against certain liabilities and expenses to which they may become subject by reason of their service as a director or officer of the Company. The provisions also set forth certain procedures, including the advancement of expenses, that apply in the event of a claim for indemnification. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is The Bank of New York. 42 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. No prediction can be made as to the effect, if any, that sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market after the restrictions described below lapse could adversely affect the prevailing market price of the Common Stock and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding 12,700,000 shares of Common Stock. See "Capitalization." Of these shares, the 3,540,000 shares (4,071,000 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock sold in this offering will be freely tradable without restriction under the Securities Act except for any shares purchased by "affiliates" (as defined in the Securities Act) of the Company. The remaining 9,160,000 (8,629,000 shares if the Underwriters' over-allotment option is exercised in full) shares are "restricted securities" within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares"). The Restricted Shares generally may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144. The Company and the Principal Stockholders have agreed not to offer, sell, contract to sell, pledge or grant any option to purchase or otherwise dispose of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Oppenheimer & Co., Inc., which consent may not be unreasonably withheld, except, without such prior written consent, the Company and the Principal Stockholders may sell shares of Common Stock pursuant to this offering, and the Company may grant options, restricted stock, stock appreciation rights or other units of stock-based incentive compensation under the 1997 Long-Term Incentive Plan. See "Underwriting." Following the Lock-up Period, any shares owned prior to this offering will not be eligible for sale in the public market without registration unless such sales meet the conditions and restrictions of Rule 144 as described below. In general, under Rule 144, as currently in effect, any person (or persons whose shares are aggregated), including an affiliate of the Company, who has beneficially owned shares for a period of at least two years (as computed under Rule 144) is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then-outstanding shares of Common Stock or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding the date on which the notice of such sale on Form 144 is filed with the Commission. Sales under Rule 144 are also subject to certain provisions relating to notice and manner of sale and the availability of current public information about the Company. In addition, a person (or persons whose shares are aggregated) who has not been an affiliate of the Company at any time during the 90 days immediately preceding a sale, and who has beneficially owned the shares for at least three years (as computed under Rule 144), would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale, public information or notice provisions of Rule 144. The foregoing summary of Rule 144 is not intended to be a complete description thereof. In addition, the Commission has proposed reducing the two-year and three-year periods referred to above to one and two years, respectively. Except for the options to purchase 587,500 shares of Common Stock that the Company currently anticipates granting under the Plan, prior to this offering, no Common Stock was subject to outstanding options or warrants to purchase, or securities convertible into, Common Stock. As soon as practicable following the consummation of this offering, the Company intends to file a registration statement under the Securities Act to register the shares of Common Stock available for issuance upon exercise of options granted pursuant to the 1997 Long Term Incentive Plan. Shares issued upon exercise of options granted pursuant to the 1997 Long-Term Incentive Plan after the effective date of such registration statement will be available for sale in the open market, subject to the Lock-up Period and, for affiliates of the Company, subject to the conditions and restrictions of Rule 144. In addition, the Company has granted certain registration rights to Philip Friedman and Victor Friedman. See "Certain Transactions." 43 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement (the "Underwriting Agreement") among the Company, the Selling Stockholders and Oppenheimer & Co., Inc. and Furman Selz LLC, as Representatives (the "Representatives") of the Underwriters of this offering, the Company and the Selling Stockholders have agreed to sell to the Underwriters, and the Underwriters have severally agreed to purchase from the Company and the Selling Stockholders, the number of shares of Common Stock set forth opposite their names below:
NUMBER UNDERWRITERS OF SHARES ------------ --------- Oppenheimer & Co., Inc. ........................................ Furman Selz LLC................................................. --------- Total ........................................................ 3,540,000 =========
The Underwriters propose to offer the Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus, and at such price less a concession not in excess of $ per share of Common Stock to certain securities dealers, of which a concession not in excess of $ per share of Common Stock may be reallowed to certain other securities dealers. After this offering, the offering price and other selling terms may be changed by the Underwriters. The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations is such that they are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Company has granted an option to the Underwriters exercisable within 30 days after the date of this Prospectus, to purchase from the Company up to an aggregate of 531,000 additional shares of Common Stock, to cover over- allotments, if any, at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. If the Underwriters exercise their over-allotment option to purchase any of the additional 531,000 shares of Common Stock, each of the Underwriters has severally agreed, subject to certain conditions, to purchase approximately the same percentage as the number of shares of Common Stock to be purchased by each of them bears to the 3,540,000 shares of Common Stock offered hereby. The Company will be obligated, pursuant to the over-allotment option, to sell Common Stock to the Underwriters to the extent such over-allotment option is exercised. The Company and the Principal Stockholders have agreed not to offer, sell, contract to sell, pledge or grant any option to purchase or otherwise dispose of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Oppenheimer & Co., Inc., which consent may not be unreasonably withheld, except, without such prior written consent, the Company and the Principal Stockholders may sell shares of Common Stock pursuant to this offering, and the Company may grant options, restricted stock, stock appreciation rights or other units of stock-based incentive compensation under the 1997 Long-Term Incentive Plan. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to certain payments that the Underwriters may be required to make in respect thereof. 44 The Representatives do not intend to confirm sales of the Common Stock to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that any active trading market will develop for the Common Stock or as to the price at which the Common Stock may trade in the public market from time to time subsequent to the offering made hereby. The initial price to the public for the shares of Common Stock offered hereby will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial price to the public are: (i) the history of and the prospects for the industry in which the Company competes; (ii) the ability of the Company's management; (iii) the past and present operations of the Company; (iv) the historical results of operations of the Company; (v) the prospects for future earnings and business potential of the Company; (vi) the general condition of the securities markets at the time of this offering; (vii) the recent market prices of securities of generally comparable companies; (viii) the market capitalizations and stages of development of other companies which the Company and the Representatives believe to be comparable to the company; and (ix) other factors deemed to be relevant. At the Company's request, the Underwriters have reserved up to 175,000 shares of Common Stock for sale at the initial public offering price to the Company's employees and other persons having business relationships with the Company. The number of shares of Common Stock available for sale to other members of the public will be reduced to the extent that these persons purchase such reserved shares. Any reserved shares not purchased will be offered by the Underwriters on the same basis as the other shares offered hereby. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the Common Stock offered hereby will be passed upon for the Company and the Selling Stockholders by Chadbourne & Parke LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The financial statements (including Schedule 16(b), which is included in the Registration Statement of which this Prospectus forms a part) of the Company at December 31, 1995 and 1996 and the years ended December 31, 1995 and 1996, appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, and for the year ended December 31, 1994, by BDO Seidman, LLP, independent auditors, as set forth in their respective reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. CHANGE OF AUDITORS In November 1995, the Company, with the approval of the Board of Directors, dismissed BDO Seidman, LLP as its independent auditors. During the period between January 1, 1993 and the date on which BDO Seidman, LLP was dismissed, there was no (i) disagreement between the Company and BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of BDO Seidman, LLP, would have caused BDO Seidman, LLP to make reference to the subject matter of such disagreement in connection with its report on the Company's financial statements or (ii) adverse opinion or a disclaimer of opinion, or qualification or modification as to uncertainty, audit scope or accounting principles in connection with its report on the Company's financial statements. The Company engaged Ernst & Young LLP as its new independent auditors in November 1995. 45 ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement under the Securities Act (the "Registration Statement") with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto. The statements contained in this Prospectus as to the contents of any document filed as an exhibit are of necessity brief descriptions thereof and are not necessarily complete; each such statement is qualified in its entirety by reference to such document. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional Offices at Seven World Trade Center, 13th Fl., New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511, and copies may be obtained at prescribed rates from the public reference section of the Commission, Washington, D.C. 20549. Such reports and other information can be reviewed through the Commission's Electronic Data Gathering Analysis and Retrieval System, which is publicly available through the Commission's web site (http://www.sec.gov). 46 COMPUTER GENERATED SOLUTIONS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Reports of Independent Auditors.......................................... F-2 Balance Sheets as of December 31, 1995 and 1996.......................... F-4 Statements of Operations for the years ended December 31, 1994, 1995 and 1996.................................................................... F-5 Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996........................................................... F-6 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.................................................................... F-7 Notes to Financial Statements............................................ F-8
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Computer Generated Solutions, Inc. We have audited the accompanying balance sheets of Computer Generated Solutions, Inc. (the "Company") as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for the years 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Computer Generated Solutions, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New York, New York January 30, 1997, except for paragraph 8 of Note 12, as to which the date is February 28, 1997 F-2 REPORT OF CERTIFIED PUBLIC ACCOUNTANTS Computer Generated Solutions, Inc. New York, New York We have audited the accompanying statements of operations, stockholders' equity and cash flows of Computer Generated Solutions, Inc. (the "Company") for the year ended December 31, 1994. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Computer Generated Solutions, Inc. for the year ended December 31, 1994 in conformity with generally accepted accounting principles. BDO Seidman, LLP New York, New York February 21, 1995, except for paragraph 8 of Note 12, as to which the date is February 28, 1997 F-3 COMPUTER GENERATED SOLUTIONS, INC. BALANCE SHEETS
DECEMBER 31, PRO FORMA ---------------- DECEMBER 31, 1995 1996 1996 ------- ------- ------------ (UNAUDITED) (NOTE 12) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS: Current assets: Cash and cash equivalents....................... $ 264 $ 57 $ 57 Accounts receivable, net of allowances of $60 in 1995 and $100 in 1996.......................... 9,177 10,691 10,691 Deferred income taxes........................... -- -- 45 Prepaid expenses and other current assets....... 122 180 180 ------- ------- ------- Total current assets........................... 9,563 10,928 10,973 Fixed assets, net................................ 1,259 1,897 1,897 Cost in excess of fair value of assets purchased, net of accumulated amortization of $533 in 1995 and $853 in 1996................................ 426 106 106 Deferred income taxes............................ -- -- 250 Deferred registration fees....................... -- 230 230 Other assets..................................... 405 615 615 ------- ------- ------- Total assets................................... $11,653 $13,776 $14,071 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Note payable--bank.............................. $ 3,200 $ 2,050 $ 2,050 Note payable--stockholder....................... 323 323 -- Accounts payable and accrued expenses........... 1,995 3,173 3,173 Current portion of long-term debt............... 472 133 133 Current portion of obligations under capital leases......................................... 93 164 164 Deferred maintenance............................ 542 422 422 Accrued payroll................................. 817 1,373 1,373 Sales tax payable............................... 178 267 267 Due to stockholders............................. -- -- 7,269 ------- ------- ------- Total current liabilities...................... 7,620 7,905 14,851 Long-term debt................................... 133 -- -- Obligations under capital leases................. 346 471 471 Subordinated debt--stockholder................... 2,146 2,146 -- Commitments STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, no shares authorized in 1995 and 1996; pro forma 1996, 1,000,000 shares authorized, no shares issued and outstanding................................ -- -- -- Common stock, $.001 par value; Voting--25,000,000 shares authorized, 13,004,246 shares issued and 9,800,000 shares outstanding in 1995 and 9,800,000 shares issued and outstanding in 1996................ 13 10 10 Additional paid-in capital...................... 216 77 77 Retained earnings (deficit)..................... 1,321 3,167 (1,338) ------- ------- ------- 1,550 3,254 (1,251) Less 3,204,246 shares held in treasury, at cost........................................... (142) -- -- ------- ------- ------- Total stockholders' equity..................... 1,408 3,254 (1,251) ------- ------- ------- Total liabilities and stockholders' equity.... $11,653 $13,776 $14,071 ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-4 COMPUTER GENERATED SOLUTIONS, INC. STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------- 1994 1995 1996 -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues: Services, software license and maintenance fees........................................... $ 19,962 $ 31,704 $ 47,846 Hardware........................................ 4,748 4,243 9,641 -------- -------- -------- Total revenues................................ 24,710 35,947 57,487 Direct costs: Services, software license and maintenance fees........................................... 12,988 22,970 35,734 Hardware........................................ 3,882 3,007 8,123 -------- -------- -------- Total direct costs............................ 16,870 25,977 43,857 -------- -------- -------- Gross profit...................................... 7,840 9,970 13,630 Selling, general and administrative expenses...... 4,725 6,690 9,995 Compensation amounts to S corporation stockhold- ers.............................................. 3,041 1,502 760 Amortization of cost in excess of fair value of assets purchased................................. 213 320 320 -------- -------- -------- 7,979 8,512 11,075 -------- -------- -------- Operating income (loss)........................... (139) 1,458 2,555 Interest expense.................................. 77 473 540 -------- -------- -------- Income (loss) before income taxes................. (216) 985 2,015 Income taxes...................................... 60 33 169 -------- -------- -------- Net income (loss)................................. $ (276) $ 952 $ 1,846 ======== ======== ======== PRO FORMA (UNAUDITED) (NOTE 12) Historical income before income taxes............. $ 2,015 Pro forma provision for income taxes.............. $ 829 -------- Pro forma net income.............................. $ 1,186 ======== Pro forma net income per share.................... $ .12 ======== Pro forma weighted average number of shares outstanding 10,241,708 ==========
The accompanying notes are an integral part of the financial statements. F-5 COMPUTER GENERATED SOLUTIONS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL NUMBER PAID-IN RETAINED TREASURY OF SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL --------- ------ ---------- -------- -------- ------ (IN THOUSANDS) Balance at December 31, 1993.................... 8,821 $ 9 $ 11 $ 645 $(185) $ 480 Net loss................ (276) -- (276) Reissued treasury stock.................. 4,183 4 205 -- 43 252 ------ ---- ---- ------ ----- ------ Balance at December 31, 1994.................... 13,004 13 216 369 (142) 456 Net income.............. 952 -- 952 ------ ---- ---- ------ ----- ------ Balance at December 31, 1995.................... 13,004 13 216 1,321 (142) 1,408 Net income.............. 1,846 -- 1,846 Retirement of treasury stock.................. (3,204) (3) (139) -- 142 -- ------ ---- ---- ------ ----- ------ Balance at December 31, 1996.................... 9,800 $ 10 $ 77 $3,167 -- $3,254 ====== ==== ==== ====== ===== ======
The accompanying notes are an integral part of the financial statements. F-6 COMPUTER GENERATED SOLUTIONS, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------- 1994 1995 1996 ------- -------- ------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss).......................... $ (276) $ 952 $ 1,846 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............. 288 530 704 Bad debt expense.......................... 54 110 302 Write-off of leasehold improvements....... 42 -- -- Changes in operating assets and liabilities (net of effects in 1994 from purchase of ACS Software Products Group and Real-Time Technology Inc.): Accounts receivable...................... (1,260) (3,835) (1,816) Prepaid expenses and other current assets.................................. (62) 4 (58) Other assets............................. (173) 23 (210) Accounts payable and accrued expenses.... (3,333) 702 1,178 Deferred maintenance..................... 115 67 (120) Accrued payroll.......................... 313 114 556 Sales taxes payable...................... (360) 33 89 ------- -------- ------- Net cash provided by (used in) operating activities................................ (4,652) (1,300) 2,471 ------- -------- ------- INVESTING ACTIVITIES: Purchase of net assets of ACS Software Products Group............................ (800) -- -- Capital expenditures....................... (74) (579) (683) ------- -------- ------- Net cash used in investing activities...... (874) (579) (683) ------- -------- ------- FINANCING ACTIVITIES: Proceeds from term loan.................... 800 -- -- Repayment of term loan..................... (133) (267) (267) Repayment of acquisition debt.............. -- (205) (205) Deferred registration fees................. -- -- (230) Proceeds (repayment) from note payable-- bank, net................................. 1,400 1,800 (1,150) Proceeds of note payable and subordinated debt--stockholder, net.................... 1,244 291 -- Principal payments under capitalized lease obligations............................... -- (82) (143) Repayments of loans payable--other......... (190) -- -- ------- -------- ------- Net cash provided by (used in) financing activities................................ 3,121 1,537 (1,995) ------- -------- ------- Decrease in cash and cash equivalents...... (2,405) (342) (207) Cash and cash equivalents, beginning of year...................................... 3,011 606 264 ------- -------- ------- Cash and cash equivalents, end of year..... $ 606 $ 264 $ 57 ======= ======== =======
The accompanying notes are an integral part of the financial statements. F-7 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Description of Business Computer Generated Solutions, Inc. (the "Company" or "CGS") provides a composite solution to the information processing needs of its clients through a wide range of information technology and outsourcing support services. Using a custom designed approach to satisfy each customer's particular need, the Company provides a complete range of solutions, including its proprietary ACS Optima software for the apparel industry, professional services ranging from strategic consulting to system integration, technical training classes and full service on-site and remote help desk and call management support services. The Company's customers are in various industries located throughout the United States. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 1996, the Company has substantially all its cash in two financial institutions. Concentration of Credit Risk The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Accounts receivable are generally due within 60 days from the date of service. Credit losses have historically been consistent with management's expectations. Fixed Assets Fixed assets are stated at cost and depreciation is computed over the estimated useful lives of the assets by the straight-line method for financial reporting and by accelerated methods for income tax purposes. Amortization on leasehold improvements is computed by the straight-line method over the shorter of the estimated useful lives of the assets or the term of the lease. Reclassifications Certain items in the December 31, 1994 and 1995 financial statements have been reclassified to conform to the December 31, 1996 presentation. Deferred Rent Deferred rent represents payments made at the beginning of the lease term for office space which is being amortized over the life of the respective lease. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Revenue Recognition Software License and Service Fees The Company recognizes revenue from sales of software licenses upon delivery of the software product to the customer because future obligations associated with such revenue are insignificant and collection is probable. Revenue from software installation, modifications and training services are recognized on a percentage-of-completion method with progress-to-completion measured based upon labor costs incurred or achievement of contract milestones. Services and Maintenance Fees related to professional services are recognized as revenue as time and material costs are incurred. Maintenance fees are recognized as revenues ratably over the term of the maintenance contract. Hardware and Other Computer hardware revenues are recognized when the units are shipped. Revenue recognition of completed units is sometimes delayed pending testing and installation of software. In such instances, hardware revenues are recognized when the customer has accepted the completed unit and authorizes the related billing. Compensation Amounts to S Corporation Stockholders For the years 1994 and 1995, compensation amounts to S corporation stockholders consisted of annual salaries and discretionary year-end bonuses which were charged to expense. The bonuses are determined and paid at year- end. For the year ended December 31, 1996, the Company has recorded compensation amounts to S corporation stockholders to reflect the aggregate base salaries in effect during 1996. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Notes payable - bank: The carrying amounts of the Company's borrowings under its credit and term loan agreement approximates their fair values. Notes payable - stockholder: The carrying amounts of the Company's borrowings under its subordinated debt agreements approximates their fair values. Long-term debt: The carrying amounts of the Company's borrowings under its long-term debt arrangements approximates their fair values. Research and Software Development Costs In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes costs incurred to develop new software products upon determination that technological feasibility has been established for the product, whereas costs incurred prior to the establishment of technological feasibility are charged to expense. All research and software development costs incurred to date have been expensed by the Company and are included in direct costs. Research and software development costs amounted to $423,000, $740,000 and $892,000 for the years ended December 31, 1994, 1995 and 1996, respectively. F-9 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Stock Based Compensation In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123. "Accounting for Stock- Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 15, 1995 and prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations with pro forma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. It is the Company's intention to present such information in accordance with APB 25 as described in (ii) above. 2. ACQUISITIONS ACS Software Products Group Effective May 5, 1994, the Company acquired substantially all of the assets and assumed certain liabilities of ACS Software Products Group ("ACS"), an apparel manufacturing and distribution software product company, for $1.2 million. The acquisition has been accounted for as a purchase and the assets of ACS have been recorded at their fair value at the date of acquisition. The excess of the total acquisition cost over the fair value of net assets acquired of $959,000 is being amortized on a straight-line basis over three years. ACS' results of operations have been included in the statements of operations since the date of acquisition. The purchase price consisted of $800,000 in cash and a promissory note in the principal amount of $410,000 (see Note 6). The note bears interest at 6.75% and provides for the payment of principal in two equal installments of $205,000 together with accrued interest. The Company paid the last installment on the note during 1996. Real-Time Technology Inc. Effective October 1, 1994, the Company acquired substantially all of the assets and assumed certain liabilities of Real-Time Technology Inc. ("RTT"), a computer consulting firm, for $252,000 (approximating the fair value of net asset acquired, which approximated book value). Funding was provided through the issuance of shares of CGS treasury stock with treasury stock credited for $43,000 and the balance of $209,000 credited to additional paid-in capital. The acquisition has been accounted for as a purchase and the assets of RTT have been recorded at their fair value at the date of acquisition which approximated cost. RTT's results of operations have been included in the statements of operations since the date of acquisition. The table below sets forth the pro forma (unaudited) results of operations for the year ended December 31, 1994 assuming consummation of the ACS and RTT acquisitions as of January 1, 1994.
YEAR ENDED DECEMBER 31, 1994 ---------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues ................................ $29,387 Net loss....................................... (715) Pro forma net loss per share (see Note 12)..... 0.07
F-10 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. FIXED ASSETS Major classes of property and equipment consist of the following:
DECEMBER 31, ------------- ESTIMATED 1995 1996 USEFUL LIVES ------ ------ ------------- (IN THOUSANDS) Furniture and fixtures........................... $ 308 $ 516 10 years Leasehold improvements........................... 261 310 Life of lease Computer equipment and software.................. 1,282 2,047 4-5 years ------ ------ 1,851 2,873 Less accumulated depreciation and amortization... 592 976 ------ ------ $1,259 $1,897 ====== ======
Furniture and fixtures, leasehold improvements, computer equipment and software include assets resulting from capitalized lease obligations totaling $521,000 and $860,000 at December 31, 1995 and 1996, respectively (see Note 7). The accumulated depreciation attributable to assets under capital leases is $52,000 and $190,000 at December 31, 1995 and 1996, respectively. 4. NOTE PAYABLE - BANK In July 1996, the Company amended its revolving credit and term loan agreement with a bank. The agreement provides for a $7.0 million revolving line of credit expiring in May 1997. Outstanding borrowings bear interest at the bank's prime rate (8.25% at December 31, 1996). Borrowings on the revolving line of credit, which are based on eligible accounts receivable, and the term loan are collateralized by a security interest in substantially all accounts receivable, fixed assets and general intangibles and an assignment of key man insurance on the life of one of the stockholders in the amount of $500,000. In addition, one of the stockholders has guaranteed the obligation. Outstanding amounts, ($2,050,000 at December 31, 1996), under the revolving line of credit are also supported by a 10% compensating balance arrangement. Subordinated debt - stockholder represents funds advanced to the Company by its principal stockholder. Effective January 1, 1995, the subordinated debt bears interest at 10% per annum and is payable on demand. In connection with the revolving line of credit, subordinated debt - stockholder is subordinated to the bank. 5. NOTE PAYABLE - STOCKHOLDER Note payable - stockholder, which is payable on demand, represents advances made to the Company by its principal stockholder, bearing interest at 10% per annum. F-11 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------- 1995 1996 ------- ------- (IN THOUSANDS) Note payable--bank (a)...................................... $ 400 $ 133 Note payable (acquisition debt) (Note 2).................... 205 -- ------- ------- Total long-term debt........................................ 605 133 Less current maturities..................................... 472 133 ------- ------- $ 133 $ -- ======= =======
- -------- (a) Note payable to a bank consists of a term loan of $800,000 which is payable in 36 equal monthly installments of $22,000 with interest at 1.25% per annum above the bank's prime rate (8.25% at December 31, 1996). The term loan contains financial covenants relating to minimum tangible net worth, working capital and a maximum debt-to-equity ratio. In addition, one of the stockholders has guaranteed the obligation. 7. CAPITAL LEASES The Company has entered into capital lease agreements for computer and telephone equipment, furniture and fixtures and leasehold improvements. The agreements provide for monthly payments of approximately $19,000 through October 2001, which include interest at rates ranging from 10% to 10.35%. The following is a schedule of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments:
YEAR ENDING DECEMBER 31, -------------- (IN THOUSANDS) 1997............................................................. $ 224 1998............................................................. 224 1999............................................................. 217 2000............................................................. 79 2001............................................................. 33 ----- Total minimum lease payments..................................... 777 Less amount representing interest................................ 142 ----- Present value of net minimum lease payments...................... $ 635 =====
F-12 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. COMMITMENTS Leases Total rent expense on real estate charged to operations for the years ended December 31, 1994, 1995 and 1996 aggregated $321,000, $421,000 and $877,000, respectively. The minimum annual rental commitments under noncancellable operating leases as of December 31, 1996 are as follows:
YEAR ENDING DECEMBER 31, -------------- (IN THOUSANDS) 1997............................................................. $ 1,122 1998............................................................. 966 1999............................................................. 968 2000............................................................. 886 2001............................................................. 840 Thereafter....................................................... 2,594 ------- Total............................................................ $ 7,376 =======
9. STATEMENTS OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
YEARS ENDED DECEMBER 31, -------------------------- 1994 1995 1996 -------- -------- -------- (IN THOUSANDS) Cash paid during the period: Income taxes............................... $ 47 $ 61 $ 16 Interest................................... 79 488 540 Noncash investing and financing activities: Notes payable on purchase of net assets of ACS (Note 2).............................. 410 -- -- Treasury stock issued on purchase of net assets of RTT (Note 2).................... 252 -- --
The Company entered into capitalized leases for approximately $521,000 in 1995 and $339,000 in 1996. 10. EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan in which all eligible employees can contribute a portion of their compensation up to the maximum amount allowable pursuant to the Internal Revenue Code. The Company contributes an amount equal to 50% of each employee's contribution limited to 3% of an eligible employee's compensation. The Company contributed to the plan $102,000, $181,000 and $240,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 11. MAJOR CUSTOMER One customer, with several contracts in various divisions, accounted for 21%, 33% and 35% of total revenues for the years ended December 31, 1994, 1995 and 1996, respectively. The Company was advised by this customer that, effective January 1, 1997, certain services previously provided by the Company would no longer be provided to this customer. The Company recognized revenues of approximately $8.7 million for providing these services to this customer in 1996, representing approximately 15% of the Company's revenues. As of December 31, 1994, 1995 and 1996, 19%, 35% and 30%, respectively, of accounts receivable was due from this customer. 12. PRO FORMA INFORMATION AND EVENTS CONCURRENT WITH THE IPO (UNAUDITED) PRO FORMA ADJUSTMENTS: STATEMENTS OF OPERATIONS The Company intends to enter into an underwriting agreement for an initial public offering ("IPO") of its common stock. If the IPO is successful, the Company will no longer be treated as an S corporation and, F-13 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) accordingly, will be subjected to federal and additional state income taxes. The unaudited pro forma adjustments on the statement of operations reflect an adjustment to record a provision for income taxes on income as if the Company had not been an S corporation. PRO FORMA NET INCOME PER SHARE Pro forma net income per share for the year ended December 31, 1996 has been computed by dividing pro forma net income by the weighted average number of common shares outstanding after giving effect to the stock split and the number of shares that would be sold by the Company to fund the distribution of S corporation taxable earnings to existing stockholders. The number of shares used in this pro forma computation is 10,241,708. There were no common stock equivalents such as options, warrants, etc., outstanding during any of the periods presented. PRO FORMA BALANCE SHEET Subsequent to December 31, 1996, the Company intends to declare an S corporation distribution to its then existing stockholders representing all of its previously earned and undistributed S corporation taxable earnings through December 31, 1996. If the IPO is successful, the Company expects that the net proceeds from the IPO will be used to pay this S corporation distribution and repay indebtedness owed to a stockholder under a promissory note and a subordinated debt agreement. The pro forma balance sheet at December 31, 1996 gives effect to these items. Amount due to stockholders on the December 31, 1996 pro forma balance sheet consists of the following:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) S corporation distributions............. $4,800 Subordinated debt--stockholder.......... 2,146 Note payable--stockholder............... 323 ------ $7,269 ======
The pro forma balance sheet at December 31, 1996 also gives effect to a deferred tax asset in the amount of $295,000 (see Note 13). The estimated distribution of $4.8 million in the pro forma presentation represents undistributed taxable S corporation earnings through December 31, 1996. The difference between the undistributed earnings of $4.8 million and retained earnings of approximately $3.2 million at December 31, 1996 is principally the result of differences between income tax bases and financial reporting. In addition, the Company plans to distribute to its existing stockholders an amount equal to the taxable earnings of the Company from January 1, 1997 to the day prior to the S termination date. LONG-TERM INCENTIVE PLAN Immediately prior to the consummation of the IPO, the Company's Board of Directors will adopt the 1997 Long-Term Incentive Plan (the "Plan"). The Company will reserve an amount of common stock equal to 10% (1,270,000 shares) of the outstanding shares of common stock outstanding upon consummation of the IPO for issuance and/or use as the basis for stock appreciation rights or other units of stock-based incentive compensation under the Plan. Unless sooner terminated by the Board of Directors, the Plan will terminate on the date which is 10 years from the date of its adoption. It is anticipated that the Company will grant 587,500 options under the F-14 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Plan, consisting of 537,500 incentive stock options and 50,000 nonqualified stock options, immediately prior to consummation of the IPO to certain officers, key employees and directors of the Company. Under the terms of the Plan, the exercise price for an incentive stock option may not be less than the fair market value of the Company's common stock on the date of grant and such options may not be exercisable by the employee, except in the event of death or disability or certain changes in control of the Company, prior to the completion of at least one year of employment subsequent to the grant of the award. Options granted under the Plan shall vest on certain changes in control of the Company, as described in the Plan, unless the Company's compensation committee otherwise determines prior to such change in control, and in such case, the participant will receive cash equal to the value of the options in lieu of exercise thereof. Nonqualified stock options shall have such terms as the compensation committee shall determine and that shall not be inconsistent with the Plan. STOCK SPLIT Effective February 28, 1997, the Board of Directors of the Company approved an increase in the number of authorized shares of Common Stock to 25,000,000 and authorized a stock split pursuant to which each share of common stock, $.01 par value per share, will be exchanged for 1,300.42 shares of Common Stock, par value of $.001 per share. The foregoing stock split has been reflected retroactively in the accompanying financial statements. 13. INCOME TAXES The Company, with the consent of its stockholders, has elected to be taxed as an S corporation pursuant to the Internal Revenue Code and certain state tax laws. As such, the Company has not been subject to federal and certain state income taxes and the stockholders have included the corporation's taxable income or loss in their individual income tax returns. Income taxes in 1994, 1995 and 1996 primarily represent New York City corporate income taxes. Deferred income taxes resulting from temporary differences are considered immaterial and, therefore, are not provided for at December 31, 1994, 1995 and 1996. The provision for pro forma income taxes (see Note 12) on pro forma income differs from the amounts computed by applying the applicable federal statutory rates due to the following:
% OF PRO FORMA PROFIT BEFORE INCOME TAXES -------------- YEAR ENDED DECEMBER 31, 1996 -------------- Federal statutory rate...................................... 34.0% State and local taxes, net of federal tax benefit........... 7.3 Nondeductible expenses...................................... 3.4 Utilization of tax credit................................... (3.6) ---- 41.1% ====
If the IPO is successful, the Company will no longer be an S corporation. Upon the change in status of the Company, under FASB Statement No. 109 "Accounting for Income Taxes", there will be a deferred income tax asset which is principally due to book amortization in excess of tax amortization related to goodwill and the timing of the deduction for certain payments to stockholders. Had the change in status occurred on December 31, 1996, the deferred tax asset that would have to be recognized would be approximately $295,000. F-15 COMPUTER GENERATED SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 14. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, ------------- 1995 1996 ------ ------ (IN THOUSANDS) Premiums receivable (a)............................... $ 328 $ 365 Security deposits..................................... 77 120 Deferred rent......................................... -- 130 ------ ------ $ 405 $ 615 ====== ======
- -------- (a) Amount represents premiums paid on a split-dollar life insurance policy on the principal stockholder. 15. TREASURY STOCK As of December 31, 1996, the Company retired and canceled the treasury stock outstanding. Such cancellation has been given effect to in the accompanying financial statements as of December 31, 1996. 16. CONTINGENT LIABILITIES There are certain claims and pending actions against the Company arising in the ordinary course of its business. Certain of these claims and actions seek damages in significant amounts. The amount of liability, if any, with respect to these claims and actions at December 31, 1996 is not presently determinable. However, in the opinion of management, these claims are without merit and the ultimate liability, if any, will not have a material adverse effect on the Company's results of operations or financial position. F-16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK REFERRED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION TO SUCH PERSON IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ---------------- TABLE OF CONTENTS Prospectus Summary ...................................................... 3 Risk Factors ............................................................ 6 The Company ............................................................. 11 Use of Proceeds ......................................................... 12 Dividend Policy ......................................................... 12 Capitalization .......................................................... 13 Dilution ................................................................ 14 Selected Financial Data ................................................. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 16 Business ................................................................ 23 Management .............................................................. 34 Certain Transactions .................................................... 38 Principal and Selling Stockholders ...................................... 39 Description of Capital Stock ............................................ 40 Shares Eligible for Future Sale ......................................... 43 Underwriting ............................................................ 44 Legal Matters ........................................................... 45 Experts ................................................................. 45 Change of Auditors....................................................... 45 Additional Information .................................................. 46 Index to Financial Statements............................................ F-1
---------------- UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3,540,000 SHARES [LOGO] COMPUTER GENERATED SOLUTIONS, INC. COMMON STOCK ---------------- PROSPECTUS ---------------- OPPENHEIMER & CO., INC. FURMAN SELZ , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Following are the estimated expenses, other than the underwriting discounts and commissions, to be incurred in connection with this offering of the Common Stock registered under this Registration Statement: Securities and Exchange Commission registration fee........... $ 17,479.36 NASD filing fee............................................... 5,792.30 NASDAQ listing fee............................................ 44,250.00 Blue sky qualification fees and expenses...................... 30,000.00 Printing and engraving expenses............................... 120,000.00 Legal fees and expenses....................................... 320,000.00 Accounting fees and expenses.................................. 300,000.00 Transfer Agent and Registrar fees and expenses................ 5,000.00 Miscellaneous................................................. 7,478.34 ----------- Total....................................................... $850,000.00 ===========
All of the above figures, except the Securities and Exchange Commission registration fee, NASD filing fee and the NASDAQ listing fee, are estimates. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is a Delaware corporation. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for violations of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchase or redemptions) or (iv) for any transactions from which a director derived an improper personal benefit. Reference also is made to Section 145 of the DGCL, which provides that a corporation may indemnify any persons, including officers and directors, who are parties to, or who are threatened to be made parties to, any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interest and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses that such officer or director actually and reasonably incurred. Article Seven of the Certificate of Incorporation of the Company (filed as Exhibit 3.1) provides that except under certain circumstances as described above and as set forth in Section 102(b)(7) of the DGCL, directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach II-1 of fiduciary duties as directors for indemnification of the officers and directors of the Company to the full extent permitted by applicable law. The Underwriting Agreement, Exhibit 1.1 to this Registration Statement, provides for indemnification by the Underwriters of the Company and its directors and certain officers, and by the Company and the Selling Stockholders of the Underwriters, for certain liability arising under the Securities Act of 1933, as amended the ("Securities Act"). The Company has agreed to indemnify each of the Selling Stockholders for any liability arising out of their obligations to indemnify, or contribute to losses incurred by, the Underwriters pursuant to the Underwriting Agreement to be entered into by the Company, the Selling Stockholders and the Underwriters in connection with this offering to the fullest extent permitted by law. The Company intends to enter into a director and officer insurance policy that will provide for reimbursement or payments for losses arising from claims against covered directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of all securities of the Company sold within the past three years, which were not registered under the Securities Act. In October 1994, the Company acquired substantially all of the assets and assumed certain liabilities of Real-Time Technology, Inc. ("Real-Time"), a computer consulting firm which was owned by Victor Friedman, the Company's Executive Vice President. The purchase price of $252,478 was paid by the issuance of shares of Company common stock to Real Time which were then transferred to Victor Friedman in a simultaneous transaction. The above described issuance of securities was made in reliance upon Section 4(2) of the Securities Act as a transaction not involving any public offering. The Company has reason to believe that the foregoing purchaser was familiar with or had access to information concerning the operations and financial conditions of the Company, and such individual acquired the securities for investment and not with a view to the distribution thereof. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS: 1.1 Form of Underwriting Agreement. 2.1 Asset Purchase Agreement, dated April 26, 1994, between ACS Software Products Group and Computer Generated Solutions, Inc.** 2.2 Plan and Agreement of Reorganization, dated August 26, 1994, between Computer Generated Solutions, Inc. and Real-Time Technology, Inc.** 3.1 Form of Amended and Restated Certificate of Incorporation of the Company. 3.2 Form of Bylaws of the Company, as amended. 4.1 Specimen certificate for the shares of Common Stock. 4.2 Registration Rights Agreement. 4.3 1997 Long-Term Incentive Plan. 5.1 Opinion of Chadbourne & Parke LLP, counsel to the Company. 10.1 Service Agreement, dated October 4, 1995, between International Business Machines Corporation and Computer Generated Solutions, Inc.* 10.2 Master Agreement for Professional Services, dated June 26, 1995, between AT&T Corp. and Computer Generated Solutions, Inc.** 10.3 Outsourcing Agreement, dated as of March 30, 1996, between Teleservice Resources, Inc. and Computer Generated Solutions, Inc.** 10.4 Agreement, dated September 15, 1995, between Borland International, Inc. and Computer Generated Solutions, Inc.** 10.5 Agreement, dated November 9, 1995, between Borland International, Inc. and Computer Generated Solutions, Inc.** 10.6 Authorized Education Center Agreement, dated May 23, 1995, between Lotus Development Corporation and Computer Generated Solutions, Inc.**
II-2 10.7 1996 Business Partner Agreement, dated June 1, 1996, between International Business Machines Corporation and Computer Generated Solutions, Inc.** 10.8 Revolving Credit Facility, dated July 1, 1996, as amended, between Computer Generated Solutions, Inc. and Bank Leumi Trust Company of New York.** 10.9 Term Loan, dated June 29, 1994, as amended, between Computer Generated Solutions, Inc. and Bank Leumi Trust Company of New York. 10.10 S Termination Agreement. 10.11 Indemnification Agreement. 10.12 Agreement for Consulting Services, dated November 7, 1996, between International Business Machines Corporation and Computer Generated Solutions, Inc.** 11.1 Statement regarding Computation of Per Share Earnings.** 16.1 Letter from BDO Seidman, LLP regarding change in certifying accountants. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of BDO Seidman, LLP. 23.3 Consent of Chadbourne & Parke LLP (included in Exhibit 5.1). 23.4 Consent of Ira Z. Kevelson.** 23.5 Consent of John J. Murphy.** 24.1 Powers of Attorney (included in signature page hereto).** 27.1 Financial Data Schedule.**
- -------- * Amended from previous filing. ** Previously filed. (B) FINANCIAL STATEMENT SCHEDULE: II--Valuation and Qualifying Accounts All other schedules are omitted either because they are not applicable or are not material, or the information presented therein is contained in the Financial Statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement certificates in such denomination and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons of the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (i) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (ii) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON MARCH 3, 1997. COMPUTER GENERATED SOLUTIONS, INC. /s/ Philip Friedman By: _________________________________ NAME: PHILIP FRIEDMAN TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS AND BY PHILIP FRIEDMAN AS ATTORNEY-IN-FACT FOR THE SPECIFIC PERSONS IN THE CAPACITIES WITH COMPUTER GENERATED SOLUTIONS, INC. ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Philip Friedman President and Chief - ------------------------------------- Executive Officer March 3, 1997 PHILIP FRIEDMAN (Principal Executive Officer), Director * Executive Vice - ------------------------------------- President, Director March 3, 1997 VICTOR FRIEDMAN * Vice President - ------------------------------------- Finance & March 3, 1997 FRED B. SCHLOSSBERG Administration and Secretary (Principal Financial and Accounting Officer), Director /s/ Philip Friedman *By:_________________________________ PHILIP FRIEDMAN ATTORNEY-IN-FACT II-4 REPORT OF INDEPENDENT AUDITORS The Board of Directors Computer Generated Solutions, Inc. We have audited the financial statements of Computer Generated Solutions, Inc. as of December 31, 1996 and 1995, and for the years then ended, and have issued our report thereon dated January 30, 1997 (except for paragraph 8 of Note 12, as to which the date is February 28, 1997) (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein for the periods stated above. Ernst & Young LLP New York, New York January 30, 1997 S-1 COMPUTER GENERATED SOLUTIONS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------------------------------------------------- ADDITIONS BALANCE BALANCE CHARGED AT AT BEGINNING TO COSTS AND (A) END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994 Allowances deducted from assets to which they apply: Allowance for doubtful accounts.. $ 5 $ 54 $(49) $10 YEAR ENDED DECEMBER 31, 1995 Allowances deducted from assets to which they apply: Allowance for doubtful accounts...................... 10 110 (60) 60 YEAR ENDED DECEMBER 31, 1996 Allowances deducted from assets to which they apply: Allowance for doubtful accounts...................... 60 302 (262) 100
- -------- (a) Uncollectible receivables written off. S-2 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 2.1 Asset Purchase Agreement, dated April 26, 1994, between ACS Software Products Group and Computer Generated Solutions, Inc.** 2.2 Plan and Agreement of Reorganization, dated August 26, 1994, between Computer Generated Solutions, Inc. and Real-Time Technology, Inc.** 3.1 Form of Amended and Restated Certificate of Incorporation of the Company. 3.2 Form of Bylaws of the Company, as amended. 4.1 Specimen certificate for the shares of Common Stock. 4.2 Registration Rights Agreement. 4.3 1997 Long-Term Incentive Plan. 5.1 Opinion of Chadbourne & Parke LLP, counsel to the Company. 10.1 Service Agreement, dated October 4, 1995, between International Business Machines Corporation and Computer Generated Solutions, Inc.* 10.2 Master Agreement for Professional Services, dated June 26, 1995, between AT&T Corp. and Computer Generated Solutions, Inc.** 10.3 Outsourcing Agreement, dated as of March 30, 1996, between Teleservice Resources, Inc. and Computer Generated Solutions, Inc.** 10.4 Agreement, dated as of September 15, 1995, between Borland International, Inc. and Computer Generated Solutions, Inc.** 10.5 Agreement, dated November 9, 1995, between Borland International, Inc. and Computer Generated Solutions, Inc.** 10.6 Authorized Education Center Agreement, dated May 23, 1995, between Lotus Development Corporation and Computer Generated Solutions, Inc.** 10.7 1996 Business Partner Agreement, dated June 1, 1996, between International Business Machines Corporation and Computer Generated Solutions, Inc.** 10.8 Revolving Credit Facility, dated July 1, 1996, as amended, between Computer Generated Solutions, Inc. and Bank Leumi Trust Company of New York.** 10.9 Term Loan, dated June 29, 1994, as amended, between Computer Generated Solution, Inc. and Bank Leumi Trust Company of New York. 10.10 S Termination Agreement. 10.11 Indemnification Agreement. 10.12 Agreement for Consulting Services, dated November 7, 1996, between International Business Machines Corporation and Computer Generated Solutions, Inc.** 11.1 Statement regarding Computation of Per Share Earnings.** 16.1 Letter from BDO Seidman, LLP regarding change in certifying accountants. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of BDO Seidman, LLP. 23.3 Consent of Chadbourne & Parke LLP (included in Exhibit 5.1). 23.4 Consent of Ira Z. Kevelson.** 23.5 Consent of John J. Murphy.** 24.1 Powers of Attorney (included in signature page hereto).** 27.1 Financial Data Schedule.**
- -------- * Amended from previous filing. ** Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 UNDERWRITING AGREEMENT 4,071,000 Shares COMPUTER GENERATED SOLUTIONS, INC. Common Stock (Par Value $0.001 per share) [ ], 1997 OPPENHEIMER & CO., INC. FURMAN SELZ LLC c/o Oppenheimer & Co., Inc. Oppenheimer Tower World Financial Center New York, New York 10281 On behalf of the several Underwriters named on Schedule I attached hereto. Ladies and Gentleman: Computer Generated Solutions, Inc., a Delaware corporation (the "Company"), ------- proposes to issue and sell, and the persons named in Schedule II hereto (the "Selling Stockholders") propose to sell, to the several Underwriters listed in - --------------------- Schedule I hereto (the "Underwriters"), for whom you are acting as ------------ representatives (the "Representatives"), an aggregate of 3,540,000 shares of --------------- Common Stock, par value $0.001 per share, of the Company (the "Common Stock"), ------------ of which 2,900,000 shares are to be issued and sold by the Company and an aggregate of 640,000 shares are to be sold by the Selling Stockholders (collectively, the "Underwritten Shares"). In addition, for the sole purpose of ------------------- covering over-allotments in connection with the sale of the Underwritten Shares, the Company proposes to issue and sell to the Underwriters, at the option of the Underwriters, up to an additional 531,000 shares of Common Stock (the "Option ------ Shares"). The Underwritten Shares and the Option Shares are herein referred to - ------ as the "Shares." ------ - 2 - On or prior to the Closing Date (as defined), the Company will declare and pay dividends (collectively, the "Dividends") to its stockholders of record --------- immediately prior to the offering of the Shares in the cumulative amount of its undistributed earnings for the entire period that it was an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). The ---- Company will terminate its S corporation status (the "S Termination") effective ------------- as of the day before the Closing Date (the "S Termination Date"). The Company ------------------ will enter into an S Corporation Termination Agreement to be dated as of the S Termination Date by and among the Company, Philip Friedman and Victor Friedman (the "Tax Agreement"). ------------- On or prior to the Closing Date, the Company will (i) adopt an amended and restated certificate of incorporation (the "Amended Certificate of ---------------------- Incorporation") and by-laws (the "Amended By-Laws") and (ii) declare and effect - ------------- --------------- a 1,300.42 for 1 stock split of its existing common stock (the "Stock Split"). ----------- The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the ---------- Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Securities Act"), a registration -------------- statement on Form S-1 (File No. 333-09297), including a prospectus, relating to the Shares. The registration statement as amended at the time when it shall become effective, or, if post-effective amendments are filed with respect thereto, as amended by such post-effective amendments at the time of their effectiveness, including in each case information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is referred to in this Agreement as the "Registration ------------ Statement"; the prospectus constituting a part of the Registration Statement in - --------- the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus." ---------- 1. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell 2,900,000 Underwritten Shares, and each Selling Stockholder, severally and not jointly, agrees to sell the respective number of Underwritten Shares set forth opposite such Selling Stockholder's name on Schedule II hereto, to the several Underwriters, and each Underwriter, on the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from each of the Company and the Selling Stockholders that number of Underwritten Shares to be - 3 - sold by the Company and each such Selling Stockholder which bears the same ratio to the aggregate number of Underwritten Shares being purchased from the Company and the Selling Stockholders by the several Underwriters as the number of Underwritten Shares set forth opposite the name of such Underwriter on Schedule I hereto (or such number increased as set forth in Section 10 hereof) bears to the aggregate number of Underwritten Shares being purchased from the Company and the Selling Stockholders by the several Underwriters subject, however, to such adjustments to eliminate fractional shares as the Representatives in their sole judgment shall make, at a purchase price of $[ ] per share (the "Purchase -------- Price"). - ----- In addition, the Company agrees to issue and sell the Option Shares to the several Underwriters as hereinafter provided, and the Underwriters, on the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, shall have the option to purchase, severally and not jointly, from the Company up to an aggregate of 531,000 Option Shares at the Purchase Price, for the sole purpose of covering over-allotments (if any) in the sale of Underwritten Shares by the several Underwriters. If any Option Shares are to be purchased, the number of Option Shares to be purchased by each Underwriter shall be the number of Option Shares which bears the same ratio to the aggregate number of Option Shares being purchased as the number of Underwritten Shares set forth opposite the name of such Underwriter on Schedule I hereto (or such number increased as set forth in Section 10 hereof) bears to the aggregate number of Underwritten Shares being purchased from the Company and the Selling Stockholders by the several Underwriters, subject, however, to such adjustments to eliminate any fractional Shares as the Representatives in their sole discretion shall make. The Underwriters may exercise the option to purchase the Option Shares at any time (but not more than once) on or before the thirtieth day following the date of the Prospectus, by written notice from the Representatives to the Company. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised and the date and time when such Option Shares are to be delivered and paid for, which may be the same date and time as the Closing Date (as hereinafter defined) but shall not be earlier than the Closing Date nor later than the tenth full Business Day (as hereinafter defined) after the date of such notice (unless such time and date are postponed in accordance with the provisions of Section 10 hereof). Any - 4 - such notice shall be given at least two Business Days prior to the date and time of delivery specified therein. Pursuant to powers of attorney granted by each Selling Stockholder, Philip Friedman will act as the representative of the Selling Stockholders. The foregoing representative (the "Representative of the Selling Stockholders") is ------------------------------------------ authorized, on behalf of each Selling Stockholder, to execute any documents necessary or desirable in connection with the sale of the Underwritten Shares to be sold hereunder by each Selling Stockholder, to make delivery of the certificates of such Underwritten Shares, to receive the proceeds of the sale of such Underwritten Shares, to give receipts for such proceeds, to pay therefrom the expenses, if any, to be borne by each Selling Stockholder in connection with the sale and public offering of the Underwritten Shares, to distribute such proceeds to the Selling Stockholders, to receive notices on behalf of each Selling Stockholder and to take such other action as may be necessary or desirable in connection with the transactions contemplated by this Agreement. 2. The Company and the Selling Stockholders understand that the Underwriters intend (a) to make a public offering of the Shares as soon as the Representatives deem advisable after the Registration Statement and this Agreement have become effective as in the judgment of the Representatives is advisable and (b) initially to offer the Shares upon the terms set forth in the Prospectus. 3. Payment for the Shares shall be made by wire transfer in immediately available funds to the account specified by the Company, in the case of the Underwritten Shares or the Option Shares to be sold by the Company, and to the account specified by the Representative of the Selling Stockholders, in the case of the Underwritten Shares to be sold by the Selling Stockholders, to the Representatives no later than noon on the Business Day prior to the Closing Date, in the case of the Underwritten Shares, or, in the case of the Option Shares, on the date and time specified by the Representatives in the written notice of the Underwriters' election to purchase such Option Shares. The time and date of such payment for the Underwritten Shares are referred to herein as the "Closing Date" and the time and date for such payment for the Option Shares, ------------ if other than the Closing Date, are herein referred to as the "Additional ---------- Closing Date". As used herein, the term "Business Day" means any day other than - ------------ ------------ a day on which banks are permitted or required to be closed in New York City. - 5 - Payment for the Shares to be purchased on the Closing Date or the Additional Closing Date, as the case may be, shall be made against delivery to the Representatives for the respective accounts of the several Underwriters of the Shares to be purchased on such date registered in such names and in such denominations as the Representatives shall request in writing not later than two full Business Days prior to the Closing Date or the Additional Closing Date, as the case may be, with any transfer taxes payable in connection with the transfer to the Underwriters of the Shares duly paid by the Company or the Selling Stockholders, as the case may be. The certificates for the Shares will be made available for inspection and packaging by the Representatives at the office of Oppenheimer & Co., Inc. set forth above not later than 1:00 P.M., New York City time, on the Business Day prior to the Closing Date or the Additional Closing Date, as the case may be. 4A. The Company represents and warrants to each of the Underwriters that: (a) no order preventing or suspending the use of any preliminary prospectus has been issued by the Commission, and each preliminary prospectus filed as part of the Registration Statement, as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act; (b) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of the Company, threatened by the Commission; and the Registration Statement and the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) comply, or will comply, as the case may be, in all material respects with the Securities Act and as of the date of filing thereof did not, and did not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented at the Closing Date and the Additional Closing Date, as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements - 6 - therein, in the light of the circumstances under which they were made, not misleading; provided that this representation and warranty shall not apply -------- to statements or omissions in the Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter expressly for use therein; (c) the financial statements, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly in all material respects (i) the financial position of the Company as of the dates indicated and (ii) the results of its operations and changes in its cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout and the supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein; the pro forma financial information (including the notes thereto) included in the Registration Statement and Prospectus (i) presents fairly in all material respects the information shown therein, (ii) was prepared in accordance with the applicable requirements of Regulation S-X promulgated under the Exchange Act, (iii) was prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and (iv) was properly computed on the bases described therein; in the opinion of the Company, the assumptions used in the preparation of any such pro forma financial information (including, without limitation, the notes thereto) were fair and reasonable and the adjustments used therein were appropriate to give effect to the transactions or circumstances referred to therein; and no pro forma financial statements or other pro forma financial information is required to be included in the Registration Statement and the Prospectus other than those included therein; (d) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than by reason of the Stock Split or Amended Certificate of Incorporation) or any material change in the long-term debt of the Company, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or - 7 - results of operations of the Company, and the Company has not entered into any transaction or agreement (whether or not in the ordinary course of business) material to the Company otherwise than as set forth or contemplated in the Prospectus; (e) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a material adverse effect on the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company (a "Material Adverse ---------------- Effect"); ------ (f) the Company has no subsidiaries; (g) this Agreement has been duly authorized, executed and delivered by the Company; (h) as of the Closing Date (after giving effect to the adoption of the Amended Certificate of Incorporation and the Stock Split), the Company will have the authorized capital stock as set forth in the Prospectus and such authorized capital stock will conform as to legal matters to the description thereof set forth in the Prospectus, and all of the outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully-paid and non-assessable and are not subject to any pre-emptive or similar rights; and, except as described in or expressly contemplated by the Prospectus, there are no outstanding rights (including, without limitation, pre-emptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company, any such convertible or exchangeable securities or any such rights, warrants or options; the Shares to be sold by the Selling Stockholders hereunder conform to the description thereof in the Prospectus; - 8 - (i) the Shares to be issued and sold by the Company hereunder have been duly authorized, and, when issued and delivered to and paid for by the Underwriters in accordance with the terms of this Agreement, will be duly issued and will be fully paid and non-assessable and will conform to the descriptions thereof in the Prospectus; and the issuance of the Shares is not subject to any preemptive or similar rights; (j) the Company is not in violation of its Certificate of Incorporation or By-Laws nor, as of the Closing Date, will it be in violation of its Amended Certificate of Incorporation or Amended By-Laws, and is not, nor with the giving of notice or lapse of time or both would it be, in violation of or in default in the performance or observance of any obligation, agreement, covenant or condition under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which it or any of its property is bound or of any permit, order, decree, judgment, statute, rule or regulation applicable to the Company, except for violations and defaults which individually and in the aggregate could not reasonably be expected to have a Material Adverse Effect; (i) the issue and sale of the Shares, (ii) the execution of this Agreement and the performance by the Company of its obligations hereunder, (iii) the consummation of the transactions contemplated herein, (iv) the declaration and payment of the Dividends, (v) the S Termination, (vi) the execution of the Tax Agreement and the performance by the parties thereto of their respective obligations thereunder and the consummation of the transactions contemplated therein, (vi) the adoption of the Amended Certificate of Incorporation and the Amended By-Laws and (vii) the declaration and consummation of the Stock Split will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, nor will any such action result in any violation of the provisions of the Certificate of Incorporation or the By-Laws of the Company or the Amended Certificate of Incorporation or the Amended By-Laws or any applicable law or statute or any order, decree, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties, except for conflicts, breaches, defaults and violations which individually and in - 9 - the aggregate could not reasonably be expected to have a Material Adverse Effect; and no consent, approval, authorization, order, license, registration or qualification of or with any such court or governmental agency or body is required for (i) the issue, sale and delivery of the Shares, (ii) the consummation by the Company of the transactions contemplated by this Agreement, (iii) the declaration and payment of the Dividends, (iv) the S Termination, (v) the consummation of the transactions contemplated by the Tax Agreement by the parties thereto, (vi) the adoption of the Amended Certificate of Incorporated and By-Laws or (vii) the declaration or consummation of the Stock Split, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained and are in full force and effect under the Securities Act, as may be required under the state securities or Blue Sky Laws contemplated by Section 5(f) in connection with the purchase and distribution of the Shares by the Underwriters or which individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect; (k) other than as set forth in the Prospectus, there are no legal or governmental investigations, actions, suits or proceedings pending against or affecting the Company or any of its properties or to which the Company is or may be a party or of which any property of the Company is or may be the subject which could reasonably be expected to have a Material Adverse Effect and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (l) the Company has good and marketable title in fee simple to all items of real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by them under valid, existing and enforceable leases with such exceptions as are not material and do not materially - 10 - interfere with the use made or proposed to be made of such property and buildings by the Company; (m) no relationship, direct or indirect, exists between or among the Company, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company, on the other hand, which is required by the Securities Act to be described in the Registration Statement or the Prospectus which is not so described; (n) no person has the right to require the Company to register any securities for offering and sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issue and sale of the Shares; (o) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); ---------------------- (p) the Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida) relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba; (q) Ernst & Young LLP, who have certified certain financial statements of the Company, are independent public accountants as required by the Securities Act; BDO Seidman LLP, who have certified certain financial statements of the Company, are independent public accountants as required by the Securities Act; (r) the Company has filed all federal, state, local and foreign tax returns which have been required to be filed and have paid all taxes shown thereon and all assessments received by it to the extent that such taxes have become due and are not being contested in good faith; and, except as disclosed in the Registration Statement and the Prospectus, there is no tax deficiency which has been asserted or threatened against the Company; the Company and its stockholders have maintained a valid election to be an S corporation under Subchapter S of the Code from the Company's inception through the S Termination Date; (s) the Company has not taken nor will it take, directly or indirectly, any action designed to, or that - 11 - might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock; (t) the Company owns, possesses or has obtained all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including foreign regulatory agencies), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as conducted as of the date hereof, except where the failure to so own, possess or obtain or make such licenses, permits, certificates, consents, orders, approvals, other authorizations, declarations or filings could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and the Company has not received notice of any proceeding relating to revocation or modification of any such license, permit, certificate, consent, order, approval or other authorization, except as described in the Registration Statement and the Prospectus or as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and the Company is in compliance with all laws and regulations relating to the conduct of its business, except where the failure to so be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (u) there are no existing or, to the best knowledge of the Company, threatened labor disputes with, or slowdowns, strikes or work stoppages by, the employees of the Company which could reasonably be expected to have a Material Adverse Effect; (v) the Tax Agreement has been duly authorized by the Company and, as of the S Termination Date, will have been duly executed and delivered by each of the parties thereto, and is enforceable against each of the parties thereto in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws providing for the protection of creditors' rights generally and general principles of equity; (w) except as disclosed in the Prospectus, each employee benefit plan, within the meaning of Section 3(3) of - 12 - the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), ----- that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees of the Company and its affiliates has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including, but not limited to, ERISA and the Code, except where the failure to so maintain in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; except as disclosed in the Prospectus, no prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect has occurred with respect to any such plan, excluding transactions effected pursuant to a statutory or administrative exemption; except as disclosed in the Prospectus, for each such plan which is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no "accumulated funding deficiency" as defined in Section 412 of the Code which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these purposes accrued but unpaid contributions) exceeded the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions (except for any deficiency which could not reasonably be expected to have a Material Adverse Effect); (x) the statistical and market-related data included in the Registration Statement and the Prospectus are based on or derived from sources which are believed by the Company to be reliable; (y) except for compensation to be paid to the Underwriters under this Agreement, the Company does not know of any outstanding claims for services, either in the nature of a finder's fee or origination fee, with respect to any of the transactions contemplated hereby; (z) the Company owns or possesses the patents, patent rights, licenses, inventions, trademarks, service marks, trade names, copyrights and know-how, including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures (collectively, the "Intellectual Property"), reasonably --------------------- - 13 - necessary to carry on the business conducted by it, except to the extent that the failure to own or possess such Intellectual Property would not have a Material Adverse Effect and, except as described in the Registration Statement and the Prospectus, the Company has no knowledge of infringement of or conflict with asserted rights of others with respect to any Intellectual Property, except for notices the content of which if accurate would not have a Material Adverse Effect; (aa) the declaration and payment of the Dividends have been duly authorized by all requisite corporate action by the Company; and the declaration and payment of the Dividends will comply with the General Corporation Law of the State of Delaware. 4B. Each Selling Stockholder, severally and not jointly, represents and warrants to each Underwriter that: (a) such Selling Stockholder now is, and at the Closing Date will be, the lawful owner of the number of Underwritten Shares to be sold by such Selling Stockholder pursuant to this Agreement and has and, at the time of delivery thereof, will have valid and marketable title to such Underwritten Shares, and, upon delivery of and payment for such Underwritten Shares, the Underwriters will acquire valid and marketable title to such Underwritten Shares free and clear of any claim, lien, encumbrance, security interest, restriction on transfer or other defect in title other than by reason of the Custody Agreement or arising under federal or state securities laws; (b) such Selling Stockholder has, and at the Closing Date will have, full legal right, power and capacity, and any approval required by law or otherwise (other than those imposed by the Securities Act and the securities or blue sky laws of certain jurisdictions), to sell, assign, transfer and deliver such Underwritten Shares in the manner provided in this Agreement; the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or result in the breach of any of the terms, provisions or conditions of, or constitute a default under, any note, indenture, mortgage, deed or declaration of trust, agreement, will or other instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound, or any existing law, order, rule, regulation, writ, injunction, judgment or decree of any - 14 - government, governmental instrumentality, agency or body, arbitration tribunal, or court, domestic or foreign, having jurisdiction over such Selling Stockholder or such Selling Stockholder's property; (c) this Agreement and the custody agreement among the Company, as custodian, and such Selling Stockholder have been duly executed and delivered by such Selling Stockholder (each, a "Custody Agreement"); ----------------- (d) when the Registration Statement becomes effective and at all times subsequent thereto through the latest of the Closing Date, Additional Closing Date or the termination of the offering of the Shares, such parts of the Registration Statement and Prospectus, and any supplements or amendments thereto, as relate to such Selling Stockholder will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (e) such Selling Stockholder has duly and irrevocably authorized the Representative of the Selling Stockholders, on behalf of such Selling Stockholder, to execute and deliver this Agreement and any other document necessary or desirable in connection with the transactions contemplated hereby and to deliver the Underwritten Shares to be sold by such Selling Stockholder and receive payment therefor pursuant hereto; and (f) the Registration Statement and the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) as of the date of filing thereof did not, and did not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented at the Closing Date and the Additional Closing Date, as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided -------- that this representation and warranty shall not apply to statements or omissions in the - 15 - Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter expressly for use therein. 4C. The Representatives represent and agree that (i) they have not offered or sold and, prior to the expiry of the period of six months from the Closing Date, will not offer or sell, any Shares to persons in the United Kingdom except persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public within the meaning of the Public Offers of Securities Regulations 1995, (ii) they have complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by them in relation to the Common Stock in, from or otherwise involving the United Kingdom and (iii) they have only issued or passed on, and will only issue and pass on, in the United Kingdom any document received by them in connection with the offering of the Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order 1995 or is a person to whom such document may otherwise lawfully be issued or passed on. 5. The Company covenants and agrees with the several Underwriters as follows: (a) to use its best efforts to cause the Registration Statement to become effective (if the Registration Statement shall not have been declared effective prior to the execution hereof) at the earliest possible time and, if applicable, to file the Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A under the Securities Act and to furnish copies of the Prospectus to the Underwriters in New York City prior to 2:00 p.m., New York City time, on the Business Day next succeeding the date of this Agreement in the quantities as the Representatives may reasonably request; (b) to deliver, at the expense of the Company, to the Representatives three signed copies of the Registration Statement (as originally filed) and each amendment thereto, in each case including exhibits, and to each other Underwriter a conformed copy of the Registration Statement (as originally filed) and each amendment thereto, in each case without exhibits, and, during the period mentioned in - 16 - paragraph (e) below, to each of the Underwriters and to dealers effecting transactions in the Common Stock as many copies of the Prospectus (including all amendments and supplements thereto) as the Underwriters and such dealers may reasonably request; (c) before filing any amendment or supplement to the Registration Statement or the Prospectus, whether before or after the time the Registration Statement becomes effective, to furnish to the Representatives a copy of the proposed amendment or supplement for review and not to file any such proposed amendment or supplement to which the Representatives reasonably object; (d) to advise the Representatives promptly after learning, and to confirm such advice in writing, (i) when the Registration Statement shall have become or becomes effective, (ii) when any amendment to the Registration Statement shall have become effective, (iii) when any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof, (iv) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for any additional information, (v) within the period referenced in paragraph (e) below, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus or the initiation or threatening of any proceeding for that purpose or the occurrence of any event as a result of which the Prospectus as then amended or supplemented would include an untrue statement of material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, and (vi) of the receipt by the Company of any notification with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and to use its reasonable best efforts to prevent the issuance of any such stop order, or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any order suspending any such qualification of the Shares, or notification of any such order and, if issued, to obtain as soon as reasonably possible the withdrawal thereof; - 17 - (e) if, during such period of time after the first date of the public offering of the Shares as, in the reasonable opinion of counsel for the Company or the Underwriters, a prospectus relating to the Shares is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with law, forthwith to prepare and furnish, at the expense of the Company, to the Underwriters and to the dealers (whose names and addresses the Representatives will furnish to the Company) to which Shares may have been sold by the Underwriters and to any other dealers upon written request, such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply in all material respects with federal securities laws and the securities or Blue Sky laws contemplated by Section 5(f); (f) to use its best efforts to register or qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives shall reasonably request and to continue such registration or qualification in effect so long as reasonably required for distribution of the Shares; provided that the Company shall not be required -------- to file a general consent to service of process in any jurisdiction or submit itself to taxation in any jurisdiction where it is not so subject; (g) to make generally available to its security holders and to the Underwriters as soon as practicable an earnings statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the effective date of the Registration Statement, which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder; (h) for a period of five years after the Closing Date, to furnish to the Representatives copies of all reports or other communications (financial or other) furnished to holders of the Shares, and copies of any reports filed with - 18 - the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or any national securities exchange; ----- (i) The Company shall not offer, sell, contract to sell, pledge or grant any option to purchase or otherwise dispose of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or file a registration statement with the Commission with respect to such securities, for a period of 180 days after the date of the Prospectus without the prior written consent of Oppenheimer & Co., Inc., which consent may not be unreasonably withheld; provided that, without such prior written -------- consent, the Company may grant options, restricted stock, stock appreciation rights or other units of stock-based incentive compensation under its director and employee stock option plan described in the Prospectus and register such options, restricted stock, stock appreciation rights or other units of stock-based incentive compensation and the shares of Common Stock, if any, underlying them under the Securities Act; (j) to file with the Commission reports on Form SR as may be required by Rule 463 under the Securities Act; (k) whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all costs and expenses incident to the performance of its and the Selling Stockholders' obligations hereunder, including without limiting the generality of the foregoing, all costs and expenses (i) incident to the preparation, issuance, execution and delivery of the Shares, (ii) incident to the preparation, printing, and filing under the Securities Act of the Registration Statement, the Prospectus and any preliminary prospectuses (including in each case all exhibits, amendments and supplements thereto), (iii) incurred in connection with the registration or qualification of the Shares under the laws of such jurisdictions as the Representatives may designate pursuant to Section 5(f) (including reasonable fees of counsel for the Underwriters and their disbursements related to such registration or qualification), (iv) in connection with the qualification for quotation of the Shares on the Nasdaq National Market, (v) related to any filing with, and review by, the NASD, (vi) in connection with the printing (including word processing and duplication costs) and delivery of this Agreement, all other agreements relating to - 19 - underwriting and syndication arrangements, the Blue Sky Survey and the furnishing to the Underwriters and dealers of copies of the Registration Statement and the Prospectus, including mailing and shipping, as herein provided, (vii) any expenses incurred by the Company in connection with a "road show" presentation to potential investors, (viii) the cost of preparing stock certificates and (ix) the cost and charges of any transfer agent and any registrar; (l) to cause the Common Stock to be qualified for quotation on the Nasdaq National Market; and (m) to use the net proceeds of the offering as set forth in the Registration Statement and the Prospectus under the caption "Use of Proceeds." 6. The several obligations of the Underwriters hereunder to purchase the Shares on the Closing Date or the Additional Closing Date, as the case may be, are subject to the performance by each of the Company and the Selling Stockholders in all material respects of their respective obligations hereunder and to the following additional conditions: (a) the Registration Statement shall have become effective (or if a post-effective amendment is required to be filed under the Securities Act, such post-effective amendment shall have become effective) not later than 5:00 P.M., New York City time, on the date hereof; and no stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the Commission; the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Securities Act and in accordance with Section 5(a) hereof; and all requests for additional information by the Commission shall have been complied with to the reasonable satisfaction of the Representatives; (b) the representations and warranties of the Company and the Selling Stockholders contained herein and in the Custody Agreement shall be true and correct in all material respects on and as of the Closing Date or the Additional Closing Date, as the case may be, as if made on and as of the Closing Date or the Additional Closing Date, as the case may be, and each of the Company and the Selling Stockholders shall have complied in all material respects with all - 20 - agreements and all conditions on their respective parts to be performed or satisfied hereunder and under the Custody Agreement at or prior to the Closing Date or the Additional Closing Date, as the case may be; (c) since the respective dates as of which information is given in the Prospectus, there shall not have been any change in the capital stock of the Company (other than by reason of the Stock Split and the adoption of the Amended Certificate of Incorporation) or any material change in the long-term debt of the Company or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company otherwise than as set forth or contemplated in the Prospectus, the effect of which in the judgment of the Representatives makes it impracticable to proceed with the public offering or the delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus; and the Company shall not have sustained since the date of the latest audited financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; (d) the Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, a certificate of each of (i) the chief executive officer of the Company and an executive officer of the Company with specific knowledge about the Company's financial matters and (ii) the Representative of the Selling Stockholders, in each case satisfactory to the Representatives, to the effect set forth in subsections (a) through (c) (with respect to the respective representations, warranties, agreements and conditions of the Company or the Selling Stockholders, as the case may be) of this Section; (e) Chadbourne & Parke LLP, counsel for the Company and the Selling Stockholders, shall have furnished to the Representatives their written opinion, addressed to the Underwriters and dated the Closing Date or the Additional Closing Date, as the case may be, in form satisfactory to the Representatives and their counsel, to the effect that: - 21 - (i) the Company is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with power and authority to own its properties and conduct its business as described in the Prospectus; the Amended Certificate of Incorporation and Amended By-Laws have been duly authorized and adopted by the Company, are in full force and effect and are substantially in the forms included as exhibits to the Registration Statement; the Stock Split has been duly authorized by all requisite corporate action by the Company and has been consummated in accordance with the General Corporation Law of the State of Delaware; (ii) the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of the jurisdictions listed on a schedule attached to such opinion, which jurisdictions the Company shall have certified to such counsel are the only jurisdictions in which the Company owns or leases properties, or conducts any business; (iii) the Company has no subsidiaries; (iv) such counsel does not know of any (x) pending or threatened action, suit or proceeding before any court or governmental authority or body involving the Company or (y) statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or, with respect to any such contracts or other documents, to be filed as exhibits to the Registration Statement that are not described or filed as required; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the Shares to be issued and sold by the Company hereunder have been duly authorized and, when delivered to and paid for the Underwriters in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and, to such counsel's knowledge, the issuance of such Shares is not subject to any preemptive rights; (vii) the statements in the Prospectus under "Description of Capital Stock" and "Shares Eligible for Future Sale," and in the Registration Statement in - 22 - Items 14 and 15, insofar as such statements constitute a summary of the terms of the Common Stock, the "blank check" preferred stock, legal matters, documents or proceedings referred to therein, fairly present in all material respects the information required by the Securities Act with respect to such terms, legal matters, documents or proceedings; (viii) (a) the issue and sale of the Shares being delivered on the Closing Date or the Additional Closing Date, as the case may be, (b) the execution of this Agreement and the performance by the Company of its obligations hereunder, (c) the consummation of the transactions contemplated herein, (d) the declaration and payment of the Dividends, (e) the S Termination, (f) the execution and delivery of the Tax Agreement and the performance by the parties thereto of their respective obligations thereunder and the consummation of the transactions contemplated therein, (g) the adoption of the Amended Certificate of Incorporation and Amended By-Laws and (h) the declaration and consummation of the Stock Split will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument which is filed as an exhibit to the Registration Statement, nor will any such action result in any violation of the provisions of the Amended Certificate of Incorporation or the Amended By-Laws of the Company or any applicable law or statute or any order, decree, rule or regulation of any court or governmental agency or body known by such counsel to have jurisdiction over the Company or any of its properties; (ix) to such counsel's knowledge, no consent, approval, authorization, order, license, registration or qualification of or with any court or governmental agency or body is required for (a) the issue and sale of the Shares, (b) the consummation of the other transactions contemplated by this Agreement, (c) the declaration and payment of the Dividends, (d) the S Termination, (e) the consummation of the transactions contemplated by the Tax Agreement, (f) the adoption of the Amended Certificate of Incorporation and Amended By- Laws or (g) the declaration or consummation of the Stock Split, except such consents, approvals, authorizations, orders, licenses, registrations or - 23 - qualifications as have been obtained under the Securities Act and as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters, the rules of the NASD or any domestic relations or similar laws; (x) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act; (xi) the Registration Statement has been declared effective under the Securities Act and, to such counsel's knowledge, no stop order or proceedings with respect thereto are pending or threatened under the Securities Act; (xii) this Agreement and the Custody Agreement of the applicable Selling Stockholder has been duly executed and delivered by or on behalf of each of the Selling Stockholders; (xiii) to such counsel's knowledge, each Selling Stockholder has full legal right and power, and has obtained any authorization or approval required by law (other than those imposed by the Securities Act and the securities or Blue Sky laws of certain jurisdictions or any domestic relations or similar law), to sell, assign, transfer and deliver the Underwritten Shares to be sold by such Selling Stockholder in the manner provided in this Agreement and the Custody Agreement of such Selling Stockholder; (xiv) upon delivery of the Underwritten Shares to be sold by the Selling Stockholders hereunder and payment of the purchase price therefor as herein contemplated, each of the Underwriters will receive good and marketable title to its ratable share of the Underwritten Shares purchased by it from each of such Selling Stockholders, free and clear of any pledge, lien, security interest, encumbrance, claim or equity, assuming the Underwriters acquire the Underwritten Shares without notice of any adverse claim as such term is used in Section 8- 302 of the Uniform Commercial Code in effect in the State of New York; - 24 - (xv) the Representative of the Selling Stockholders has been duly authorized by Victor Friedman to execute and deliver on his behalf this Agreement and any other document necessary or desirable in connection with the transactions contemplated hereby and to deliver the Shares to be sold by Victor Friedman and receive payment therefor pursuant hereto; (xvi) the declaration and payment of the Dividends have been duly authorized by all requisite corporate action by the Company; and the declaration and payment of the Dividends will comply with the General Corporation Law of the State of Delaware; and (xvii) the Tax Agreement has been duly authorized by the Company and has been duly executed and delivered by each of the parties thereto, and is enforceable against each of the parties thereto in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws now or hereafter in effect providing for the protection of creditors' rights generally and general principles of equity and except that rights to indemnity and contribution may be limited by public policy; in addition, such counsel shall also include a statement to the effect that nothing has come to the attention of such counsel which leads such counsel to believe that (i) the Registration Statement (other than the financial statements and schedules and other financial and statistical data included therein, as to which such counsel need make no statement nor opinion), when it became effective, contained or, as of the date such opinion is delivered, contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) the Prospectus (other than the financial statements and schedules and other financial and statistical data included therein, as to which such counsel need make no statement nor opinion) as of its date contained or, as of the date such opinion is delivered, contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; - 25 - in rendering such opinions, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States, the State of New York and General Corporation Law of the State of Delaware, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to the Underwriters' counsel familiar with the applicable laws; and (B) as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company, certificates of the Selling Stockholders and the Representative of the Selling Stockholders and certificates or other written statements of officials of jurisdictions having custody of documents respecting the corporate existence or good standing of the Company. The opinion of such counsel shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in such counsel's opinion, the Underwriters and they are justified in relying thereon; the opinion of Chadbourne & Parke LLP described above shall be rendered to the Underwriters at the request of the Company and the Selling Stockholders and shall so state therein; (f) on the effective date of the Registration Statement (the "Effective Date") and the effective date of the most recently filed post- --------------- effective amendment, if any, to the Registration Statement and also on the Closing Date or the Additional Closing Date, as the case may be, each of Ernst & Young LLP and BDO Seidman LLP shall have furnished to the Underwriters letters, dated the respective dates of delivery thereof, in form and substance satisfactory to the Representatives, containing statements and information of the type customarily included in accountants' "comfort letters" to underwriters with respect to certain financial information relating to the Company contained in the Registration Statement and the Prospectus; (g) the Representatives shall have received on the Closing Date an opinion of Cahill Gordon & Reindel, counsel for the Underwriters, with respect to the validity of the Shares, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; - 26 - (h) the Shares shall have been qualified for quotation on the Nasdaq National Market, subject to official notice of issuance; (i) on or prior to the Closing Date, the Company and the Selling Stockholders shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request. The several obligations of the Underwriters to purchase Option Shares are, only as so far as they relate to the Company, subject to the conditions set forth in paragraphs (a)-(i) above on and as of the Additional Closing Date (references therein to the Closing Date shall be deemed references to the Additional Closing Date for this purpose), except that the certificates called for by paragraph (d), the opinions called for by paragraphs (e) and (g) and the letters called for by paragraph (f) shall be dated as of, and delivered on, the Additional Closing Date. 7. Each of the Company and each Selling Stockholder agree, jointly and severally, to indemnify and hold harmless each Underwriter, its officers and directors, and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and ------------ against any and all losses, claims, damages and liabilities (including, without limitation, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter, through the Representatives, expressly for use therein; provided, -------- however, that the indemnity agreement contained in this paragraph with respect - ------- to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares which are the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the - 27 - written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with paragraph (b) of Section 5 hereof. Notwithstanding the provisions of this Section 7, each Selling Stockholder shall not be liable under this Section 7, or under any other provision of this Agreement, for any amount in excess of the net proceeds received from the sale of Shares by such Selling Stockholder. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the Selling Stockholders to the same extent as the foregoing indemnity from the Company and the Selling Stockholders to each Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, the Prospectus, any amendment or supplement thereto or any preliminary prospectus. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (the "Indemnified Person") shall promptly ------------------ notify the person or persons against whom such indemnity may be sought (each an "Indemnifying Person") in writing, and such Indemnifying Person, upon request ------------------- of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may designate in such proceeding and shall pay the reasonable fees and expenses incurred by such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) such Indemnifying Person and such Indemnified Person shall have mutually agreed to the contrary, (ii) such Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to such Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include an Indemnifying Person and an Indemnified Person and - 28 - representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that an Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for the Underwriters and such control persons of Underwriters shall be designated in writing by Oppenheimer & Co., Inc.; any such separate firm for the Company, its directors, its officers who sign the Registration Statement and such control persons of the Company shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, such Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the preceding sentence, if at any time an Indemnified Person shall have requested an Indemnifying Person to reimburse the Indemnified Person for fees and expenses incurred by counsel as contemplated by the third sentence of this paragraph, such Indemnifying Person agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding. If the indemnification provided for in the first and second paragraphs of this Section 7 is unavailable to an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders in the aggregate, on the one hand, and the - 29 - Underwriters, on the other hand, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders in the aggregate, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders in the aggregate, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders in the aggregate and the total underwriting discounts received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Shares. The relative fault of the Company and the Selling Stockholders in the aggregate, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Each of the Company, the Selling Stockholders and the Underwriters agrees that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Company and the --- ---- Selling Stockholders, on the one hand, and the Underwriters, on the other hand, were each treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, (i) in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such - 30 - untrue or alleged untrue statement or omission or alleged omission and (ii) in no event shall a Selling Stockholder be required to contribute any amount in excess of the amount by which the net proceeds received by it through the sale of its Shares to the Underwriters exceeds the amount of any damages that such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective number of shares of Common Stock constituting Underwritten Shares set forth opposite their names in Schedule I hereto, and not joint. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company and the Selling Stockholders as set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or any other person who controls the Company or any Selling Stockholder and (iii) acceptance of and payment for any of the Shares. 8. Notwithstanding anything herein contained, this Agreement or the obligations of the several Underwriters with respect to the Shares may be terminated in the absolute discretion of the Representatives, by notice given to the Company and the Representative of the Selling Stockholders, if after the execution and delivery of this Agreement and prior to the Closing Date (or, in the case of the Option Shares, prior to the Additional Closing Date) (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market, (ii) trading of any securities of or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by Federal or New York State authorities or (iv) there shall have occurred an outbreak of hostilities or an - 31 - escalation of hostilities or any change in financial markets or any calamity or crisis that, in the judgment of the Representatives, is material and adverse and which, in the judgment of the Representatives, makes it impracticable to market the Shares being delivered on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus. 9. If this Agreement shall be terminated by the Representatives because of any failure or refusal on the part of the Company or any Selling Stockholder to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or any Selling Stockholder shall be unable to perform its respective obligations under this Agreement or any condition of the Underwriters obligations can not be fulfilled, the Company agrees to reimburse the Underwriters or such Underwriters who have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and expenses of their counsel) reasonably incurred by the Underwriters in connection with this Agreement or the offering contemplated hereunder. 10. This Agreement shall become effective upon the later of (a) execution and delivery hereof by the parties hereto and (b) the effectiveness of the Registration Statement (or, if applicable, any post-effective amendment). If, on the Closing Date or the Additional Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Shares which it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the number of Shares to be purchased on such date, the other Underwriters shall be obligated severally, in the proportions that the numbers of Underwritten Shares set forth opposite their respective names in Schedule I hereto bears to the aggregate number of Underwritten Shares set forth opposite the names of all such nondefaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided -------- that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by an amount in excess of one-ninth of the number of Shares which such Underwriter is obligated to purchase on such date hereunder without the written consent of such Underwriter. If, on the Closing Date or the Additional Closing Date, as the - 32 - case may be, any Underwriter or Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives, the Company and the Selling Stockholders (in the case of the Underwritten Shares only) for the purchase of such Shares are not made within 36 hours after such default, this Agreement (or the obligations of the several Underwriters to purchase the Option Shares, as the case may be) shall terminate without liability on the part of any non-defaulting Underwriter, the Company or any Selling Stockholder. In any such case, either the Representatives or the Company shall have the right to postpone the Closing Date (or, in the case of the Option Shares, the Additional Closing Date), but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 11. Any action by the Representatives hereunder may be taken by the Representatives jointly or by Oppenheimer & Co., Inc. alone on behalf of the Representatives, and any such action taken by Oppenheimer & Co., Inc. alone shall be binding upon the Representatives. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representatives, c/o Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281 (facsimile (212) 667-5851), Attention: Syndicate Department. Notices to the Company shall be given to it at 1675 Broadway, New York, New York 10019, Attention: Alan Kaplan, Esq. Notices to the Selling Stockholders shall be given to the Representative of the Selling Stockholders c/o the Company at its address as set forth above, Attention: President. 12. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company and the Selling Stockholders and any controlling person referred to herein and their respective successors, heirs and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person, firm or corporation, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. No - 33 - purchaser of Shares from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 13. This Agreement may be signed in counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 14. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws provisions thereof. - 34 - If the foregoing is in accordance with your understanding, please sign and return four counterparts hereof. Very truly yours, COMPUTER GENERATED SOLUTIONS, INC. By: ------------------------------------- Name: Title: THE SELLING STOCKHOLDERS NAMED IN SCHEDULE II HERETO By: ------------------------------------- Name: Title: Attorney-in-Fact Accepted: [ ], 1997 OPPENHEIMER & CO., INC. FURMAN SELZ LLC Each acting severally on behalf of itself and as a Representative of the several Underwriters named in Schedule I hereto. By: OPPENHEIMER & CO., INC. By: ------------------------------------- Name: Title: - 35 - SCHEDULE I Number of Shares of Common Stock Constituting Underwritten Shares Underwriter To Be Purchased - ----------- ---------------------- Oppenheimer & Co., Inc............ Furman Selz LLC................... Total............... _________ ========= - 36 - SCHEDULE II SELLING STOCKHOLDERS Number of Shares of Common Name Stock - ---- --------- Philip Friedman................................ 444,000 Victor Friedman................................ 196,000 EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF COMPUTER GENERATED SOLUTIONS, INC. Computer Generated Solutions, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST. (a) The present name of the corporation is Computer Generated Solutions, Inc. (b) The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was March 27, 1984 under the name Computer Generated Solutions, Inc. SECOND. This Restated Certificate of Incorporation has been duly adopted pursuant to and in accordance with Sections 228 and 245 of the General Corporation Law of the State of Delaware (the "General Corporation Law"), and restates and amends the provisions of the existing Certificate of Incorporation of Computer Generated Solutions, Inc. THIRD. The Certificate of Incorporation of Computer Generated Solutions, Inc. is hereby amended and restated so as to read in its entirety as follows: ARTICLE ONE NAME The name of the corporation is COMPUTER GENERATED SOLUTIONS, INC. (the "Corporation"). ARTICLE TWO REGISTERED OFFICE The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle 19801 and the name of the registered agent at such address is Prentice-Hall Corporation System, Inc. ARTICLE THREE PURPOSES The nature of the business or purposes of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law, and by such statement all lawful acts and activities shall be within the purposes of the Corporation, except for express limitations, if any. ARTICLE FOUR CAPITAL STRUCTURE Section 4.1 The total number of shares of stock which the Corporation shall have authority to issue is 26,000,000 shares of all classes of stock, consisting of 25,000,000 shares of Common Stock, par value $.001 per share, and 1,000,000 shares of Preferred Stock, par value $.001 per share. Section 4.2 Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors, each of said series to be distinctly designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, if any, of each such series may differ from those of any and all other series of Preferred Stock at any time outstanding, and the Board of Directors is hereby expressly granted authority to fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of each such series, including but without limiting the generality of the foregoing, the following: (a) The distinctive designation of, and the number of shares of Preferred Stock that shall constitute, such series, which number (except where otherwise provided by the Board of Directors in the resolution establishing such series) may be increased or decreased (but not below the number of shares of such series then outstanding) from time to time by like action of the Board of Directors; 2 (b) The rights in respect of dividends, if any, of such series of Preferred Stock, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes or on any other series of the same or other class or classes of capital stock of the Corporation and whether such dividends shall be cumulative or noncumulative; (c) The right, if any, of the holders of such series of Preferred Stock to convert the same into, or exchange the same for, shares of any other class or classes or of any other series of the same or any other class or classes of capital stock of the Corporation, and the terms and conditions of such conversion or exchange; (d) Whether or not shares of such series of Preferred Stock shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, shares of such series of Preferred Stock may be redeemed; (e) The rights, if any, of the holders of such series of Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation or in the event of any merger or consolidation of or sale of assets by the Corporation; (f) The terms of any sinking fund or redemption or repurchase or purchase account, if any, to be provided for shares of such series of Preferred Stock; (g) The voting powers, if any, of the holders of any series of Preferred Stock generally or with respect to any particular matter, which may be less than, equal to or greater than one vote per share, and which may, without limiting the generality of the foregoing, include the right, voting as a series by itself or together with the holders of any other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the Corporation generally or under such specific circumstances and on such conditions, as shall be provided in the resolution or resolutions of the Board of Directors adopted pursuant hereto, including, without limitation, in the event there shall have been a default in the payment of dividends on or redemption of any one or more series of Preferred Stock; and 3 (h) Such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, as the Board of Directors shall determine. ARTICLE FIVE DIRECTORS Section 5.1 The Board of Directors shall be determined and the number may be changed in such manner as provided in the by-laws of the Corporation. Section 5.2 The Board of Directors shall be divided into three classes, each class to consist, as nearly as practical, of one-third of the Board of Directors constituting the entire Board of Directors, with the term of office of one class expiring each year. At the annual meeting of stockholders, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Directors hold office until the annual meeting of the stockholders of the Corporation in the year in which the term of their class expires and until their successors have been duly elected and qualified. At each succeeding meeting of the stockholders, the successors to the class whose term expires shall be elected for a three-year term. Any vacancies in the Board of Directors for any reason, and any directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors and not by the stockholders, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors have been duly elected and qualified. Notwithstanding the foregoing, and except as otherwise--required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. Subject to the foregoing, at each annual meeting of stockholders the successors to the class of directors whose term shall then expire shall be elected 4 to hold office for a term expiring at the third succeeding annual meeting. Section 5.3 Any director may be removed solely for cause by the affirmative vote of the holders of record of a majority of the outstanding shares of capital stock of the Corporation entitled to vote with respect to the election of directors. Section 5.4 Unless and except to the extent that the by-laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. ARTICLE SIX LIMITATION ON LIABILITY A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. ARTICLE SEVEN INDEMNIFICATION Section 7.1 No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing clause shall not apply to any liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. Neither the amendment nor repeal of this ARTICLE SEVEN, nor the adoption of any provision of this Restated Certificate 5 of Incorporation inconsistent with this ARTICLE SEVEN, shall be effective with respect to any cause of action, suit, claim or other matter that, but for this ARTICLE SEVEN, would accrue or arise prior to such amendment, repeal or adoption of an inconsistent provision. Section 7.2 The Corporation shall indemnify each officer, director, employee or agent of the Corporation (and his or her heirs, successors and administrators) to the fullest extent permitted by law, subject to any limitations set forth in the By-Laws. Section 7.3 The Corporation shall pay the expenses (including attorneys' fees) of any person referred to in Section 7.1 of ARTICLE SEVEN incurred in defending any proceeding in advance of its final disposition; provided, however, that the advancement of expenses incurred by a director or - -------- ------- officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this ARTICLE SEVEN or otherwise. Section 7.4 If a claim for indemnification or advancement of expenses under this ARTICLE SEVEN is not paid in full within sixty (60) days after a written claim therefore has been received by the Corporation (except in the case of a claim for advancement of expenses, in which case the applicable period shall be twenty (20) days), the claimant may file suit to recover the unpaid amount of such claim. If successful in whole in such an action, the claimant shall be entitled to be paid the expense of prosecuting such claim; if successful in part in such an action, the claimant shall be entitled to be paid the expense of prosecuting each successfully resolved claim, issue or matter. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or advancement of expenses under applicable law. Section 7.5 The rights conferred on any person by this ARTICLE SEVEN shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of this Restated Certificate of Incorporation, provision of the by-laws, agreement, vote of stockholders or disinterested directors or otherwise. 6 Section 7.6 The Corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such person would be entitled to retain as indemnification from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. Section 7.7 Any repeal or modification of the foregoing provisions of this ARTICLE SEVEN shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE EIGHT AMENDMENT OF CERTIFICATE Except for ARTICLE FIVE, ARTICLE SIX, ARTICLE SEVEN and this ARTICLE EIGHT, each of which shall not be amended, altered, changed or repealed without the affirmative vote of the holders of at least seventy-five percent (75%) of the outstanding shares of the capital stock of the Corporation entitled to vote thereon, from time to time and at any time, any provision contained in this Restated Certificate of Incorporation may be amended, altered, changed or repealed by the Corporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this ARTICLE EIGHT. ARTICLE NINE AMENDMENT OF BY-LAWS In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the Corporation is expressly authorized to make, alter and repeal the by-laws of the Corporation. 7 ARTICLE TEN STOCKHOLDER ACTION Any action required or permitted to be taken by any stockholders of the Corporation must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing by such stockholders. Except as otherwise required by law, special meetings of stockholders of the Corporation may be called only the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be executed by Fred B. Schlossberg, the Secretary of the Corporation, this day of , 1997. ----- -------------------- ------------------------- Fred B. Schlossberg Secretary 8 EX-3.2 4 FORM OF BY-LAWS OF THE COMPANY Exhibit 3.2 Computer Generated Solutions, Inc. BY-LAWS ------- ARTICLE ONE STOCKHOLDERS SECTION 1.1. Annual Meeting. An annual meeting of stockholders for --------------- the election of directors and for the transaction of such other business as may properly be presented at the meeting, notice of which was given in the notice of meeting, shall be held on such date and at such time as may from time to time be designated by resolution duly adopted by the Board of Directors, at such place (within or without the State of Delaware) as the Board of Directors, the Chairman of the Board, the Executive Committee, if any, or the President may fix. SECTION 1.2. Special Meetings. A special meeting of stockholders may ----------------- be called for any proper purpose, notice of which was given in the notice of meeting, at any time only by the President of the Corporation and shall be called by the President upon receipt of a written request of a majority of the Board of Directors to do so specifying the matter or matters, appropriate for action at such a meeting, that are proposed to be presented at the meeting. Any such meeting shall be held on such date, at such time and at such place, within or without the State of Delaware, as shall be determined by the person calling such meeting and as shall be stated in the notice of such meeting. Stockholders are not permitted to call a special meeting of stockholders, to require that the President call such a special meeting or to require that the Board of Directors request the calling of a special meeting of stockholders. SECTION 1.3. Notice of Meeting. For each meeting of stockholders ------------------ written notice shall be given stating the place, date and hour and, in the case of a special meeting, the purpose or purposes for which the meeting is called and, if other than the place where the meeting is to be held, the place within the city in which the meeting is to be held where the list of stockholders required by Section 1.10 is to be open for examination at least 10 days prior to the meeting. Except as otherwise provided by Delaware law, the written notice of any meeting shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. SECTION 1.4. Quorum. Except as otherwise required by law or in the ------- Certificate of Incorporation, the holders of record of a majority of the shares of stock entitled to be voted present in person or represented by proxy at a meeting shall constitute a quorum for the transaction of business at the meeting, but, in the absence of a quorum, the holders of record present in person or represented by proxy at such meeting may vote to adjourn the meeting from time to time until a quorum is obtained. SECTION 1.5. Presiding Officer and Secretary at Meetings. Each -------------------------------------------- meeting of stockholders shall be presided over by the Chairman of the Board or, in his absence, by the President or, if neither is present, by the person designated in writing by the Chairman of the Board or, if no such person is present, then by a person designated by the Board of Directors; if no such person is present, then the stockholders at the meeting present in person or represented by proxy shall by plurality vote elect a person to act as chairman of the meeting. The Secretary, or in his absence an Assistant Secretary, shall act as secretary of the meeting, or, if no such officer is present, a secretary of the meeting shall be designated by the chairman of the meeting. SECTION 1.6. Voting. Except as otherwise provided in the By-Laws or ------- in the Certificate of Incorporation, and subject to the provisions of Section 1.11: (a) each stockholder of record shall be entitled at every meeting of stockholders to one vote for each share standing in his name on the books of the Corporation; (b) directors shall be elected by a plurality vote; (c) each matter, other than election of directors, properly presented to any meeting, shall be decided by a majority of the votes cast on the matter; and (d) election of directors and the vote on any other matter presented to a meeting shall be by written ballot only if so ordered by the chairman of the meeting or if so requested by any stockholder at the meeting present in person or represented by proxy entitled to vote in such election or on such matter, as the case may be. SECTION 1.7. Proxies. Each stockholder entitled to vote at a meeting -------- of stockholders or to express consent or dissent to corporate action in writing without a meeting may 2 authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. SECTION 1.8. Adjourned Meetings. A meeting of stockholders may be ------------------- adjourned to another time or place as provided in Sections 1.4 or 1.6(c). Unless the Board of Directors fixes a new record date, stockholders of record for an adjourned meeting shall be as originally determined for the meeting from which the adjournment was taken. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting, provided a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. SECTION 1.9. Consent of Stockholders in Lieu of Meeting. No ------------------------------------------- stockholder action by written consent in lieu of a meeting is permitted. SECTION 1.10. List of Stockholders Entitled to Vote. A complete list -------------------------------------- of the stockholders entitled to vote at every meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared and shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. Such list shall be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 1.11. Fixing of Record Date. The Board of Directors, by ---------------------- resolution, may fix a date for determining the stockholders of record, which record date shall not be earlier than the date of such resolution. The record date shall be determined as follows: (a) The record date for stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof shall not be more than 60 nor less than 10 days before the date of the meeting. If no such record date is fixed by the Board of Directors, the record date shall be the close of business on the day immediately preceding the day on which notice is given, 3 or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held. The record date shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting. (b) The record date for determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, shall be not more than 60 days prior to such action. If no such record date is fixed by the Board of Directors, the record date for determining stockholders for any such purpose shall be the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. SECTION 1.12. Business at Annual Meetings. In addition to the ---------------------------- election of directors, other proper business may be transacted at the annual meeting of stockholders, provided that such business is properly brought before such meeting. To be properly brought before an annual meeting, business must be (a) brought by or at the direction of the President of the Corporation or the Board of Directors, or (b) brought before the meeting by a stockholder pursuant to written notice thereof, in accordance with Section 1.13, and received by the Secretary not fewer than seventy nor more than ninety days prior to the first anniversary of the previous year's annual meeting. Any such stockholder notice shall set forth (i) the name and address of the stockholder proposing such business; (ii) a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the Corporation which are beneficially owned by the stockholder; (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to propose such business; and (iv) as to each matter the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the language of the business matter (if appropriate), and any material interest of the stockholder in such business. No business shall be conducted at any annual facts warrant, the Board of Directors, or the chairman of an annual meeting of stockholders, shall determine and declare (a) that a proposal does not constitute proper business to be transacted at the meeting or (b) that business was not properly brought before the meeting in accordance with the provisions of this Section 1.12 and, if, in either case, it is so determined, any such business shall not be transacted. The procedures set forth in this Section 1.12 for business to be 4 properly brought before an annual meeting by a stockholder are in addition to, and not in lieu of, the requirements set forth in Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, or any successor provision. SECTION 1.13. Notice to Corporation. Any written notice required to ---------------------- be delivered by a stockholder to the Corporation pursuant to Section 1.12 or Section 2.14 must be given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the Corporation's principal executive offices in the City of New York, State of New York. ARTICLE TWO DIRECTORS SECTION 2.1. General Powers. The business and affairs of the --------------- Corporation shall be managed by or under the direction of the Board of Directors. SECTION 2.2. Number; Term of Office. The number of directors that ----------------------- shall constitute the whole Board of Directors shall be determined by action of the Board of Directors taken by the affirmative vote of a majority of the whole Board of Directors. The directors shall be divided into three classes, each of which shall be composed as nearly as possible of one-third of the directors. Each director shall serve for the term to which the director was elected, and until a successor shall have been elected and qualified or until the director's prior death, resignation or removal. At each annual election, directors shall be chosen for a full three-year term to succeed those whose terms expire. SECTION 2.3. Resignation. Any director of the Corporation may resign ----------- at any time by giving written notice of such resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if no time is specified, upon receipt thereof by the Board of Directors or one of the above-named officers. Unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. When one or more directors shall resign from the Board of Directors effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in these By-Laws in the filling of other vacancies. 5 SECTION 2.4. Removal. Any one or more directors may be removed only -------- for cause by the holders of a majority of the outstanding shares of capital stock of the Corporation entitled to vote at an election of directors. SECTION 2.5. Vacancies; Newly Created Directorships. Vacancies and --------------------------------------- newly created directorships resulting from any increase in the authorized number of directors may be filled only by a vote of a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and the directors so chosen shall hold office, subject to Sections 2.3 and 2.4, until the next annual meeting of stockholders and until their respective successors are elected and qualified. SECTION 2.6. Regular and Annual Meetings; Notice. Regular meetings ------------------------------------ of the Board of Directors shall be held at such time and at such place (within or without the State of Delaware) as the Board of Directors may from time to time prescribe. No notice need be given of any regular meeting, and a notice, if given, need not specify the purposes thereof. A meeting of the Board of Directors may be held without notice immediately after an annual meeting of stockholders at the same place as that at which such meeting was held. SECTION 2.7. Special Meetings; Notice. A special meeting of the ------------------------- Board of Directors may be called at any time by the Board of Directors, the Chairman of the Board, the Executive Committee, if any, the President or any person acting in the place of the President and shall be called by any one of them or by the Secretary upon receipt of a written request to do so specifying the matter or matters, appropriate for action at such a meeting, proposed to be presented at the meeting and signed by at least two directors. Any such meeting shall be held at such time and at such place (within or without the State of Delaware) as shall be determined by the body or person calling such meeting. Notice of such meeting stating the time and place thereof shall be given (a) by deposit of the notice in the United States mail, first class, postage prepaid, at least seven days before the day fixed for the meeting, addressed to each director at his address as it appears on the Corporation's records or at such other address as the director may have furnished the Corporation for that purpose, or (b) by delivery of the notice similarly addressed for dispatch by telex, telecopy, telegraph, cable or radio or by delivery of the notice by telephone or in person, in each case at least 24 hours before the time fixed for the meeting. SECTION 2.8. Presiding Officer and Secretary at Meetings. Each -------------------------------------------- meeting of the Board of Directors shall be presided over by the Chairman of the Board, or in his absence 6 by the President, if a director, or if neither is present, by such member of the Board of Directors as shall be chosen by a majority of the directors present. The Secretary, or in his absence an Assistant Secretary, shall act as secretary of the meeting, or if no such officer is present, a secretary of the meeting shall be designated by the person presiding over the meeting. SECTION 2.9. Quorum; Voting. A majority of the whole Board of --------------- Directors shall constitute a quorum for the transaction of business, but in the absence of a quorum a majority of those present (or if only one be present, then that one) may adjourn the meeting, without notice other than announcement at the meeting, until such time as a quorum is present. Except as otherwise required by law, the Certificate of Incorporation or the By-Laws, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 2.10. Meeting by Telephone. Members of the Board of --------------------- Directors or of any committee thereof may participate in meetings of the Board of Directors or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 2.11. Action Without Meeting. Any action required or ----------------------- permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of such committee. SECTION 2.12. Executive and Other Committees. The Board of Directors ------------------------------- may, by resolution passed by a majority of the whole Board of Directors, designate an Executive Committee or one or more other committees, each such committee to consist of one or more directors as the Board of Directors may from time to time determine. Any such committee, to the extent provided in such resolution or resolutions, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, including the power to authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have such power or authority in reference to amending the Certificate of Incorporation (except for such amendments as by law are expressly permitted to be made by committees of the Board of Directors), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or 7 substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-Laws; and unless the resolution shall expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. The Board of Directors may designate one or more directors as alternate members of any committee who, in the absence or disqualification of a member or members of a committee at a meeting, may replace such absent or disqualified member or members at such meeting. In the absence of such a designation, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Each such committee other than the Executive Committee shall have such name as may be determined from time to time by the Board of Directors. SECTION 2.13. Compensation. Each director who is a salaried officer ------------- or employee of the Corporation shall not receive any salary for his services as a member of the Board of Directors or of any committee, but the Board of Directors may authorize the payment of a specified fee for attendance at each meeting of the Board of Directors or of a committee; and each such director shall be reimbursed for his expenses in attending such meetings. Each other director shall receive a salary for acting as a member of the Board of Directors and as a member of any committee, or a fixed sum for attendance at meetings of the Board of Directors and such committee, as may from time to time be determined by the Board of Directors and shall be reimbursed for his expenses in attending any meeting of the Board of Directors or of such committee. However, any director who serves the Corporation in any capacity other than as a member of the Board of Directors or a committee may receive compensation therefor. SECTION 2.14. Nomination. Only persons who are nominated in ----------- accordance with the following procedures shall be eligible for election as directors. Nominations for the election of directors may be made (a) by or at the direction of the President of the Corporation, or (b) by any stockholder of record entitled to vote for the election of directors at such meeting; provided, however, that a stockholder may nominate persons for election as directors only if written notice (in accordance with Section 1.13) of such stockholder's intention to make such nominations is received by the Secretary not later than (i) with respect to an election to be held at an annual meeting of the stockholders, not fewer than seventy days nor more than ninety days prior to the first anniversary of the previous year's annual meeting and (ii) 8 with respect to an election to be held at a special meeting of the stockholders for the election of directors, not fewer than ninety days prior to such special meeting nor more than the later of (x) seventy days prior to such special meeting and (y) ten days after public announcement of the date of such special meeting is first made. Any such stockholder notice shall set forth (a) the name and address of the stockholder who intends to make a nomination; (b) a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the Corporation which are beneficially owned by the stockholder; (c) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (d) as to each person the stockholder proposes to nominate for election or re-election as a director, the name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had such nominee been nominated by the Board of Directors, and a description of any arrangements or understandings, between the stockholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made; and (e) the consent of each such nominee to serve as a director if elected. If the facts warrant, the Board of Directors, or the chairman of a stockholders meeting at which directors are to be elected, shall determine and declare that a nomination was not made in accordance with the foregoing procedure and, if it is so determined, the defective nomination shall be disregarded. The right of stockholders to make nominations pursuant to the foregoing procedure is subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation. [The procedures set forth in this Section 2.14 for nomination for the election of directors by stockholders are in addition to, and not in lieu or limitation of, (a) any procedures now in effect or hereafter adopted by or at the direction of the Board of Directors or any committee thereof and (b) the requirements set forth in Rule 14A-11 under Section 14 of the Securities Exchange Act of 1934, or any successor provision.] ARTICLE THREE OFFICERS SECTION 3.1. Election; Qualification. The officers of the ------------------------ Corporation shall have such titles and duties as are set forth in a resolution adopted by the Board of Directors. The Board of Directors may elect such officers as it may from time to time determine. Two or more offices may be held by the same person. 9 SECTION 3.2. Term of Office. Each officer shall hold office from the --------------- time of his election and qualification until the expiration of the term for which he is elected and until the time his successor is elected and qualified, unless sooner he shall die or resign or shall be removed pursuant to Section 3.4. SECTION 3.3. Resignation. Any officer of the Corporation may resign ------------ at any time by giving written notice of such resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if no time be specified, upon receipt thereof by the Board of Directors or one of the above-named officers. Unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.4. Removal. Any officer of the Corporation may be removed -------- at any time, with or without cause, by the vote of a majority of the whole Board of Directors. SECTION 3.5. Vacancies. Any vacancy, however caused, in any office ---------- of the Corporation may be filled by the Board of Directors. SECTION 3.6. Compensation. The compensation of each officer shall be ------------- such as the Board of Directors may from time to time determine. ARTICLE FOUR CAPITAL STOCK SECTION 4.1. Stock Certificates. The interest of each holder of ------------------- stock of the Corporation shall be evidenced by a certificate or certificates in such form as the Board of Directors may from time to time prescribe, provided the Board of Directors may by resolution provide that some or all of any or all classes or series of its stock shall be uncertificated shares. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of uncertificated shares, upon request, shall be entitled to receive from the Corporation a certificate representing the number of shares registered in such stockholder's name on the books of the Corporation. Each stock certificate and certificate representing previously uncertificated shares shall be signed by or in the name of the Corporation by the Chairman of the Board or the President or a Vice President and by the Secretary or an Assistant Secretary. Any or all of the signatures appearing on any such certificate or certificates may be a facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon 10 any such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 4.2. Transfer of Stock. Shares of stock of the Corporation ------------------ shall be transferable on the books of the Corporation by the holder of record thereof or by his attorney, pursuant to applicable law and such rules and regulations as the Board of Directors shall from time to time prescribe. Any shares represented by a certificate shall be transferable only upon surrender of the certificate with an assignment endorsed thereon or attached thereto duly executed and with such proof of authenticity of signatures as the Corporation may reasonably require. SECTION 4.3. Holders of Record. Prior to due presentment for ------------------ registration of transfer, the Corporation may treat the holder of record of a share of its stock as the complete owner thereof exclusively entitled to vote, to receive notifications and otherwise entitled to all the rights and powers of a complete owner thereof, notwithstanding notice to the contrary. SECTION 4.4. Lost, Destroyed, Mutilated or Stolen Certificates. The -------------------------------------------------- Corporation shall issue a new certificate of stock or uncertificated shares to replace a certificate theretofore issued by it alleged to have been lost, destroyed, mutilated or stolen, if the owner or his legal representative (i) submits a written request for the replacement of the certificate, together with the mutilated certificate or such evidence as the Board of Directors may deem satisfactory of the loss, destruction or theft of the certificate, and such request is received by the Corporation before the Corporation has notice that the certificate has been acquired by a bona fide purchaser, (ii) files with the Corporation a bond sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, destruction, mutilation or theft of any such certificate or the issuance of any such new certificate and (iii) satisfies such other terms and conditions as the Board of Directors may from time to time prescribe. ARTICLE FIVE MISCELLANEOUS SECTION 5.1. Waiver of Notice. Whenever notice is required to be ----------------- given by the Certificate of Incorporation, the By-Laws or any provision of the Delaware General Corporation Law, a written waiver thereof, signed by the person entitled 11 to notice, whether before or after the time required for such notice, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. SECTION 5.2. Fiscal Year. The fiscal year of the Corporation shall ------------ start on January 1, in each year. SECTION 5.3. Corporate Seal. The corporate seal shall be in such --------------- form as the Board of Directors may from time to time prescribe, and the same may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE SIX AMENDMENT OF BY-LAWS SECTION 6.1. Amendment. The By-Laws may be adopted, amended or ---------- repealed by the Board of Directors by a majority vote of the whole Board of Directors. 12 EX-4.1 5 SPECIMEN CERTIFICATE FOR SHARES OF COMMON STOCK EXHIBIT 4.1 COMMON STOCK COMMON STOCK NUMBER SHARES [ CGS ] [LOGO] [ ] Incorporated under See reverse for the laws of the certain State of Delaware definitions COMPUTER GENERATED SOLUTIONS, INC. CUSIP 20513Q 10 0 - ------------------------------------------------------------------------------- This Certifies That is the owner of - ------------------------------------------------------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF $0.001 PER SHARE OF ===================== COMPUTER GENERATED SOLUTIONS, INC. ====================== (the "Corporation") transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. A statement of the rights of the holders of the shares of the capital stock of the Corporation will be furnished by the Corporation to any stockholder upon written request and without charge. This Certificate is not valid unless countersigned by the Transfer Agent and Registrar of the Corporation. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: COMPUTER GENERATED SOLUTIONS, INC. CORPORATE SEAL /s/ FRED SCHLOSSBERG /s/ 1984 SECRETARY DELAWARE PRESIDENT Countersigned: TRANSFER AGENT THE BANK OF NEW YORK AND REGISTRAR (NEW YORK) By: AUTHORIZED SIGNATURE The following abbreviations, when used in the inscription on the face of this certificate, shall be conceived as though they were written out in full according to the applicable laws or regulations. TEN COM- as tenants in common UNIF GIFT MIN ACT-_______CUSTODIAN________ (Cust) (Minor) TEN ENT- as tenants by the entireties under Uniform Gifts to Minors JT ENT- as joint tenants with right of survivorship and Act_______________________________ not as tenants in common (State)
Additional abbreviations may also be used though not in the above list. For Value received, ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint --------------------------------------------- Attorney to - -------------------------------------------------------------- transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated, ----------------------
X ------------------------------------------------------------------------------------------ X ------------------------------------------------------------------------------------------ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: BY - ----------------------------------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR institution (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EX-4.2 6 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.2 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of March , 1997, among -- COMPUTER GENERATED SOLUTIONS, INC., a Delaware corporation (the "Company"), and Philip Friedman and Victor Friedman (Philip Friedman and Victor Friedman together being the "Stockholders"). W I T N E S S E T H : --------------------- WHEREAS, the Company and the Stockholders desire to enter into this Agreement for the purpose, among others, of establishing registration rights for the Holders (as hereinafter defined). NOW, THEREFORE, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement, the following terms ----------- shall have the following meanings: "Blackout Period" shall mean any Section 6(a) Period and any Section --------------- 6(b) Period. "Effective Period" shall mean a period commencing on the date of this ---------------- Agreement and ending on the first date as of which all Registrable Securities cease to be Registrable Securities. "IPO" has the meaning specified in Section 3(a). --- "Holders" shall mean each Stockholder and each Permitted Assignee that ------- becomes a holder of Registrable Securities, provided that if such Person is not a Stockholder, such Permitted Assignee has agreed in writing to become a Holder hereunder and to be bound by the terms and conditions of this Agreement. "Permitted Assignee" shall mean (w) Philip Friedman and Victor ------------------ Friedman and any of their descendants; (x) a spouse or surviving spouse (even if remarried) of any individual named or described in (w) above; (y) any estate, trust, guardianship, custodianship, curatorship or other fiduciary arrangement for the primary benefit of any one or more of the individuals named or described in (w) or (x) above; and (z) any corporation, partnership, limited liability company or other business organization controlled by and substantially all of the interests in which are owned, directly or indirectly, by any one or more of the individuals and entities named or described in (w), (x), and (y) above. "Prospectus" shall mean the prospectus included in any Registration ---------- Statement, as amended or supplemented by any prospectus supplement and by all other amendments and supplements, including post-effective amendments and supplements and all material incorporated by reference in such prospectus. "Registrable Securities" shall mean any and all shares of common stock ---------------------- of the Company (the "Common Shares") which are, on or after the date hereof, held by any of the Stockholders or issuable to any of the Stockholders upon the conversion or exercise of any warrant, right or other security or which are, on or after the date hereof, issued as a dividend or other distribution with respect to, in exchange for or in replacement of, any Common Shares or other securities of the Company. Common Shares shall not cease to be Registrable Securities because of their transfer to a Permitted Assignee. "Registration Statement" means any registration statement (including a ---------------------- Shelf Registration) of the Company referred to in Section 3 or 4, including any Prospectus, amendments and supplements to any such registration statement, including post-effective amendments, and all exhibits and all material incorporated by reference in any such registration statement. "SEC" means the Securities and Exchange Commission. --- "Section 6(a) Period" has the meaning specified in Section 6(a). ------------------- "Section 6(b) Period" has the meaning specified in Section 6(b). ------------------- "Securities Act" means the Securities Act of 1933, as amended, -------------- including the rules and regulations promulgated thereunder. 2 "Shelf Registration" means a "shelf" registration statement on an ------------------ appropriate form pursuant to Rule 415 under the Securities Act (or any successor rule that may be adopted by the SEC). "underwritten registration or underwritten offering" shall mean an -------------------------------------------------- offering in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Securities Subject to this Agreement. The securities entitled to ------------------------------------ the benefits of this Agreement are the Registrable Securities. For the purposes of this Agreement, as to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities only when and to the extent that (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) such Registrable Securities are distributed to the public pursuant to and in accordance with Rule 144 (or any similar provision then in force) under the Securities Act, (iii) such Registrable Securities have been otherwise transferred to a party that is not a Permitted Assignee or (iv) such Registrable Securities have ceased to be outstanding. 3. Piggy-Back Registration Rights. (a) If, at any time after the ------------------------------ effective date of an initial public offering of Common Shares pursuant to a registration statement filed under the Securities Act (an "IPO"), the Company proposes to register any securities under the Securities Act in connection with any offering of its securities, whether or not for its own account, the Company shall (i) give written notice at least fifteen business days prior to the filing thereof to each Holder of Registrable Securities, specifying the approximate date on which the Company proposes to file such Registration Statement and the intended method of distribution in connection therewith, and advising such Holder of such Holder's right to have any or all of the Registrable Securities then held by such Holder included among the securities to be covered thereby and (ii) at the written request of any such Holder given to the Company at least two business days prior to the proposed filing date, include among the securities covered by such Registration Statement the number of Registrable Securities that such Holder shall have requested be so included. Subject to reduction in accordance with paragraph (b) of 3 this Section 3, the Company shall cause the Registration Statement to include the Registrable Securities requested to be included in the Registration Statement. (b) If the lead managing underwriter of an underwritten offering made pursuant to this Section 3(a) shall advise the Company in writing (with a copy to the Holders of Registrable Securities participating in such offering) that, in its opinion, the number of Registrable Securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the Company, the Company will reduce the Registrable Securities to be included in such offering to the number which the Company is so advised can be sold in such offering within such price range. Any such reduction shall be on a pro rata basis based on the total number of Registrable Securities to be included in such Registration Statement by the Company and stockholders of the Company, including Holders of Registable Securities. (c) Nothing in this Section 3 shall create any liability on the part of the Company to the Holders of Registrable Securities if the Company for any reason should decide not to file a Registration Statement proposed to be filed under Section 3(a) or to withdraw such Registration Statement subsequent to its filing, regardless of any action whatsoever that a Holder may have taken, whether as a result of the issuance by the Company of any notice hereunder or otherwise. (d) A request by Holders to include Registrable Securities in a proposed offering pursuant to Section 3(a) shall not be deemed to be a request for a demand registration pursuant to Section 4. 4. Demand Registration Rights. (a) Upon the written request of a -------------------------- Holder or Holders of Registrable Securities that the Company effect the registration with the SEC, under and in accordance with the provisions of the Securities Act, of all or part of such Holder's or Holders' Registrable Securities and specifying the aggregate number of shares of Registrable Securities requested to be so registered, the Company will promptly give written notice of such requested registration to all other Holders of Registrable Securities. Within 15 days after receipt of the Company's notice each such other Holder shall notify the Company in writing as to whether such Holder wishes to have any or all of its Registrable Securities included in such 4 requested registration. Thereupon, the Company shall use its best efforts to file a Registration Statement as expeditiously as practicable (the terms of any underwritten offering or other distribution to be determined by the Holders of a majority of the Registrable Securities so requested to be registered). The Holders shall have unlimited rights to make demand registrations; provided, however, that the Company shall not be required to take any action pursuant to this Section 4: (i) if the Company has effected a registration pursuant to this Section 4 within the 90-day period next preceding such request; (ii) if the Company shall at the time have effective a Shelf Registration pursuant to which the Holder or Holders that requested registration could effect the disposition of such Registrable Securities pursuant to an underwritten offering or such other method of distribution requested by such Holder or Holders; or (iii) during the pendency of any Blackout Period; and provided, further, that the Company shall be permitted to satisfy -------- ------- its obligations under this Section 4(a) by amending (to the extent permitted by applicable law) any Shelf Registration previously filed by the Company under the Securities Act so that such Shelf Registration (as amended) shall permit the disposition (in accordance with the intended methods of disposition specified as aforesaid) of all of the Registrable Securities for which a demand for registration has been made under this Section 4(a). (b) The Company will not include any securities that are not Registrable Securities in any Registration Statement (including a Shelf Registration referred to in the second proviso of Section 4(a)) filed pursuant to a demand made under this Section 4 without the prior written consent of the Holders of a majority in number of the Registrable Securities covered by such Registration Statement (including a Shelf Registration referred to in the second proviso of Section 4(a)). (c) If the lead managing underwriter of an underwritten offering made pursuant to this Section 4 shall advise the Company in writing (with a copy to the Holders of Registrable Securities participating in such offering) that, 5 in its opinion, the number of Registrable Securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the Holders of a majority in number of the Registrable Securities requested to be included in such offering, the Company will reduce the Registrable Securities requested to be included in such offering to the number which the Company is so advised can be sold in such offering within such price range. Any such reduction shall be on a pro rata basis based on the total number of Registrable Securities to be included in such Registration Statement by each Holder. 5. Selection of Underwriters. In connection with any offering ------------------------- pursuant to a Registration Statement filed pursuant to a demand made in accordance with Section 4, the Company shall have the right to select a managing underwriter or underwriters to administer the offering, so long as such managing underwriter or underwriters shall be reasonably satisfactory to Holders of a majority in number of the Registrable Securities to be included in such offering; provided, however, that such Holders shall have the right to select one co-managing underwriter, so long as such co-managing underwriter shall be reasonably satisfactory to the Company. The managing underwriter or underwriters selected by the Company shall be deemed reasonably satisfactory to Holders of a majority in number of the Registrable Securities to be included in such offering unless such Holders send a written notice of objection to the Company within 10 days of receipt of notice from the Company of the appointment of a managing underwriter or underwriters and the co-managing underwriter selected by such Holders shall be deemed to be reasonably satisfactory to the Company unless the Company sends a written notice of objection to such Holders within 10 days of receipt of notice from such Holders of the appointment of a co-managing underwriter. 6. Blackout Periods. (a) If the Company determines in good faith ---------------- that the registration and distribution of Registrable Securities (or the use of the Registration Statement or related Prospectus) would interfere with any pending financing, acquisition, corporate reorganization or any other corporate development involving the Company or any of its subsidiaries (or would require premature disclosure thereof) and promptly gives the Holders of Registrable Securities written notice of such determination, the Company shall be entitled to postpone the 6 filing of the Registration Statement, any amendment thereto or any Prospectus supplement otherwise required to be prepared and filed by the Company pursuant to Section 3 or 4 and/or elect that the Registration Statement (including any Prospectus contained therein) not be used for a reasonable period of time, but not to exceed 90 days (a "Section 6(a) Period"). Any such written notice shall contain a general statement of the reasons for such postponement or restriction on use and an estimate of the anticipated delay. The Company shall promptly notify each Holder of the expiration or earlier termination of a Section 6(a) Period. (b) If (i) during the Effective Period, the Company shall file a registration statement (other than in connection with the registration of securities issuable pursuant to an employee stock option, stock purchase or similar plan on Form S-8 or pursuant to a merger, exchange offer or a transaction of the type specified in Rule 145(a) under the Securities Act) with respect to any Common Shares and (ii) with reasonable written prior notice, (A) the Company (in the case of a non-underwritten offering pursuant to such registration statement) advises the Holders in writing that a sale or distribution of Registrable Securities would adversely affect such offering or (B) the managing underwriter or underwriter (in the case of an underwritten offering) advise the Company in writing (in which case the Company shall notify the Holders), that a sale or distribution of Registrable Securities would adversely impact such offering, then each Holder shall refrain from effecting any sale or distribution of Registrable Securities (other than any Registrable Securities included in any Registration Statement), including sales pursuant to Rule 144 under the Securities Act, during the 10-day period prior to, and during the 180-day period beginning on, the effective date of such registration statement (a "Section 6(b) Period"); provided that this Section 6(b) shall not -------- restrict the offer or sale of any Registrable Securities which have already been registered pursuant to a Registration Statement or otherwise relieve the Company of its obligations pursuant to Sections 3 and 4. (c) The period for which a Registration Statement shall be kept effective pursuant to Section 7(b) shall be extended by a number of days equal to the number of days of any Blackout Period occurring during such period. The beginning of any Blackout Period shall be at least 120 days after the end of any prior Blackout Period. Notwithstanding 7 anything to the contrary contained herein, the aggregate number of days included in all Blackout Periods during any consecutive 18 months during the Effective Period shall not exceed 180 days. (d) During the five day period prior to, and during the 90 day period commencing on, the effective date of a registration statement filed by the Company on behalf of Holders in connection with an underwritten offering pursuant to Section 4(a), the Company hereby agrees not to effect (except pursuant to employee benefit plans or to the extent permitted by Holders of a majority of outstanding Registrable Securities) any public sale or distribution of Common Shares. 7. Registration Procedures. If and whenever the Company is required ----------------------- to use its best efforts to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Agreement, the Company shall, as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement with respect to such Registrable Securities on any form for which the Company then qualifies or that counsel for the Company shall deem appropriate, and which form shall be available for the sale of the Registrable Securities in accordance with the intended methods of distribution thereof proposed by the Holders of Registrable Securities to be included in such Registration Statement, and use its best efforts to cause such Registration Statement to become and remain effective in accordance with the provisions hereof; (b) prepare and file with the SEC amendments and post-effective amendments to such Registration Statement as may be necessary to maintain the effectiveness of such registration and to otherwise comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement until the earlier of (x) the date which is 180 days after the effective date of such registration statement and (y) such time as all Registrable Securities covered by such Registration Statement have ceased to be Registrable Securities (it being understood that the Company at its option may determine to maintain such effectiveness for a longer period, whether pursuant to a Shelf Registration or otherwise), and cause the related Prospectus to be 8 supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act for such period of time as a Prospectus is required to be delivered; provided, however, -------- ------- that a reasonable time before filing a Registration Statement or Prospectus, or any amendments or supplements thereto (other than reports required to be filed by it under the Exchange Act), the Company shall furnish to the Holders of Registrable Securities, the managing underwriter and their respective counsel for review and comment, copies of all documents proposed to be filed and shall not file any such documents (other than as aforesaid) to which any of them reasonably object prior to the filing thereof; (c) furnish to each Holder of such Registrable Securities and to any underwriter in connection with an underwritten offer such number of conformed copies of such Registration Statement and of each amendment and post-effective amendment thereto (in each case including all exhibits) and such number of copies of any Prospectus or Prospectus supplement and such other documents as such Holder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities by such Holder or underwriter (the Company hereby consents to the use (subject to the limitations set forth in the last paragraph of this Section 7) of the Prospectus or any amendment or supplement thereto in connection with such disposition); (d) use its best efforts to register or qualify such Registrable Securities covered by such Registration Statement under such other securities or "blue sky" laws of such jurisdictions as each Holder of such Registrable Securities shall reasonably request, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction where, but for the requirements of this Section 7(d), it would not be obligated to be so qualified, to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (e) notify each Holder of any such Registrable Securities covered by such Registration Statement, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act of the 9 Company's becoming aware that the Prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of any such Holder, prepare and furnish to such Holder a reasonable number of copies of an amendment or supplement to such Registration Statement or related Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (f) notify each such Holder of Registrable Securities covered by such Registration Statement at any time: (i) when the Prospectus or any Prospectus supplement or post- effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for other additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or any order preventing the use of a related Prospectus, or the initiation (or any overt threats) of any proceedings for such purposes; (iv) of the receipt by the Company of any notification of the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation (or overt threats) of any proceeding for that purpose; and (v) if at any time the representations and warranties of the Company contemplated by 10 paragraph (i)(i) below cease to be true and correct in all material respects; (g) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders an earnings statement that shall satisfy the provisions of Section 11(a) of the Securities Act, provided that the Company shall be deemed to have complied with this paragraph if it has complied with Rule 158 of the Securities Act; (h) use its best efforts to cause all such Registrable Securities to be listed on any securities exchange or automated quotation system on which the class of Registrable Securities being registered is then listed, if such Registrable Securities are not already so listed and if such listing is then permitted under the rules of such exchange or market, as the case may be, and to provide a transfer agent and registrar for such Registrable Securities covered by such Registration Statement no later than the effective date of such Registration Statement; (i) enter into agreements (including an underwriting agreement in the form customarily entered into by the Company in a comparable underwritten offering) and take all other appropriate and all commercially reasonable actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (i) make such representations and warranties to the Holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by the Company to underwriters in comparable underwritten offerings; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions shall be reasonably satisfactory (in form, scope and substance) to the managing underwriters, if any, and the Holders of a majority in number of the Registrable Securities being sold) addressed to all such Holders of Registrable Securities included in such Registration Statement and the underwriters 11 covering the matters customarily covered in opinions requested in comparable underwritten offerings by the Company; (iii) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling Holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by independent accountants in connection with comparable underwritten offerings on such date or dates as may be reasonably requested by the managing underwriter; (iv) provide the indemnification in accordance with the provisions and procedures of Section 10 hereof to all parties to be indemnified pursuant to such Section; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in number of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (f) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; (j) cooperate with the Holders of Registrable Securities covered by such Registration Statement and the managing underwriter or underwriters to facilitate, to the extent reasonable under the circumstances, the timely preparation and delivery of certificates (not bearing any restrictive legends) representing the securities to be sold under such Registration Statement, and enable such securities to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, or such Holders may request and/or in a form eligible for deposit with the Depository Trust Company; (k) make available for inspection by any Holder included in such Registration Statement, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by any such Holder 12 or underwriter (collectively, the "Inspectors"), reasonable access to appropriate officers of the Company and the Company's subsidiaries to ask questions and to obtain information reasonably requested by such Inspector and all financial and other records and other information, pertinent corporate documents and properties of any of the Company and its subsidiaries and affiliates (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility; provided, however, that the Records that the Company -------- ------- determines, in good faith, to be confidential and which it notifies the Inspectors in writing are confidential shall not be disclosed to any Inspector unless such Inspector signs a confidentiality agreement reasonably satisfactory to the Company or either (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission of a material fact in such Registration Statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction; provided, further, that any decision regarding the disclosure of information pursuant to subclause (i) shall be made only after consultation with counsel for the applicable Inspectors; and provided, further, that each Holder agrees that it will, promptly after learning that disclosure of such Records is sought in a court having jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of such Records; and (l) in the event of the issuance of any stop order suspending the effectiveness of the Registration Statement or of any order suspending or preventing the use of any related Prospectus or suspending the qualification of any Registrable Securities included in the Registration Statement for sale in any jurisdiction, the Company will use all commercially reasonable efforts promptly to obtain its withdrawal. The Company may require each Holder as to which any registration is being effected to furnish the Company with such information regarding such Holder and pertinent to the disclosure requirements relating to the registration and the distribution of such securities as the Company may from time to time reasonably request in writing. 13 Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 7(e) or Section 7(f)(iii) or (iv), such Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Prospectus or Registration Statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 7(e) or, in the case of any such notice of an event of the kind described in Section 7(f)(iii) or (iv), until it is advised (the "Advice") in writing by the Company that the use of the applicable Prospectus can be resumed, and, in any such case, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 7(b) shall be extended by the number of days during the period from the date of the giving of such notice pursuant to Section 7(e) or Section (f), as the case may be, through the date when each Holder of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 7(e) or the Advice, as the case may be. 8. Registration Expenses. With respect to a Demand Registration or --------------------- Piggy-Back Registration, the Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations made pursuant to Sections 3 or 4 as the case may be, including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the Holders (it being understood that only fees and disbursements of one counsel to all Holders of Registrable Securities shall be paid and borne by the Company), but excluding underwriting discounts and commissions relating to Registrable Securities. 9. Rule 144. The Company agrees that it shall timely file the -------- reports required to be filed by it under the Securities Act or the Exchange Act (including, without limitation, the reports under sections 13 and 15(d) of the Exchange Act referred to in paragraph (c)(l) of Rule 144 under the Securities Act), and shall take such further actions as any Holder may reasonably request, all to the 14 extent required to enable Holders to sell Registrable Securities, from time to time, pursuant to the resale limitations of (a) Rule 144 under the Securities Act, as such rule may be hereafter amended, or (b) any similar rules or regulations hereafter adopted by the SEC. Upon the written request of any Holder, the Company shall deliver to such Holder a written statement verifying that it has complied with such requirements. 10. Indemnification; Contribution. (a) Indemnification by the ----------------------------- Company. The Company agrees to indemnify and hold harmless each Holder of Registrable Securities included in any Registration Statement, its trustees, officers and directors and each Person who controls such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), and any agent or investment adviser thereof against all losses, claims, damages, liabilities and expenses (including reasonable attorneys' fees and expenses) incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation arising out of or based upon (i) any untrue or alleged untrue statement of material fact contained in any Registration Statement, any Prospectus or preliminary Prospectus, or any amendment or supplement to any of the foregoing or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus or a preliminary Prospectus, in light of the circumstances then existing) not misleading, except in each case insofar as the same arise out of or are based upon, any such untrue statement or omission made in reliance on and in conformity with information with respect to such Holder furnished in writing to the Company by such Holder or its counsel expressly for use therein. In connection with an underwritten offering, the Company will indemnify the underwriters thereof, their officers, directors and agents and each Person who controls such underwriters (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders. Notwithstanding the foregoing provisions of this Section 10(a), the Company will not be liable to any Holder, any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such Holder or underwriter (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), under the indemnity agreement in this Section 10(a) for any such 15 loss, claim, damage, liability (or action or proceeding in respect thereof) or expense that arises out of such Holder's or other Person's failure to send or deliver a copy of a final Prospectus to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of the Registrable Securities to such Person if such statement or omission was corrected in such final Prospectus and the Company has previously furnished copies thereof to such Holder and underwriter in accordance with this Agreement. (b) Indemnification by Holders of Registrable Securities. In ---------------------------------------------------- connection with the any registration of Registrable Securities pursuant to this Agreement, each Holder of Registrable Securities included in such registration shall furnish to the Company and any underwriter in writing such information, including the name, address and the amount of Registrable Securities held by such Holder, as the Company or any underwriter reasonably requests for use in the Registration Statement relating to such registration or the related Prospectus and agrees to indemnify and hold harmless the Company, all other Holders and any underwriter, each such party's officers and directors and each Person who controls each such party (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), and any agent or investment adviser thereof against all losses, claims, damages, liabilities and expenses (including reasonable attorneys' fees and expenses) incurred by each such party pursuant to any actual or threatened action, suit, proceeding or investigation arising out of or based upon (i) any untrue or alleged untrue statement of material fact contained in any Registration Statement, any Prospectus or preliminary Prospectus, or any amendment or supplement to any of the foregoing or (ii) any omission or alleged omission to state therein a material tact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus or a preliminary Prospectus, in light of the circumstances then existing) not misleading, but only to the extent that any such untrue statement or omission is made in reliance on and in conformity with information with respect to such Holder furnished in writing to the Company or any underwriter by such Holder or its counsel specifically for inclusion therein. (c) Conduct of Indemnification Proceedings. Any Person entitled to -------------------------------------- indemnification hereunder agrees to give prompt written notice to the indemnifying party after the 16 receipt by such indemnified party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such indemnified party may claim indemnification or contribution pursuant to this Section 10 (provided that failure to give such notification shall not affect the obligations of the indemnifying party pursuant to this Section 10 except to the extent the indemnifying party shall have been actually prejudiced as a result of such failure). In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under these indemnification provisions for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. Notwithstanding the foregoing, if (i) the indemnifying party shall not have employed counsel reasonably satisfactory to such indemnified party to take charge of the defense of such action within a reasonable time after notice of commencement of such action, or (ii) the actual or potential defendants in, or targets of, any such action include both the indemnifying party and such indemnified party and such indemnified party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the indemnifying party which, if the indemnifying party and such indemnified party were to be represented by the same counsel, could result in a conflict of interest for such counsel or materially prejudice the prosecution of the defenses available to such indemnified party, then such indemnified party shall have the right to employ separate counsel, in which case the fees and expenses of one counsel or firm of counsel (plus one local counsel or firm of counsel) selected by a majority in interest of the indemnified parties shall be borne by the indemnifying party and the fees and expenses of all other counsel retained by the indemnified parties shall be paid by the indemnified parties. No indemnified party shall consent to entry of any 17 judgment or enter into any settlement without the consent (which consent, in the case of an action, suit, claim or proceeding shall not be unreasonably withheld) of each indemnifying party. (d) Contribution. If the indemnification from the indemnifying party ------------ provided for in this Section 10 is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities and expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 10(c), any legal and other fees and expenses reasonably incurred by such indemnified party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 10(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 10(d), no underwriter shall be required to 18 contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Holder were offered to the public exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. If indemnification is available under this Section 10, the indemnifying parties shall indemnify each indemnified party to the fullest extent provided in Section 10(a) or (b), as the case may be, without regard to the relative fault of such indemnifying parties or indemnified party or any other equitable consideration provided for in this Section 10(d). (e) The provisions of this Section 10 shall be in addition to any liability which any party may have to any other party and shall survive any termination of this Agreement. The indemnification provided by this Section 10 shall remain in full force and effect irrespective of any investigation made by or on behalf of an indemnified party, so long as such indemnified party does not act in a fraudulent, reckless or grossly negligent manner. 11. Participation in Underwritten Offerings. No Holder may --------------------------------------- participate in any underwritten offering hereunder unless such Holder (a) in the case of a registration pursuant to Section 3, agrees to sell such Holder's securities on the basis provided in any underwriting arrangements approved by the Company in its reasonable discretion and (b) completes and executes all questionnaires, powers of attorney, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 12. Miscellaneous. (a) Remedies. Each Holder, in addition to being ------------- -------- entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. (b) Amendments and Waivers. Except as otherwise provided herein, the ---------------------- provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, 19 unless the Company has obtained the written consent of Holders of at least a majority in number of the Registrable Securities then outstanding. (c) Notices. Notices, requests, permissions, waivers, and other ------- communications hereunder shall be in writing and shall be deemed to have been duly given if signed by the respective Persons giving them (in the case of any corporation the signature shall be by an officer thereof) and delivered by hand, deposited in the United States mail (registered or certified, return receipt requested), properly addressed and postage prepaid, or delivered by telecopy: If to a Stockholder, to: Philip Friedman 33 Vanderbilt Drive Livingston, New Jersey 07039 Telephone: (201) 716-0067 Victor Friedman 8 Jan Lane Woodbury, New York 11797 Telephone: (516) 921-0055 If to the Company, to: COMPUTER GENERATED SOLUTIONS, INC. 1675 Broadway New York, New York 10019 Telephone: (212) 408-3800 Telecopy: (212) 977-7474 Attention: General Counsel (d) Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and be binding upon the successors and assigns of each of the parties; provided, however, that any successor to a Holder shall have agreed in writing to become a Holder under this Agreement and to be bound by the terms and conditions hereof. (e) Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 20 (f) Descriptive Headings. The descriptive headings used 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. (g) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. (h) Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Holders shall be enforceable to the fullest extent permitted by law. 21 (i) Entire Agreement. This Agreement is intended by the parties as a ---------------- final expression and a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter hereof. There are no restrictions, promises, warranties or undertakings with respect to the subject matter hereof, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. COMPUTER GENERATED SOLUTIONS, INC. By: ---------------------------------- Name: Title: ------------------------------------- Philip Friedman ------------------------------------- Victor Friedman 22 EX-4.3 7 1997 LONG-TERM INCENTIVE PLAN EXHIBIT 4.3 COMPUTER GENERATED SOLUTIONS, INC. 1997 LONG-TERM INCENTIVE PLAN 1. Purpose of Plan The purpose of this 1997 Long-Term Incentive Plan (the "Plan") is to aid Computer Generated Solutions, Inc. and its Subsidiaries (the "Company") in securing and retaining Key Employees of outstanding ability by making it possible to offer them increased incentives, which may include a proprietary interest in the Company, to join or continue in the service of the Company and to increase their efforts for its welfare. 2. Definitions As used in the Plan, the following words shall have the following meanings: (a) "CGS" means Computer Generated Solutions, Inc.; (b) "Award" means an award or grant made to a Participant pursuant to the Plan, including, without limitation, an award or grant of an Option, Right, Restricted Stock, Performance Award or Other Stock-Based Award, or any combination of the foregoing; (c) "Award Agreement" means an agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to an Award; (d) "Board of Directors" means the Board of Directors of CGS; (e) "Committee" means the Compensation Committee of the Board of Directors; (f) "Common Stock" means common stock of CGS; (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended; (h) "Incentive Stock Option" means a stock option to purchase shares of Common Stock which is intended to qualify as an incentive stock option as defined in Section 422(b) of the Internal Revenue Code; (i) "Key Employee" means any person, including an officer or director, in the regular full-time employment of the Company who, in the opinion of the Committee, is or is expected to be primarily responsible for the management, growth or protection of some part or all of the business of the Company; (j) "Limited Right" means a right to receive cash in lieu of the exercise of an Option or Right as set forth in Section 12(b); (k) "Nonqualified Stock Option" means a stock option to purchase shares of Common Stock which is intended not to qualify as an incentive stock option as defined in Section 422 of the Internal Revenue Code; (l) "Option" means an Incentive Stock Option or a Nonqualified Stock Option; (m) "Other Stock-Based Award" means an Award pursuant to Section 8; (n) "Participant" means a person to whom one or more Awards have been granted that have not all been forfeited or terminated under the Plan; (o) "Performance Period" means the period specified with respect to a Performance Award during which specified performance criteria are to be measured; (p) "Performance Award" means an Award granted pursuant to Section 7; (q) "Restricted Stock" means shares of Common Stock granted pursuant to Section 6 or as part of a Performance Award or an Other Stock-Based Award; (r) "Right" means a stock appreciation right to elect to receive shares of Common Stock with a fair market value, at the time of any exercise of such stock appreciation right, equal to the amount by which the fair market value of all shares (or where issued pursuant to Section 5, the shares subject to the Option (or part thereof)) in respect of which such stock appreciation right was granted exceeds the exercise price of said Option (or part thereof) or in the Committee's discretion to receive from CGS, in lieu of such shares, the fair market value in cash, or to receive a combination of such shares and cash, as provided in Section 5; and 2 (s) "Subsidiary" means any corporation other than CGS in an unbroken chain of corporations beginning with CGS where each of the corporations other than the last corporation in the unbroken chain owns 50% or more of the voting stock in one of the other corporations in such chain. 3. Administration of Plan The Plan shall be administered by the Committee, whose members shall be appointed by the Board of Directors and consist of at least two members of the Board of Directors. Members of the Committee shall qualify to administer the Plan for purposes of Rule 16b-3 (and any other applicable rule) promulgated under Section 16(b) of the Exchange Act. The Committee may adopt its own rules of procedure, and the action of a majority of the Committee, taken at a meeting, or taken without a meeting by unanimous written consent of the members of the Committee, shall constitute action by the Committee. The Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules. 4. Awards The Committee (or prior to the formation of the Committee, the Board of Directors) may from time to time make such Awards under the Plan to such Key Employees and in such form and having such terms, conditions and limitations as the Committee may determine. Awards may be granted singly, in combination or in tandem. The terms, conditions and limitations of each Award under the Plan shall be set forth in an Award Agreement, in a form approved by the Committee, consistent, however, with the terms of the Plan. 5. Awards of Options and Rights (a) The terms and conditions with respect to each Award of Options under the Plan shall be consistent with the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable: (i) The Option price per share shall be determined by the Committee at the time of grant, but in no event shall the exercise price of an Incentive Stock Option be less than 100 percent of the fair 3 market value of the shares at the time the Option is granted. (ii) The Option shall be exercisable at such time or times and subject to such terms and conditions (including vesting and forfeiture provisions) as shall be determined by the Committee at the date of grant, but in no event shall an Option be exercisable prior to the Participant named therein having remained in the employ of the Company for at least one year after the date of the grant of the Option; provided, however, that the one-year employment requirement shall not be applicable in the event of the death or disability of the Participant within such year or as otherwise provided in Section 12(b). The Option may contain performance goals and measurements consistent with the provisions in Section 7, and the provisions with respect to any Option need not be the same as the provisions with respect to any other Option. The Option shall be exercisable in whole or in part from time to time during the period beginning at the completion of the required employment time stated in the Option and ending at the expiration of ten years from the date of grant of the Option, unless an earlier expiration date shall be stated in the Option or the Option shall cease to be exercisable pursuant to Section 5(a)(iv) or because of the exercise of the Limited Right pertaining thereto as provided in Section 12(b). To the extent that the aggregate fair market value of shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year exceeds $100,000, such Options shall be treated as Nonqualified Stock Options. The foregoing shall be applied by taking Options into account in the order in which they were granted. For purposes of the foregoing, the fair market value of any share shall be determined at the time of the grant of the Option. In the event the foregoing results in a portion of an Incentive Stock Option exceeding the $100,000 limitation, only such excess shall be treated as a Nonqualified Stock Option. (iii) Payment in full of the Option price shall be made upon exercise of each Option and may be made in cash, by the delivery of shares of Common Stock with a fair market value equal to the Option price, provided that any such shares acquired by the Participant pursuant to the exercise of an Incentive Stock Option shall have been held by the Participant for a period of 4 at least one year, or by a combination of cash and such shares that have been held by the Participant for a period of at least one year whose fair market value together with such cash shall equal the Option price. The Committee may also permit Participants, either on a selective or aggregate basis, simultaneously to exercise Options and sell the shares of Common Stock thereby acquired pursuant to a brokerage or similar arrangement, approved in advance by the Committee, and use the proceeds from such sale as payment of the purchase price of such shares. (iv) If a Participant's employment with the Company terminates other than by reason of the Participant's death, disability or retirement under a retirement plan of the Company, the Participant's Option shall terminate and cease to be exercisable except as otherwise provided in Section 12(b). If a Participant's employment with the Company terminates by reason of death, disability or retirement under a retirement plan of the Company, the Participant's Option shall continue to be exercisable until the expiration date stated in the Option, provided that a Nonqualified Stock Option may be exercised within one year from the date of death even if later than such expiration date. In the case of a Participant whose principal employer is a Subsidiary, then such Participant's employment shall be deemed to be terminated for purposes of this Section 5 as of the date on which such principal employer ceases to be a Subsidiary. (v) Each Option shall contain a Limited Right to receive cash in lieu of shares under the circumstances set forth in Section 12(b). (b) The Committee, at the time of grant of an Option or at any time prior to the expiration of its term, may also grant, subject to the terms and conditions of the Plan, Rights in respect of all or part of such Option to the Participant who has been granted the Option, provided that at such time the Participant is a Key Employee. (c) The holder of an Option or Right who decides to exercise the Option or Right in whole or in part shall give notice to the Secretary of CGS of such exercise in writing on a form approved by the Committee. A notice exercising a Right shall also specify the extent, if any, to which the Participant elects to receive cash, and shall be 5 subject to the determination by the Committee as provided in Section 5(f). Any exercise shall be effective as of the date specified in the notice of exercise, but not earlier than the date the notice of exercise, together with, in the case of exercise of an Option, payment in full of the Option price, is actually received and in the hands of the Secretary of CGS. (d) To the extent an Option is exercised in whole or in part, any Right granted in respect of such Option (or part thereof) shall terminate and cease to be exercisable. To the extent a Right is exercised in whole or in part, the Option (or part thereof) in respect of which such Right was granted shall terminate and cease to be exercisable. (e) Subject to Sections 5(b), a Right granted with an accompanying Option shall be exercisable only during the period in which the Option (or part thereof) in respect of which such Right was granted is exercisable. (f) The Committee shall have sole discretion to determine the form in which payment will be made following exercise of a Right. All or any part of the obligation arising out of an exercise of a Right may be settled (i) by payment in shares of Common Stock with a fair market value equal to the cash that would otherwise be paid, (ii) by payment in cash, or (iii) by payment in a combination of such shares and cash. (g) To the extent that any Right that shall have become exercisable shall not have been exercised or canceled or, by reason of any termination of employment, shall have become non-exercisable, it shall be deemed to have been exercised automatically, without any notice of exercise, on the last day on which its related Option is exercisable, provided that any conditions or limitations on its exercise (other than (i) notice of exercise and (ii) exercise or election to exercise during the period prescribed in Section 5(e)) are satisfied and the Right shall then have value. Such exercise shall be deemed to specify that, subject to determination by the Committee as provided in Section 5(f), the holder elects to receive cash and that such exercise of a Right shall be effective as of the time of the exercise. 6 6. Awards of Restricted Stock The terms and conditions with respect to each Award of Restricted Stock under the Plan shall be consistent with the following: (a) The provisions of Awards of Restricted Stock need not be the same with respect to each Participant. Each Award of Restricted Stock shall be subject to forfeiture as set forth in the Plan and may be otherwise subject to forfeiture as set forth in the provisions of such Award. (b) Each Participant receiving an Award of Restricted Stock shall be issued a certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award. The Committee may require that the certificates evidencing such shares be held in custody by CGS until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the Participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Award. (c) Shares of Restricted Stock shall be subject to the restrictions set forth in this Section 6(c). (i) Subject to the provisions of the Plan and the applicable Award Agreement, during the period established by the Committee commencing on the date of such Award (the "Restriction Period"), the Participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber such shares of Restricted Stock. Within these limits, the Committee may provide for the lapse of such restrictions in installments and may accelerate or waive any or all of such restrictions, in whole or in part, based on service, performance and such other factors or criteria as the Committee may determine. (ii) Subject to Section 10(e) and except as provided in this Section 6(c), the Participant shall have, with respect to shares of Restricted Stock issued to such Participant under the Plan, all of the rights of a holder of Common Stock of CGS, including the right to vote the shares and the right to receive any cash dividends. Unless otherwise determined by the Committee, cash dividends shall be automatically 7 reinvested in additional shares of Common Stock which shall be treated as Restricted Stock under this Section 6 and dividends payable in Common Stock shall be treated as additional shares of Restricted Stock subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (iii) Except to the extent otherwise provided in this Section 6(c), in Section 12(c) or 12(d) or in the applicable Award Agreement, upon termination of a Participant's employment with the Company for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the Participant. Except to the extent otherwise provided in the applicable Award Agreement, if the Participant's employment shall terminate and cease by reason of disability, retirement under a retirement plan of the Company or death, the Restriction Period with respect to any shares of Restricted Stock then held shall expire as of the date of such disability, retirement or death. (iv) Upon expiration of the Restriction Period with respect to any shares of the Restricted Stock without a prior forfeiture thereof, the holder of such shares shall have the right to receive in exchange for the certificates representing such shares unlegended certificates for such shares. 7. Performance Awards The terms and conditions with respect to each Performance Award under the Plan shall be consistent with the following: (a) Performance Awards may be paid in cash, shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6), Rights or any combination thereof. The Committee shall determine the nature, length and starting date of the Performance Period for each Performance Award which shall be at least two years (subject to Sections 12(c) and 12(d)) and shall determine the performance objectives to be used in valuing Performance Awards and determining the extent to which such Performance Awards have been earned. Performance objectives may vary from Participant to Participant and between groups of Participants and shall be based upon revenues, operating income, operating company contribution, cash flow, income 8 before income taxes, net income, earnings per share, return on equity or assets or total return to stockholders, whether applicable to the Company or any relevant Subsidiary or business unit, or any combination thereof, as the Committee may deem appropriate. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Awards that are subject to different Performance Periods and different performance factors and criteria. The terms of Performance Awards need not be the same with respect to each Participant. The Committee shall determine for each Performance Award subject to such Performance Period the range of dollar values or number of shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6), or combination thereof, to be received by the Participant at the end of the Performance Period if and to the extent that the relevant measures of performance for such Performance Awards are met. The factors must include a minimum performance standard below which no payment will be made and a maximum performance level above which no increased payment will be made. Such dollar values or number of shares may be fixed or may vary in accordance with such performance or other criteria as may be determined by the Committee. (b) The Committee may adjust the performance goals and measurements applicable to Performance Awards to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances, provided that no adjustment shall be made which would result in an increase in the compensation of any Participant whose compensation is subject to the limitation on deductibility under Section 162(m) of the Internal Revenue Code, as amended, or any successor provision, for the applicable year. The Committee also may adjust the performance goals and measurements applicable to Performance Awards and thereby reduce the amount to be received by any Participant pursuant to such Awards if and to the extent that the Committee deems it appropriate, provided that no such reduction shall be made on or after the date of a Change in Control (as defined in Section 12(b)(iii)). (c) Except as otherwise provided in the applicable Award Agreement, if during a Performance Period a Participant's employment with the Company terminates by reason of the Participant's death, disability or retirement under a retirement plan of the Company, such Participant 9 shall be entitled to a payment with respect to each outstanding Performance Award at the end of the applicable Performance Period (i) based, to the extent relevant under the terms of the Award, upon the Participant's performance for the portion of such Performance Period ending on the date of termination and (ii) prorated for the portion of the Performance Period during which the Participant was employed by the Company, all as determined by the Committee. The Committee may provide for an earlier payment in settlement of such Performance Award discounted at a reasonable interest rate and otherwise in such amount and under such terms and conditions as the Committee deems appropriate. Except as otherwise provided in Section 12(c) or 12(d) or in the applicable Award Agreement, if during a Performance Period a Participant's employment with the Company terminates other than by reason of the Participant's death, disability or retirement under a retirement plan of the Company, then such Participant shall not be entitled to any payment with respect to the Performance Awards relating to such Performance Period, unless the Committee shall otherwise determine. (d) The earned portion of a Performance Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Committee. Payment shall be made in the form of cash or whole shares of Common Stock, either in a single payment or in annual installments, all as the Committee shall determine. (e) If a Participant engages in detrimental activity (as hereinafter defined) at any time (whether before or after termination of employment), any Performance Award that has not been paid to such Participant (or is not payable as provided in Section 12(c) or 12(d)) prior to the date such activity has been determined by the Committee to constitute detrimental activity shall be forfeited and shall never become payable. For purposes of this Section 7(e), "detrimental activity" shall mean willful, reckless or grossly negligent activity that is determined by the Committee, on a case-by-case basis, to be detrimental to or destructive of the business or property of CGS or any Subsidiary. Any such determination of the Committee shall be conclusive and binding for all purposes of the Plan. Notwithstanding the foregoing, no Performance Award shall be forfeited or become not payable by virtue of this Section 7(e) on or after the date of a Change in Control (as defined in Section 12(b)(iii)). 10 8. Other Stock-Based Awards The Committee may grant other Awards under the Plan pursuant to which shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6) are or may in the future be acquired, or Awards denominated in stock units, including ones valued using measures other than market value. The Committee may also grant stock appreciation rights without the grant of an accompanying Option, which Rights shall permit the Participants to receive, at the time of any exercise of such Rights, cash equal to the amount by which the fair market value of all shares of Common Stock in respect to which the Right was granted exceeds the exercise price thereof. Such Other Stock- Based Awards may be granted alone, in addition to or in tandem with any Award of any type granted under the Plan and must be consistent with the purposes of the Plan. 9. Dividend Equivalents Any Awards (other than Awards of Options or Rights) under the Plan may, in the discretion of the Committee, earn dividend equivalents. In respect of any such Award which is outstanding on a dividend record date for Common Stock the Participant may be credited with an amount equal to the cash or stock dividends or other distributions that would have been paid on the shares of Common Stock covered by such Award had such covered shares been issued and outstanding on such dividend record date. The Committee shall establish such rules and procedures governing the crediting of dividend equivalents, including the timing, form of payment and payment contingencies of such dividend equivalents, as it deems are appropriate or necessary. 10. Limitations and Conditions (a) The total number of shares of Common Stock that may be made subject to Awards under the Plan is 1,270,000 shares. Such total number of shares may consist, in whole or in part, of unissued shares or reacquired shares. Not more than 250,000 shares of Common Stock may be made subject to Awards under the Plan to any individual Participant, which limitation shall be applied in a manner consistent with the requirements of Section 162(m) of the Internal Revenue Code, as amended. The foregoing numbers of shares are based on the capitalization of CGS immediately 11 following a proposed 1300.2 to one Stock Split in connection with a contemplated initial public offering (the "Stock Split") and may be increased or decreased by the events set forth in Section 12(a). In the event that the Company makes an acquisition or is a party to a merger or consolidation and CGS assumes the options or other awards consistent with the purpose of this Plan of the company acquired, merged or consolidated which are administered pursuant to this Plan, shares of Common Stock subject to the assumed options or other awards shall not count as part of the total number of shares of Common Stock that may be made subject to Awards under this Plan. (b) Any shares that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is settled in shares) shall again be available for award and shall not be considered as having been theretofore made subject to award. Any shares subject to option under an Option (or part thereof) that is canceled upon exercise of a Right when settled wholly or partially in shares shall to the extent of such settlement in shares be treated as if the Option itself were exercised and such shares received in settlement of the Right shall no longer be available for grant. (c) No Awards shall be made under the Plan after February 28, 2007, but the terms of Awards granted on or before the expiration thereof may extend beyond such expiration. At the time an Award is granted or amended or the terms or conditions of an Award are changed, the Committee may provide for limitations or conditions on such Award. (d) No Award or portion thereof shall be transferable by the Participant unless permitted in the applicable Award Agreement. A Right shall never be transferred except to the transferee of the related Option. (e) No person who receives an Award under the Plan which includes shares of Common Stock or the right to acquire shares of Common Stock (which may include shares of Restricted Stock pursuant to Section 6) shall have any rights of a stockholder (i) as to shares under option until, after proper exercise of the Option, such shares have been recorded on CGS's official stockholder records as having been issued or transferred, (ii) as to shares to be delivered following exercise of a Right until, after proper exercise of the Right and determination by the Committee to 12 make payment therefor in shares, such shares shall have been recorded on CGS's official stockholder records as having been issued or transferred, or (iii) as to shares included in Awards of Restricted Stock, Performance Awards or Other Stock-Based Awards, until such shares shall have been recorded on CGS's official stockholder records as having been issued or transferred. (f) CGS shall not be obligated to deliver any shares until they have been listed (or authorized for listing upon official notice of issuance) upon the Nasdaq National Market or each stock exchange upon which outstanding shares of such class at the time are listed nor until there has been compliance with such laws or regulations as CGS may deem applicable. CGS shall use its best efforts to effect such listing and compliance. No fractional shares shall be delivered. (g) Nothing contained herein shall affect the right of the Company to terminate any Participant's employment at any time or for any reason. 11. Transfers and Leaves of Absence For purposes of the Plan: (a) a transfer of a Participant's employment without an intervening period from CGS to a Subsidiary or vice versa, or from one Subsidiary to another, shall not be deemed a termination of employment, and (b) a Key Employee who is granted in writing a leave of absence shall be deemed to have remained in the employ of the Company during such leave of absence. 12. Stock Adjustments, Change in Control and Divestitures (a) In the event of any merger, consolidation, stock or other non-cash dividend, extraordinary cash dividend, split-up, spin-off, combination or exchange of shares, reorganization or recapitalization or change in capitalization, or any other similar corporate event, other than the stock split, the Committee may make such adjustments in (i) the aggregate number of shares subject to the Plan and the number of shares that may be made subject to Awards to any individual Participant as set forth in Section 10(a), (ii) the number and kind of shares that are subject to any Option (including any Option outstanding after termination of employment) and the Option price per share without any change in the aggregate Option price to be paid therefor upon exercise of the Option, (iii) the number and kind of Rights granted or that may be granted under the 13 Plan, (iv) the number and kind of shares of outstanding Restricted Stock, (v) the number and kind of shares of Common Stock covered by a Performance Award or Other Stock-Based Award and (vi) the number of outstanding dividend equivalents, as the Committee shall deem appropriate in the circumstances. The determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. (b) (i) In the event of a Change in Control (as defined in Section 12(b)(iii)), then unless the Committee otherwise determines at any time prior to such Change in Control, each Option or Right held by a Participant that is not then exercisable shall become immediately exercisable and shall remain exercisable as provided in Section 5 notwithstanding anything to the contrary in the first sentence of Section 5(a)(ii) or in Section 5(b). In addition, unless the Committee otherwise determines at the time of grant or at any time thereafter but prior to such Change in Control, each Limited Right in respect of an Option or Right then exercisable by a Participant that is outstanding at the time of such Change in Control shall be deemed to be automatically exercised as of the date of such Change in Control or as of such other date during the 60-day period beginning on the date of such Change in Control as the Committee may determine prior to such Change in Control. In the event that the Limited Right is not automatically exercised, the Participant may during the 60-day period beginning on the date of the Change in Control (such 60-day period being herein referred to as the "Limited Right Exercise Period"), in lieu of exercising such Option or Right in whole or in part, exercise the Limited Right (or part thereof) pertaining to such Option. Such Participant, whether the exercise is pursuant to his election or automatic pursuant to the terms hereof, shall be entitled to receive in cash an amount determined by multiplying the number of shares subject to such Option (or part thereof) by the amount by which the exercise price of each share is exceeded by (A) if such Option is an Incentive Stock Option, the fair market value of such shares at the date of exercise or (B) if such Option is a Nonqualified Stock Option, the greater of (x) the highest purchase price per share paid for the shares of the Company beneficially acquired in the transaction or series of transactions resulting in the Change in Control by the person or persons deemed to have acquired control pursuant to the Change in Control and (y) the highest fair market value of shares of Common Stock during the Limited Right Exercise Period prior to the time of exercise. A Limited Right shall be exercised in whole or 14 in part by giving written notice of such exercise on a form approved by the Committee to the Secretary of CGS, except that no such written notice shall be required in the event such Limited Right is automatically exercised pursuant to the terms hereof. The exercise shall be effective as of the date specified in the notice of exercise, but not earlier than the date the notice of exercise is actually received and in the hands of the Secretary of CGS. In the event the last day of a Limited Right Exercise Period shall fall on a day that is not a business day, then the last day thereof shall be deemed to be the next following business day. To the extent an Option or a Right pertaining thereto is exercised in whole or in part, the Limited Right in respect of such Option shall terminate and cease to be exercisable. To the extent a Limited Right is exercised in whole or in part, the Option (or part thereof) to which such Limited Right pertains and the Right (or part thereof) pertaining to such Option (or part thereof) shall terminate and cease to be exercisable. (ii) Notwithstanding anything to the contrary in the first sentence of Section 5(a)(ii) or in 5(a)(iv) or 5(b), the provisions of this Section 12(b)(ii) will be applicable in the event of a termination of a Participant's employment on or after a Change in Control and prior to the expiration of the Limited Right Exercise Period applicable thereto. No Option, Right or Limited Right held by a Participant shall terminate or cease to be exercisable as a result of his termination of employment on or after a Change in Control and prior to the expiration of the Limited Right Exercise Period applicable thereto, but shall be exercisable throughout the Limited Right Exercise Period applicable thereto; provided, however, that in no event shall any Option or Right be exercisable after ten years from its date of grant (except in the event of death as provided in Section 5(a)(iv)). (iii) A "Change in Control" shall be deemed to have occurred if (A) any person (as that term is used in Sections 13(d) and 14(d) of the Exchange Act, as in effect on February 28, 1997) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act, and the rules and regulations promulgated thereunder, as in effect on February 28, 1997) of stock of the Company entitled to cast more than the greater of (x) 20% or (y) the largest percentage owned by any other person of the votes at the time entitled to be cast generally for the election 15 of directors, (B) more than 50% of the members of the Board of Directors shall not be Continuing Directors (which term, as used herein, means the directors of CGS (x) who are members of the Board of Directors on February 28, 1997 or (y) who subsequently became directors of CGS and who were elected or designated to be candidates for election as nominees of the Board of Directors, or whose election or nomination for election by CGS's stockholders was otherwise approved, by a vote of a majority of the Continuing Directors then on the Board of Directors), (C) CGS shall be merged or consolidated with, or, in any transaction or series of transactions, substantially all of the business or assets of CGS shall be sold or otherwise acquired by, another corporation or entity and, as a result thereof, either (1) the stockholders of CGS immediately prior thereto shall not directly or indirectly have at least 50% or more of the combined voting power of the surviving, resulting or transferee corporation or entity immediately thereafter or (2) any person (as that term is used in Sections 13(d) and 14(d) of the Exchange Act, as in effect on February 28, 1997) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act, and the rules and regulations promulgated thereunder, as in effect on February 28, 1997) of more than the greater of (x) 20% or (y) the largest percentage owned by any other person of combined voting power of the surviving, resulting or transferee corporation or entity, or (D) any change in control of CGS shall have occurred of a nature that would be required to be reported in response to Item 1(a) of Form 8-K promulgated under the Exchange Act as in effect on February 28, 1997, regardless of whether CGS is at the time of such change in control subject to the reporting requirement thereof. Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred if an acquisition of stock that would otherwise constitute a Change in Control pursuant to clause (A) or (D) of the preceding sentence is made by the Company, by any corporation in a merger or consolidation that does not constitute a Change in Control pursuant to clause (C) of the preceding sentence or by any employee benefit plan (or related trust) sponsored or maintained by the Company. (c) Notwithstanding any other provision of the Plan, in the event that a Participant's employment is terminated on or after a Change in Control (as defined in Section 12(b)(iii)) (x) by the Company or (y) by the 16 Participant because the Participant in good faith believes that as a result of such Change in Control he is unable effectively to discharge his duties or the duties of the position he occupied immediately prior to such Change in Control or because of a diminution in his aggregate compensation or in his aggregate benefits below that in effect immediately prior to such Change in Control: (i) with respect to shares of Restricted Stock then outstanding, the Restriction Period with respect to such shares shall be deemed satisfied as of the date such Participant's employment is so terminated, but only as to that portion of such shares as is equivalent to the portion of the Restriction Period applicable thereto that has been satisfied as of such date without regard to this Section 12(c)(i); as of such date, the portion of such shares as to which the Restriction Period is deemed satisfied pursuant to this Section 12(c)(i) shall become nonforfeitable and all other of such shares shall be forfeited; and (ii) with respect to Performance Awards and Other Stock-Based Awards, including shares of Common Stock covered thereby, all such Performance Awards and Other Stock-Based Awards shall become nonforfeitable and shall be paid out on the date such Participant's employment is so terminated (A) as if all Performance Periods or other conditions or restrictions applicable thereto had been completed or satisfied, the maximum performance or other objectives with respect thereto had been attained and all Awards granted with respect thereto had been fully earned, but (B) prorated for the portion of any relevant Performance Period or other period ending on the date such Participant's employment is so terminated, unless prior to the Change in Control the Committee otherwise so provides. (d) In the case of a Participant whose principal employer is a Subsidiary, then such Participant's employment shall be deemed to be terminated for purposes of Sections 6 through 9 as of the date on which such principal employer ceases to be a Subsidiary (the "Divestiture Date") and, except to the extent otherwise determined by the Committee and set forth in the applicable Award Agreement: (i) with respect to shares of Restricted Stock held by such Participant, the Restriction Period shall be deemed satisfied as of the Divestiture Date, but only as to that portion of such shares as is equivalent 17 to the portion of the Restriction Period applicable thereto that has been satisfied as of the Divestiture Date without regard to this Section 12(d)(i); as of the Divestiture Date, the portion of such shares as to which the Restriction Period is deemed satisfied pursuant to this Section 12(d)(i) shall become nonforfeitable and all other of such shares shall be forfeited; and (ii) with respect to Performance Awards and Other Stock-Based Awards, including shares of Common Stock covered thereby, all such Performance Awards and Other Stock-Based Awards shall become nonforfeitable and shall be paid out on the Divestiture Date (A) as if all Performance Periods or other conditions or restrictions applicable thereto had been completed or satisfied, the maximum performance or other objectives with respect thereto had been attained and all Awards granted with respect thereto had been fully earned, but (B) prorated for the portion of the relevant Performance Period or other period ending on the Divestiture Date, all as determined by the Committee. In the event of a termination of the Plan, then each Participant's employment shall be deemed to be terminated for purposes of Sections 6 through 9 as of the date of such termination of the Plan and, except to the extent otherwise determined by the Committee and set forth in the applicable Award Agreement, the foregoing provisions of clauses (i) and (ii) of this Section 12(d) shall apply to such Participant's shares of Restricted Stock, Performance Awards and Other Stock-Based Awards with the same effect as if the date of such termination of the Plan were a Divestiture Date. 13. Amendment and Termination (a) The Board of Directors shall have the power to amend the Plan, including the power to change the amount of the aggregate fair market value of the shares subject to Incentive Stock Options first exercisable in any calendar year under Section 5 to the extent provided in Section 422, or any successor provision, of the Internal Revenue Code. It shall not, however, except as otherwise provided in the Plan, increase the maximum number of shares authorized for the Plan, nor change the class of eligible employees to other than Key Employees, nor reduce the basis upon which the minimum Option price is determined, nor extend the period within which Awards under the Plan may be granted, nor provide for an Option that is exercisable more than ten 18 years from the date it is granted except in the event of death. It shall have no power to change the terms of any Award theretofore granted under the Plan so as to impair the rights of a Participant without the consent of the Participant whose rights would be affected by such change except to the extent, if any, provided in the Plan or in the Award. (b) The Board of Directors may suspend or terminate the Plan at any time. No such suspension or termination shall affect Options, Rights or Limited Rights then in effect. 14. Withholding Taxes The Company shall have the right to deduct from any cash payment made under the Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of CGS to deliver shares upon the exercise of an Option or Right, upon payment of a Performance Award, upon delivery of Restricted Stock or upon exercise, settlement or payment of any Other Stock-Based Award that the Participant pay to the Company such amount as may be requested by the Company for the purpose of satisfying any liability for such withholding taxes. Any Award Agreement may provide that the Participant may elect, in accordance with any conditions set forth in such Award Agreement, to pay any withholding taxes in shares of Common Stock. 15. Effective Date The Plan shall be effective on and as of March __, 1997. 19 EX-5.1 8 OPINION OF CHADBOURNE & PARKE LLP EXHIBIT 5.1 Computer Generated Solutions, Inc. 1675 Broadway New York, New York 10019 Re: Computer Generated Solutions, Inc. Initial Public Offering of Common Stock ---------------------------------------- Ladies And Gentlemen: We have acted as special counsel to Computer Generated Solutions, Inc., a company organized under the laws of the State of Delaware (the "Company"), in ------- connection with the issuance and sale by the Company of up to 3,431,000 shares of Common Stock, par value $0.001 per share (the "Shares"), of the Company ------ (which includes up to 531,000 Shares that may be purchased by the underwriters solely for the purpose of covering over-allotments) (the "Company Shares") and as special counsel to Philip Friedman and Victor Friedman (the "Selling ------- Stockholders"), in connection with the sale by the Selling Stockholders of - ------------ 640,000 Shares (the "Selling Stockholder Shares"), all of the foregoing upon the terms and conditions of a public offering described in a Registration Statement on Form S-1 filed with the Securities and Exchange Commission (the "Registration Statement"). Capitalized terms used herein but not defined herein shall have the meanings set forth in the Registration Statement. We have examined originals, or copies certified to our satisfaction, of such records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company and the Selling Stockholders, and have made such other and further investigations, as we have deemed relevant and necessary as a basis for the opinion hereinafter set forth. In addition, we have relied as to matters of fact upon certificates of officers of the Company and of the Selling Stockholders. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. -2- March 3, 1997 We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York, the Federal law of the United States and the General Corporation Law of the State of Delaware. Based upon the foregoing, we are of the opinion that (i) the Company Shares will be validly issued, fully paid and nonassessable Shares when issued and sold by the Company and paid for by the Underwriters, all in the manner contemplated in the Registration Statement, and (ii) the Selling Stockholder Shares will be validly issued, fully paid and nonassessable Shares when sold by the Selling Stockholders and paid for by the Underwriters, all in the manner contemplated in the Registration Statement. We hereby consent to the filing of this opinion as a part of the Registration Statement and to the reference of our firm under the caption "Legal Matters" in the Prospectus filed as a part thereof. Very truly yours, Chadbourne & Parke LLP EX-10.1 9 SERVICE AGREEMENT DATED OCTOBER 4, 1995 EXHIBIT 10.1 Service Agreement Between International Business Machines Corporation and Computer Generated Solutions, Inc. October 04, 1995 Contact: Nancy Hiatt [ARTWORK] 303-924-5396 IBM Integrated Procurement Solutions 6300 Diagonal Highway P.O. Box 1900 Boulder, Colorado 80301-9191 Department: PRB1 Building: 001H Service Agreement Number 2165
Contents 1.0 SERVICE AGREEMENT............................... 1 1.1 Statement of Work............................... 1 1.2 Definitions..................................... 1 1.3 Subcontracting.................................. 2 1.4 Delegations and Assignments..................... 2 1.5 Payment and Records............................. 2 1.6 Confidential Information........................ 3 1.7 Information Asset Security Requirements 3 1.8 IBM Furnished Materials......................... 4 1.9 Rights In Data.................................. 4 1.10 Invention Rights............................... 5 1.11 Contractor's Employees......................... 5 1.12 IBM Regulations & Policies..................... 6 1.13 Former IBM Employees.......................... 7 1.14 Insurance...................................... 7 1.14.1 General Requirements......................... 7 1.14.2 Minimum Limits of Coverage................... 7 1.15 Contractor Safety on Premise................... 7 1.16 Indemnification................................ 8 1.17 Environment................................... 9 1.18 Compliance with Laws........................... 9 1.19 Trademark ..................................... 10 1.20 Monthly Report................................. 10 1.21 Electronic Data Interchange/Electronic Funds Transfer...................................... 10 1.22 Utilization of Minority Owned Businesses........ 11 1.23 Taxes.......................................... 11 1.24 Gifts and Gratuities........................... 11 1.25 Representations And Warranties................. 11 1.26 Quality And Acceptance ........................ 12 1.27 Cost Reduction................................. 13 1.28 General Provisions............................. 13 1.29 Notices........................................ 14 1.30 Modifications.................................. 14 1.31 Authority...................................... 14 1.32 Rate Schedule.................................. 14 1.33 Delivery Schedule ............................. 14 1.34 Term.......................................... 14 1.35 Termination and Cancellation.................. 14 1.36 Entire Agreement............................... 15 1.37 Order of Precedence............................ 15 2.0 SIGNATURES ..................................... 17 3.0 ATTACHMENT A: STATEMENT OF WORK................ 19 3.1 Project Description............................. 19 3.2 Manpower........................................ 19 3.3 Work Schedules.................................. 20 3.4 Skill Requirements.............................. 20 3.5 Job Descriptions................................ 21 3.6 Training....................................... 25 3.7 Transitional Training........................... 25 3.8 Measurements.................................... 25 3.9 Acceptance Criteria............................. 26 3.10 IBM Responsibilities........................... 26 3.11 Contractor Responsibilities.................... 27 3.12 Rate Schedule.................................. 27 3.13 Glossary of Terms............................. 29 4.0 TRAVEL EXPENSE GUIDELINES....................... 31 4.1.1 Expense Account Details..................... 31 4.1.2 Receipts.................................... 31 4.1.3 Transportation.............................. 31 4.1.4 Lodging and Meals .......................... 31 4.1.5 Personal Expenses........................... 32
1.0 SERVICE AGREEMENT This is a service agreement numbered 2165, made by and between International Business Machines Corporation (IBM), a corporation of the state of New York, having an office at 6300 Diagonal Highway, Boulder, Colorado 80301-9191, (hereinafter referred to as IBM), and Computer Generated Solutions, Inc., a corporation of the state of Delaware, having an office at 1675 Broadway, 31st Floor, New York, NY 10019 (hereinafter referred to as Contractor). 1.1 STATEMENT OF WORK Contractor shall provide IBM with call center and associated services as specified in the Statement of Work attachment(s) and in purchase orders issued by IBM and accepted by the Contractor. The Statement of Work shall be more fully described in the alphabetical attachments beginning with "A," appended to and made part of this Agreement. All Deliverables shall be performed in accordance with the terms and conditions of this Agreement and with the terms and conditions on the front and back of purchase orders issued from time to time by IBM and accepted by Contractor. Such purchase orders shall constitute the only authorization for Contractor to take any action or to expend any money for services hereunder. IBM will pay only the amount specified in purchase orders for such work. Contractor's services may include collaboration with and assistance to IBM personnel or others retained by IBM. In the event of any conflict between the terms and conditions of this Agreement and those of purchase orders issued hereunder, the terms and conditions of this Agreement shall prevail. IBM shall appoint a coordinator for each purchase order issued by IBM under this Agreement. This coordinator shall be responsible for maintaining technical liaison with Contractor's on-site supervisor and for determining for IBM the adequacy, acceptability, and fitness of the services performed by Contractor under such purchase orders. When work is done on IBM's premises, Contractor shall at all times provide on such IBM premises supervisory personnel acceptable to IBM to supervise Contractor's employees. Contractor shall notify IBM of the name of the supervisor responsible for the work. The supervisor shall have authority to act as agent for Contractor in Contractor's absence. 1.2 DEFINITIONS 1. "Deliverables" means all the items, material, or services prepared or performed for or submitted to IBM under this Agreement. 2. "Confidential Information" means oral or written information which relates to the past, present, or future research, development, or business activities of IBM or its direct or indirect subsidiaries whether or not identified as IBM Confidential Information, including the names, addresses, phone numbers, and requirements of IBM's contractors, customers, and prospective customers. The contents of any reports prepared by Contractor hereunder shall be treated as Confidential Information. No obligation of confidentiality applies to any information that the Contractor: (a) already possesses without obligation of confidentiality; (b) develops independently; or (c) rightfully receives without obligation of confidentiality from a third party. No obligation of confidentiality applies to information that is, or becomes, publicly available without breach of this Agreement. 3. "Invention" means any idea, design, concept, technique, invention, discovery, or improvement, whether or not patentable, made solely or jointly by Contractor or Contractor's employees with one or more employees of IBM during the term of this Agreement and in the performance of services hereunder, provided that either the conception or first actual reduction to practice occurs during the term of this Agreement and in the performance of services hereunder. 4. "Preexisting Materials" means any materials included in the Deliverables necessary for effective utilization thereof but which were developed outside the scope of work encompassed by this Agreement. 5. The term "Subsidiary" means a corporation, company, or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are; or which does not have outstanding shares or securities, as may be the case in a partnership, joint venture, or unincorporated association, but more than fifty percent (50%) of whose ownership interest (representing the right to make the decisions for such corporation, company, or other entity) is; now or hereafter, owned or controlled, directly or indirectly, by a party hereto, but such corporation, company, or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. 6. "Subcontractor On Premise" (SCOP) is defined as employees of another company specializing in selling services and providing personnel for short term projects. SCOPs typically are integrated with the IBM work force, possess skills similar to IBM employees, receive technical direction from IBM management and personnel management from their parent company, and are subcontracted for time and workload. 7. "Vendors On Premise" (VOP) is defined as employees of another company who have been selected by that company to accomplish a defined scope of work. The work performed will normally require at least four or more contractor personnel for an initial period of at least six months. Work direction and technical information required shall be provided by the contractor supervisor. The contractor supervisor shall be responsible to provide supervision and control over the work of the contractor's personnel. Office space provided by IBM shall minimize casual commingling between IBM employees and the contractor personnel. 1.3 SUBCONTRACTING Contractor shall not subcontract the work to be performed under this Agreement without IBM's consent in writing, but Contractor may purchase goods it normally purchases to perform the work. 1.4 DELEGATIONS AND ASSIGNMENTS Contractor shall not delegate any duties under this Agreement without IBM's prior written consent. Contractor shall inform IBM prior to any assignments of rights to moneys due or to become due under this Agreement. 1.5 PAYMENT AND RECORDS 1. IBM will pay Contractor for services under this Agreement in accordance with the Statement of Work and as specified on the purchase orders issued hereunder by IBM. 2. Invoices are to be sent to IBM Corporation, National Accounts Payable Services, P.O. Box 9001, Endicott, NY 13761-9001. The purchase order number and the terms of payment shall be stated on the invoices. 3. The date used for calculation of terms of payment shall be the date IBM receives an acceptable invoice. 4. Contractor shall maintain complete and accurate accounting records in a form according to sound accounting practices to substantiate Contractor's charges. Such records shall include payroll records, job cards, attendance cards, and job summaries. Contractor shall retain such records for one (1) year from the date of final payment hereunder. 5. IBM shall have access to such records for purposes of audit during normal business hours during the term of this Agreement and during the respective periods in which Contractor is required to maintain such records as herein provided. 6. No overtime or premium rate will be paid without the prior approval of the IBM Purchasing Contract Administrator/Buyer. - -------------------------------------------------- 1.6 CONFIDENTIAL INFORMATION Contractor and its employees will have access to IBM Confidential Information and the following terms shall govern all disclosures of Confidential Information to Contractor and its employees regardless of whether such Confidential Information is removed from IBM's premises. 1. Contractor shall hold all Confidential Information in confidence for IBM and shall not use Confidential Information or disclose it by publication or otherwise to any other person during the term of this Agreement and for a period of two (2) years thereafter other than those persons whose services Contractor requires and who have a need to know such Confidential Information for purposes of carrying out the terms of this Agreement and who agree in writing to be bound by and to comply with the provisions of this Section. 2. Upon termination or expiration of this Agreement, Contractor shall return to IBM all written or descriptive matter including but not limited to drawings, blueprints, descriptions, or other papers, documents, tapes, or any other media which contain any Confidential Information. In the event of a loss at any time of any item containing Confidential Information, Contractor shall promptly notify IBM in writing. 3. Contractor shall not make any copies of any writings, documents, or other media containing Confidential Information provided by IBM. If copies of such writings, documents, or other media are necessary for performing services under this Agreement, they will be provided by IBM upon Contractor's written request. 4. Contractor shall secure all writings, documents, and other media containing Confidential Information in locked files at all times when not in use to prevent its loss or unauthorized disclosure and segregate Confidential Information at all times from the material of others. IBM agrees to pay all reasonable costs incurred in accomplishing the foregoing. All such costs must be agreed to in writing by IBM prior to any expenditure by Contractor. 5. Contractor will not disclose any information Contractor's company deems Confidential or proprietary without an IBM Agreement for Exchange of Confidential Information (AECI) that both parties have signed. - -------------------------------------------------- 1.7 INFORMATION ASSET SECURITY REQUIREMENTS IBM information asset equipment utilized by the Contractor is intended for the exclusive use of supporting IBM business requirements as defined in this Agreement. The Contractor will adhere to the following requirements for the purpose of protecting IBM information assets: 1. Computing installations and support facilities are to be administered as areas of restricted physical access when information classified IBM Confidential or higher is stored on-line. 2. Access to IBM's information assets are to be restricted to authorized individuals only. The Contractor must communicate the names and telephone number of those authorized individuals to IBM. The Contractor will maintain a list of users, including the name and IBM user ID. 3. Access passwords to IBM networks and IBM application systems are considered IBM Confidential data. 4. Access passwords to IBM networks and IBM application systems will be issued by IBM to the Contractor. An access password must not be used by any individual other than the individual to whom the access password was issued. 5. The Contractor shall notify IBM when Contractor personnel changes result in a required discontinuance of access to IBM networks or application systems. 6. The Contractor shall immediately notify IBM of any suspected compromise of IBM password confidentiality. 7. The Contractor shall ensure that IBM equipment is connected only to IBM via an authorized IBM network or other approved connection. 8. The Contractor shall ensure that IBM terminals in use are attended while in use to protect against unauthorized access. 9. The Contractor shall notify IBM when invoking a backup telecommunications link via dial-up over a public telecommunications network. Use of dial-up telecommunications over a public network is restricted to those instances when direct line link is unavailable or when IBM specifically instructs the Contractor to use dial up telecommunications. 10. Screen access is controlled by IBM. If access is achieved by the Contractor that is not related to this Agreement, the Contractor will advise IBM immediately. - -------------------------------------------------- 1.8 IBM FURNISHED MATERIALS Unless otherwise agreed in writing, Contractor will supply all materials, equipment, tools, and facilities required to perform this Agreement. All materials, equipment, and tools furnished to Contractor by IBM or specifically paid for by IBM ("Materials"), and any replacement thereof, or any materials affixed or attached thereto, shall be and remain the property of, with the right of possession in, IBM. Contractor shall use the Materials only in performing work for IBM and not otherwise. Contractor shall, at its expense, maintain all Materials in good condition and repair, replacing any such Materials if necessary. While in Contractor's custody or control, all Materials shall be kept and insured by the Contractor at its expense against loss and/or damage in an amount equal to their replacement cost and shall be subject to removal at IBM's written request, in which event Contractor at its expense shall prepare such Materials for shipment and shall deliver them to IBM in the same condition as originally received by Contractor. Contractor shall promptly notify IBM of the location of any Materials not located at Contractor's address as specified in this Agreement. Contractor shall maintain accountability and property control records of all Materials in accordance uith sound commercial practice. IBM reserves the right to review such records and to take its own inventory as often as IBM deems necessary. Contractor agrees to count and provide written confirmation of receipts from IBM of any IBM furnished Materials. Upon completion or termination of this Agreement, Contractor shall obtain from IBM shipping instructions or other authorization instructions prior to returning any Materials to IBM. - -------------------------------------------------- 1.9 RIGHTS IN DATA 1. All of the "Deliverables" except preexisting materials shall belong exclusively to IBM and shall be deemed to be works made for hire. 2. To the extent that any of the Deliverables may not, by operation of law, be works made for hire, Contractor hereby assigns to IBM the ownership of all rights in such part of the Deliverables and IBM shall have the right to obtain and to hold in its own name copyrights, registrations, and whatever protection which may be available in the Deliverables. Contractor agrees to give IBM or its designees all assistance reasonably required to perfect such rights. 3. To the extent that any preexisting materials of Contractor are contained in the Deliverables, Contractor hereby grants to IBM an irrevocable, non-exclusive, worldwide, royalty-free license to: use, execute, reproduce, display, perform, distribute (internally or externally) copies of, and prepare derivative works based upon such preexisting materials and derivative works thereof; and, authorize others to do any, some, or all of the foregoing. Contractor shall obtain IBM's prior written approval before incorporating any of Contractor's preexisting materials in the Deliverables. 4. Should Contractor and IBM mutually agree that there is a requirement to include in the Deliverables the materials of a third party, Contractor agrees to obtain all necessary rights and or licenses from such third party at Contractor's expense. The terms and conditions of such rights and licenses are subject to IBM's approval and must, at a minimum, enable IBM to l) use, execute, reproduce, display, perform, distribute (internally and externally) copies of, and prepare derivative works based upon, such materials of a third party and derivative works thereof; 2) authorize others to do any, some or all of the foregoing. Upon IBM's request, Contractor shall deliver to IBM a complete copy of every agreement, license, or other arrangement from which Contractor derives authority to grant IBM rights and licenses granted under this Agreement. Contractor shall obtain IBM's prior written approval before incorporating the materials of a third party in the Deliverables. 5. No license or right is granted to Contractor either expressly or by implication, estoppel, or otherwise to publish, reproduce, prepare derivative works of, distribute copies of, publicly display or perform any of the Deliverables except preexisting materials of Contractor, either during or after the term of this Agreement. 6. The Contractor shall satisfactorily complete and return to IBM, when required, a Vendor Certificate of Originality, as specified in Exhibit 1 of this Agreement. This pertains to all programming software work at the completion of such software work or earlier if so requested by IBM. The acceptance of the properly completed certificate is a condition of final payment by IBM for the finished material. - -------------------------------------------------- 1.10 INVENTION RIGHTS 1. Contractor shall promptly make a complete written disclosure to IBM of each Invention, specifically pointing out the features or concepts which Contractor believes to be new or different. 2. Contractor hereby assigns to IBM, its successors, and assigns, any Invention together with the right to seek protection by obtaining patent rights therein, and to claim all rights of priority thereunder, and the same shall become and remain IBM's property whether or not such protection is sought. 3. Contractor shall, upon IBM's request and at IBM's expense, cause patent applications to be filed on any Invention, through solicitors designated by IBM and forthwith assign all such applications to IBM, its successors and assigns. Contractor shall give IBM and its solicitors all reasonable assistance in connection with the preparation and prosecution of any such patent applications and shall cause to be executed all such assignments and other instruments and documents as IBM may consider necessary or appropriate to carry out the intent of this Section. 4. To the extent that IBM has the right to do so, IBM hereby grants to Contractor an irrevocable, nonexclusive, nontransferable, and fully paid-up license throughout the world under any Inventions assigned to IBM pursuant to this Section and under any patents throughout the world issuing thereon including reissues, extensions, divisions, and continuations thereof; provided, however, that such license is not applicable to any Inventions, patent applications, or patents related to appearance designs. 5. Nothing contained in this Agreement shall be deemed to grant either directly or by implication, estoppel, or otherwise, any license under any patents or patent applications arising out of any other inventions of either party. - -------------------------------------------------- 1.11 CONTRACTOR'S EMPLOYEES 1. Contractor shall have an appropriate agreement with each of its employees or others whose services Contractor may secure to perform hereunder, sufficient to enable it to comply with all of the terms of this Agreement including this section. 2. Contractor agrees to take appropriate preventive steps before the assignment of any of its employees to perform work under this Agreement that it reasonably believes will ensure that its employees and its subcontractors' employees at any level will not engage in inappropriate conduct while on IBM premises. Inappropriate conduct shall include but is not limited to: being under the influence of or affected by alcohol, illegal drugs, or controlled substances; the manufacture, use, distribution, sale/or possession of alcohol, illegal drugs, or any other controlled substance except for approved medical purposes; the possession of a weapon of any sort; or harassment, threats/or violent behavior. Violation of this provision may result in termination of this Agreement and any other remedy available to IBM at law or in equity. 3. Contractor agrees to distribute the following notice concerning sexual harassment to any of its employees who are assigned to work on IBM premises: "IBM is committed to providing a work environment free from sexual harassment. Sexual harassment is unwelcome sexual conduct which has the purpose or effect of unreasonably interfering with an individual's work performance or which creates an offensive or hostile work environment. If you believe that you have been the victim of sexual harassment while working on IBM premises, you are encouraged to report such incidents directly to your employer and directly to IBM by calling IBM Corporate Security at 8/251-4885 or (914) 765-4885 between 8:30 a.m. and 5:00 p.m. Eastern time. If you are calling long distance from outside IBM, you may call this number collect. All complaints to IBM of such conduct will be investigated promptly and dealt with appropriately." 4. IBM shall have access to the documentation necessary to verify compliance with Contractor's commitment in this entire section. 5. IBM may, at its sole discretion, request that Contractor remove any specified employees of Contractor from IBM's premises and that they not be reassigned to any IBM premises under this Agreement. No reason is required of IBM for such request. Contractor hereby agrees to take action immediately to remove such specified employees and to ensure that such reassignment does not occur. 6. Personnel supplied by Contractor shall be deemed employees of Contractor and shall not for any purpose be considered employees or agents of IBM. Contractor assumes full responsibility for the actions of such personnel while performing services pursuant to any purchase order issued hereunder and shall be solely responsible for their supervision, daily direction and control, payment of salary (including withholding of income taxes and social security), worker's compensation, disability benefits, and the like. 7. Except as specified in attachment A: Statement of Work, Section 3.6, all training of Contractor's employees shall be conducted by the Contractor. In the event that IBM conducts such training of Contractor's employees, Contractor shall reimburse IBM for such training at a price not less than the Training Specialist bill rate specified in Section 3.12. 8. Contractor shall not conduct non-production meetings, hold perspective employee interviews, or terminate employees on IBM premises. 9. In the event of cancellation, termination or expiration of this Agreement, Contractor shall not prohibit its employees assigned to work under this Agreement from seeking immediate employment with IBM or another third party employer. The management and teamleader positions are excluded from this provision. - -------------------------------------------------- 1.12 IBM REGULATIONS & POLICIES Contractor personnel are not eligible to use or to participate in the following: IBM Credit Union IBM Club recreational or social activities Voluntary education programs IBM Suggestion Program Any IBM awards program Cashier Contractor personnel shall not make personal use of: IBM tools, test equipment, etc. IBM bulletin boards Telephones Copiers Internal computing systems Contractor personnel shall: Wear badges at all times and comply with all IBM security procedures Not remove any IBM property nor take any work off IBM premises Comply with Confidential Information Section of this Agreement While working at IBM, contractor personnel shall observe the following rules: No liquor or drug abuse No fighting, horseplay, etc. No dishonesty No firearms, knives, or other weapons No foul language No gambling No promiscuous conduct No solicitation No ethnic or racial or sexual jokes or slurs No sexual harassment No threats No misuse of IBM assets including copiers, systems, or facsimiles - -------------------------------------------------------------------------------- 1.13 Former IBM Employees 1. Contractor shall inform IBM Purchasing when Contractor plans to assign a former IBM employee to perform work under this Agreement whether or not on IBM premises. IBM reserves the right to approve or to disapprove the assignment. 2. Nothing contained in this Agreement shall be construed as granting to Contractor or any employee of Contractor rights under any IBM employee benefit plan. - -------------------------------------------------------------------------------- 1.14 Insurance 1.14.1 General Requirements Supplier shall, at its own expense, provide and keep in full force and effect during the term of the Agreement at least the following kinds and minimum amounts of insurance covering its services in the state(s) in which the work is to be performed. 1. Worker's Compensation Insurance and Employer's Liability Insurance. 2. Commercial General Liability Insurance including personal and advertising injury with the following extensions of coverage: 2.1. "Premises Operations" 2.2. "Products and Completed Operations" for two years following expiration or termination of the Agreement.+ 2.3. "Contractual Liability" for the liability assumed by Supplier under the Section entitled "Indemnification" General Liability Insurance requirements for sole proprietors operating as IBM suppliers will be satisfied by procuring a Business Owners Policy with a $1,000,000 limit of liability. 3. Comprehensive Automobile Liability Insurance for personal injury and property damage for owned and non-owned, and hired vehicles used by Supplier while performing service in connection with the Agreement. 4. Supplier shall provide IBM with a Certificate of Insurance upon request evidencing the insurance specified in this Section. 5. Insurance coverage must include the following requirements: 5.1. IBM named as Certificate holder. 5.2. Minimum of 30 days notice of any changes or cancellations to policy 5.3. IBM named as an additional insured under 2 and 3 above. +Note: Products and Completed Operations Coverage not required of suppliers who are not at all involved in the manufacturing or sales process related to products (i.e.: consultants, maintenance). 1.14.2 Minimum Limits of Coverage COVERAGE MINIMUM LIMITS - -------------------------------------------------------------------------------- Worker's Compensation ... Statutory requirements of the state of which the work is to be done. Employer's Liability ... Not less than $100,000 Commercial General Liability++ A. Bodily Injury ... $1,000,000 each occurrence B. Property Damage ... $1,000,000 each occurrence $1,000,000 combined single limit acceptable for A&B. ++Includes Premises Operations, Products and Completed Operations, and Contractual Liability. Comprehensive Automobile Liability (owned, non-owned and hired) A. Bodily Injury ... $250,000 each person ... $500,000 each occurrence B. Property Damage ... $200,000 each occurrence - -------------------------------------------------------------------------------- 1.15 Contractor Safety on Premise 1. At their own expense, Contractor or its Subcontractors of any tier entering IBM's premises shall comply with the Occupational Safety and Health Act of 1970, as amended, and all regulations and standards. 2. Contractor shall notify IBM promptly in writing if a charge of non-compliance with the Occupational Safety and Health Act of 1970, as amended, has been filed against the Contractor in connection with any services being performed hereunder on IBM owned or leased premises. 3. For Contractor's projected to work 500 hours or more at an IBM location providing construction or manufacturing type services, Contractor must provide evidence of a satisfactory safety program to IBM consisting of the following elements and performance standards at IBM's request: . Contractor's OSHA Accident/Illness Frequency Rate number, no greater than industry average for SIC code (annually). . Contractor's SIC Code. . Contractor's OSHA 200 Log (copy) if contract extends beyond one year. . Contractor's OSHA Lost Workday Frequency Rate (Preferably below 1.5). . Contractor's Workers Compensation Experience Modification Rate (EMR) (Rate no greater than 1.0, without evidence of Contractor's progress toward this level). . Contractor's Safety Officer responsible for administering Safety and Health programs. . Copy of Contractor's Safety Program that addresses all aspects of the work to be performed for IBM such as Protective Equipment, HAZCOM, Lockout Tagout, Electrical Safety Work Practices, Confined Space, Accident Reporting, and General Office Safety. . Copy of Contractor's training programs for those tasks requiring specific safety related training. 4. General Contractors must ensure that any subcontractors they bring on IBM premises must also meet the above criteria. 5. IBM shall monitor and evaluate Contractor's performance under this section. Any non-compliance may result in termination of this Agreement. Past and present performance under this section will be considered in the awarding of future business. - -------------------------------------------------------------------------------- 1.16 Indemnification Contractor will at its expense, indemnify, defend and save IBM harmless against any claims (including costs of litigation and attorneys' fees, loss, damage, penalty, fine, or expense whatsoever) resulting from: 1. a breach or alleged breach of Contractor's warranties or representations under this Agreement; 2. Contractor's failure to comply with any governmental law, statute, ordinance, administrative order, rule, or regulation; 3. Contractor's or Subcontractor's failure to comply with the Occupational Safety and Health Act of 1970, as amended, and all regulations and standards; 4. for personal injury or death to persons and damage to property (including IBM's property) arising out of or in connection with or resulting from operations under this Agreement to the extent that such injuries, deaths, or damage are caused by the Contractor or any of its Subcontractors or by anyone directly or indirectly employed by any of them; 5. any alleged or actual infringement by any Deliverable, or any preexisting or third party materials from which any Deliverables are prepared, of a patent, copyright, trademark, trade secret, or other intellectual property right, privacy or similar right of any third party, in any country in the world. Contractor shall notify IBM if Contractor is or becomes aware of any right of, or protection accorded to, a third party as set forth above that might affect Contractor's ability to provide goods under this Agreement or limit IBM's freedom to use or sell such goods anywhere in the world. IBM shall provide notice to Contractor of any such proceeding or claim of which it becomes aware. IBM may actively participate in any such proceedings at its own expense. Contractor shall have no liability for required compliance by Contractor with written specifications furnished by IBM if such infringement cannot be avoided by the Contractor in complying with such specifications. - -------------------------------------------------------------------------------- 1.17 Environment 1. Contractor certifies that it is currently in compliance and that it shall comply with all federal, state, and local laws, rules, orders, and regulations relating to the protection of the environment and related matters. Contractor acknowledges that any chemical, material, or waste that may be used or generated in its processes is solely its responsibility to properly handle, use, store, treat, and dispose of in accordance with the applicable environmental laws and regulations. 2. Contractor agrees to provide IBM promptly, upon request, with any and all relevant information concerning its compliance with applicable environmental laws and regulations, including copies of required permits, EPA ID Numbers, waste manifest documents, and other appropriate federal, state, and local authority required documentation. Contractor also agrees, upon reasonable notice and during normal office hours, to permit IBM to inspect its premises and to audit its relevant records for the purpose of determining Contractor's compliance with all applicable environmental laws and regulations. 3. In the event that IBM specifications require the Contractor to use materials or chemicals that are not commonly used by the Contractor, before commencing work on the process, Contractor will represent in writing to IBM that it has the necessary expertise to use, control, and dispose of any such materials or wastes generated in the process, if any, in accordance with all appropriate and applicable environmental laws and regulations. - -------------------------------------------------------------------------------- 1.18 Compliance with Laws 1. General Contractor shall, at its own expense, comply with all governmental laws and regulations relating to its duties, obligations, and performance under this Agreement, including without limitation, Executive Order 11246 (as amended) of the President of the United States on Equal Employment Opportunity and the Rules and Regulations issued pursuant thereto, all environmental laws, ordinances, codes, rules, regulations, license and permit provisions, guidelines and directives, the Immigration Reform and Control Act of 1986, the Foreign Corrupt Practices Act, and the import and export laws and regulations of the United States Customs Services, the United States Department of Commerce and Department of State, and shall procure all licenses and pay all fees and other charges required thereby. Contractor shall notify IBM promptly, in writing, if a charge of non- compliance with the Occupational Safety and Health Act of 1970 has been filed against the Contractor in connection with services being performed hereunder on IBM owned or leased premises. 2. Leased Employees and Management Services Organization Contractor shall provide IBM any information about Contractor's personnel that IBM is required by law to obtain, including information on "leased employees" and "management services organization" as these terms are used in Secs. 414(m), (n) and (o) of the Internal Revenue Code. 3. Former DOD Employees Contractor warrants that no individual who is a former officer or employee of the Department of Defense (DOD) who: left DOD service on or after April 16, 1987; and served in a civilian position for which the rate of pay is equal to or greater than the minimum rate of pay for GS-13; or served in the Armed Forces in a pay grade of 04 or higher; shall be employed or compensated for services rendered under this Agreement within two (2) years after leaving service in DOD without the specific written approval of IBM. If Contractor requests such approval, Contractor agrees to provide IBM with any information needed to comply with 10 USC 2397 (b) and (c). 4. DTC ITAR Contractor warrants that it is not the subject of an indictment or conviction of the criminal statutes enumerated in 22 CFR Part 120.24, or is ineligible to contract with, or to receive a license or other approval to import defense articles or defense services from, or to receive an export license or other approval from any agency of the U.S. Government. Contractor must notify IBM immediately if it becomes the subject of an indictment or conviction of the criminal statutes enumerated in 22 CFR Part 120.24. 5. Contractor agrees that neither Contractor nor any of its agents or employees will export or re-export any information of IBM or any process, product, or service that is produced as a result of the use of such information to any country specified in such Export Regulations as a prohibited destination without first obtaining U.S. Government approval by application through IBM. Upon request, IBM will advise Contractor of the countries then specified in such regulations as prohibited destinations. 6. Boycotts Contractor shall comply with Part 769 of the U.S. Export Regulations concerning Restrictive Trade Practices or Boycotts. Contractor may not alter or add any statements to IBM documentation including, but not limited to IBM commercial invoices, IBM manifests, carrier air waybills, ocean bills of lading, certificates of origin, insurance certificates, consul documentation, or any other documentation. Contractor may not provide any information whether positive or negative concerning IBM's past, present, or future business: 6.1. With or in a boycotted country; 6.2. With any business concern organized under the laws of a boycotted country; 6.3. With any national or resident of a boycotted country; or 6.4. With "Black List" organizations or persons. Contractor will advise IBM of all boycott related requests that Contractor receives in connection with any IBM shipment, including but not limited to requests Contractor is required to report to the U.S. Department of Commerce in accordance with U.S. regulations. - -------------------------------------------------------------------------------- 1.19 Trademark Nothing in this Agreement grants either party any rights to use the other party's trademarks or trade names, directly or indirectly, in connection with any product, service, promotion, or publication without the prior written approval of the trademark owner. - -------------------------------------------------------------------------------- 1.20 Monthly Report Contractor with employees working on IBM premises shall submit a monthly report due by the fifth (5th) of each month listing the employee names, IBM purchase order numbers, and the rates of each of the Contractor's employees for the previous month. This report shall be submitted to the procurement administrator of this Agreement. - -------------------------------------------------------------------------------- 1.21 Electronic Data Interchange / Electronic Funds Transfer When business documents are transmitted electronically the following terms and conditions apply: 1. Transmission - Each party may electronically transmit and receive documents through the assistance of a network in accordance with mutually agreed upon standards. Each party shall be responsible for all network charges. If both parties use the IBM Information Network, the sender will be responsible for the transmission costs. 2. Receipt - A document is received when it arrives at the receiving party's mailbox. Upon receipt of any document, the receiving party shall promptly send an acceptance which will conclusively establish receipt and content of a document. If any document is received in an unintelligible or garbled form, the receiving party shall promptly notify the originating party (if identifiable from the received document) in a reasonable manner. In the absence of such a notice, the originating party's records of the contents of such document shall prevail. 3. Signature and Enforceability - Each party shall adopt as its signature an electronic identification consisting of symbols or codes (User ID) that shall be affixed to or contained in each document. Each party will maintain security procedures to prevent unauthorized use or disclosure of its User ID. Any document containing, or to which there is affixed, a User ID shall be considered: (a) a "writing" or "in writing"; (b) to have been "signed"; (c) an "original" when printed from electronic files or records established and maintained in the normal course of business; and (d) "admissible" to the same extent and under the same conditions as other business records originated and maintained in documentary form. 4. Confidential Information - The parties agree that all information transmitted shall comply with the Confidential Information Section of this Agreement. 5. Electronic Funds Transfer - By completing this Section, Contractor authorizes IBM to initiate electronic credit entries to the account listed below. Contractor agrees that such transactions will be governed by the National Automated Clearing House Association rules. This authority is to remain in effect until IBM has received written notification of termination in such time and such manner as to afford IBM a reasonable opportunity to act on it. ------------------------------------------------------------ Financial Institution: ------------------------------------------------------------ City, State ------------------------------------------------------------ Account Number: (max 17) ------------------------------------------------------------ Bank Routing/Transit Code: (max 9) 6. Limitation of Remedies - Neither party shall be liable to the other for any special, incidental, exemplary, or consequential damages arising from or as a result of: (l) any delay, omission, or error in the electronic transmission or receipt of any documents; or (2) any delay, omission, or error of an electronic credit entry by IBM even if the other party has been advised of the possibility of such damages. In addition, neither party shall be liable for any damages claimed by the other party based on any third party claim. In no event will either party be liable for any damages caused by the other party's failure to maintain security procedures to prevent the unauthorized use or disclosure of its User ID. - -------------------------------------------------------------------------------- 1.22 Utilization of Minority Owned Businesses l. In support of the services and products being provided herein, Contractor shall, when subcontract/purchasing opportunities exist, attempt to utilize minority owned suppliers to fulfill requirements of this contract. 2. Upon IBM request, Contractor shall provide reports to include the name and address of the minority owned suppliers utilized, description of services or products provided, dollar value of services or products, and a summary of efforts to utilize minority owned businesses. 3. A minority-owned business is defined as 51% or more owned and controlled by members of the following minority groups: Black Americans, Hispanic Americans, American Indians, native Hawaiians, Asian-Indian Americans, Asian- Pacific Americans, American Eskimos or Aleuts. The minority-owned supplier must certify their status. - -------------------------------------------------------------------------------- 1.23 Taxes 1. Contractor is responsible for all federal and state payroll taxes such as social security and unemployment taxes. 2. Contractor agrees to pay any taxes imposed by law related to the service provided hereunder unless otherwise agreed to in writing by IBM. - -------------------------------------------------------------------------------- 1.24 Gifts and Gratuities Contractor shall not make or offer a gratuity or gift of any kind to IBM employees or their families that could be viewed as relating to an actual or potential business relationship with IBM. Gifts include entertainment, personal services, favors, discounts, and other preferential treatment of any kind. IBM will interpret any such action as an improper attempt to influence IBM employees which will jeopardize IBM's relationship with the Contractor. - -------------------------------------------------------------------------------- 1.25 Representations And Warranties l. Contractor represents and warrants the originality of the Deliverables and that no portion of the Deliverables or their use or distribution violates or is protected by any copyright or other rights of any third party except as provided in the fourth paragraph of the "Rights In Data" section of this Agreement. 2. Contractor represents and warrants that it is under no obligation or restriction nor will it assume any such obligation or restriction which would in any way interfere or be inconsistent with or present a conflict of interest concerning the services to be furnished by Contractor under this Agreement. 3. Contractor represents and warrants that all Deliverables shall be free of any computer code, programming instruction, or set of instructions that are intentionally constructed with the ability to damage, interfere with, or otherwise adversely affect computer programs, data files, or hardware. 4. In providing services under this Agreement, Contractor understands that IBM does not wish to receive from Contractor any information which may be considered confidential or proprietary to Contractor or to any third party. Contractor represents and warrants that any information disclosed by Contractor to IBM is not confidential or proprietary to Contractor or to any third party. 5. Contractor represents and warrants that all Deliverables shall be free from defects in design, materials, and workmanship for a period of one year unless longer warranties are required in the Statement of Work in which case the longer periods of time shall prevail. 6. Contractor represents and warrants that Contractor maintains comprehensive general and vehicular liability insurance for claims for damages because of bodily injury or death and property damage caused by or arising out of acts or omissions of its employees. Contractor further represents and warrants that Contractor maintains sufficient contractual liability insurance to cover the liabilities assumed by Contractor under this Agreement. In no event shall any insurance be cancelled, be allowed to lapse or be materially modified without prior written notice to IBM. 7. Contractor represents and warrants that in all dealings leading to the execution of this Agreement, Contractor has been represented solely by its own bona fide employees or agents and that it has not paid or agreed to pay any other person any commission, percentage, brokerage, or contingent fee. Contractor also warrants that it has not made and will not make any gifts, loans, or grant other consideration to any employee of IBM, directly or indirectly, in connection with this Agreement or otherwise. The falsity or breach of either such warranty shall constitute a default under this Agreement. 8. Contractor represents and warrants that the price of the products or services purchased under this Agreement does not exceed the price charged by Contractor to any other customer purchasing the same products or services in like or smaller quantities, and under similar conditions of purchase. 9. Contractor represents and warrants that Contractor will not in any way, directly or indirectly, at any time during the term of this Agreement or any renewal thereof, or within two (2) years after its termination or expiration, solicit, divert, take away, or attempt to solicit, divert or take away from IBM any customers or prospective customers of IBM who were served by Contractor during the term of this Agreement, or whose names and/or addresses became known to Contractor in any manner during the term of this Agreement. Contractor also represents and warrants that it will not, during the term of this Agreement or within two (2) years thereafter, attempt or seek to cause any of the customers of IBM to refrain from patronizing IBM and will not assist any other persons to do so. - -------------------------------------------------------------------------------- 1.26 Quality And Acceptance 1. Contractor shall establish a quality improvement plan that demonstrates continuous quality improvement on the products and or services provided to IBM. Contractor must conform to the Malcolm Baldrige National Quality Award criteria, the ISO 9000 Standards, or an equivalent documented quality improvement process. IBM may audit Contractor's quality improvement plan for conformance to this requirement. 2. Contractor shall notify IBM in writing at the earliest possible time of any factor, event, or anticipated event that may affect Contractor's ability to meet the requirements of any Statement of Work, including changes in the assignment of key employees, strikes, or unavailability of critical resources. The issuance of such notice shall not excuse the Contractor from any default of performance obligation. 3. IBM shall have the right to conduct progress reviews at Contractor's place of business to verify that Contractor's performance is in accordance with the standards, specifications, and other requirements of the Statement of Work. Contractor shall take all actions necessary to correct any deficiencies identified by IBM during such reviews. Contractor's failure to correct such identified deficiencies or to obtain IBM's agreement on a plan to correct such deficiencies within ten (10) work days after receipt of such notice and to diligently proceed in accordance with such plan shall be grounds for termination of the Statement of Work by IBM in accordance with the Termination Section of this Agreement. 4. IBM shall have the right to evaluate and to test each Deliverable in accordance with the completion and acceptance criteria specified in the Statement of Work. IBM shall provide Contractor with written notification of its acceptance or rejection of the Deliverable. In the case of rejection or partial or conditional acceptance, such notification shall state the reasons for IBM's determination. Contractor shall correct any deficiencies preventing final acceptance at no additional charge to IBM and obtain IBM's agreement on a plan to correct such deficiencies within ten (10) work days after receipt of such notification. Contractor's failure to correct such deficiencies or to obtain IBM's agreement on such a plan and to proceed diligently in accordance with such plan shall be grounds for termination by IBM of the Statement of Work in accordance with the Termination Section of this Agreement. - -------------------------------------------------------------------------------- 1.27 Cost Reduction Contractor shall implement methods of improved productivity designed to facilitate cost reductions resulting in price reductions to IBM of at least 3% annually during the term of the Agreement. In the event that market conditions permit Contractor to reduce its costs further, Contractor shall provide additional cost reductions to IBM. In the event that market conditions beyond Contractor's control offset some or all of the agreed upon annual price reductions, Contractor shall notify IBM in writing, detailing the market conditions. If IBM agrees that such market conditions exist, IBM and Contractor shall negotiate in good faith to reach a mutually agreeable price reduction. - -------------------------------------------------------------------------------- 1.28 General Provisions 1. The rights and obligations of Sections titled Payment and Records, Confidential Information, Rights in Data, Invention Rights, Compliance with Laws, IBM Trademarks, and Warranties shall survive and continue after any expiration or termination of this Agreement and shall bind the parties and their legal representatives, successors, heirs, and assigns. 2. This Agreement does not imply any commitment to purchase products or services by either party. 3. IBM may at any time have others provide like or similar services provided by the Contractor as specified in the Statement of Work or purchase orders or may elect to accomplish like or similar work itself. 4. Contractor shall not disclose the existence of this Agreement or any of its terms and conditions or the fact that Contractor has furnished or contracted to furnish IBM services under this Agreement without the prior written consent of IBM. 5. Neither party shall be responsible for failure to fulfill its obligations under this Agreement due to fire, flood, war or other such cause beyond its control and without its fault or negligence (excluding labor disputes) provided it promptly notifies the other party. 6. The laws of the State of New York govern this Agreement. 7. Both parties agree to waive their right to a trial by jury in any dispute arising out of this Agreement. 8. No delay or failure by either party to act in the event of a breach or default hereunder shall be construed as a waiver of that or any subsequent breach or default of any provision of this Agreement. 9. The prevailing party in any legal action hereunder shall be entitled to reimbursement by the other party of its expenses including, without limitation, reasonable attorney's fees. 10. Any terms of this Agreement which by their nature extend beyond their expiration or termination shall remain in effect until fulfilled and shall bind the parties and their legal representatives, successors, heirs, and assigns. 11. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. - -------------------------------------------------------------------------------- 1.29 Notices Unless otherwise provided in this Agreement, all notices required or permitted hereunder shall be in writing and shall be given by personal service or sent by registered, certified or express mail, reputable overnight courier service or facsimile with receipt confirmed: International Business Machines Corporation P.O. Box 1900 Dept. PRB1 / Bld. 001H Boulder, CO 80301-9191 Attention: Nancy Hiatt - -------------------------------------------------------------------------------- 1.30 Modifications Except as specifically provided herein, this Agreement may not be amended or modified except by a formal amendment signed by both parties. - -------------------------------------------------------------------------------- 1.31 Authority Wherever the word "IBM" appears in this Agreement with respect to authorization for such items as Subcontracting; Delegations; Modifications; Termination and Cancellation, the word is deemed to mean and only mean IBM's Purchasing Department. No other person or department of IBM so authorized to act. Claims by Contractor for adjustments, increases, and increments to price or for added costs resulting from the foregoing items will not be allowed unless the said authorization shall have been duly granted in writing prior to implementation by IBM's Purchasing Department. - -------------------------------------------------------------------------------- 1.32 Rate Schedule The rates for all Deliverables and associated services committed by IBM under this Agreement shall be as specified in the Statement of Work and on the purchase orders issued by IBM and accepted by the Contractor. - -------------------------------------------------------------------------------- 1.33 Delivery Schedule Deliverables shall be completed and delivered in accordance with the Statement of Work and purchase orders issued hereunder. Time is of the essence in Contractor's furnishing Deliverables to IBM. Contractor shall apply best efforts in providing Deliverables to IBM. If Contractor fails to provide the Deliverables on time, IBM may purchase elsewhere and may, unless Contractor's delay was due to unforeseeable causes beyond its control and without its fault or negligence, charge Contractor with all losses incurred. - -------------------------------------------------------------------------------- 1.34 Term This Agreement dated October 04, 1995 shall become effective the date both parties have signed this Agreement and shall expire on October 31, 1997. - -------------------------------------------------------------------------------- 1.35 Termination and Cancellation 1. Either party may terminate this Agreement for convenience upon sixty (60) days prior written notice to the other party. 2. Either party may terminate this Agreement in the event of a material breach of this Agreement by the other party provided the party in breach is given written notice and fails to cure such breach within thirty (30) days. Contractor shall, upon receipt of notice to terminate, stop all work being performed and cancel subcontracts associated therewith. Any outstanding purchase orders shall terminate upon termination of this Agreement. IBM's sole liability for termination of each purchase order outstanding as of the date of termination shall be to pay at rates specified in the purchase orders for satisfactory work performed under the purchase orders as of the date of termination and for expenses or other direct charges incurred by Contractor from which Contractor cannot decommit itself. Any such amount shall not exceed the amount specified for the work in such terminated purchase orders. 3. Purchase orders issued by IBM under this Agreement and accepted by Contractor may be cancelled by IBM, in each case without further liability thereunder, as follows: Purchase orders, or portions thereof, covering services of Contractor's personnel to be performed on or off IBM premises, may be cancelled on twenty- four (24) hours written notice. Purchase orders issued under a Government contract may be cancelled at any time upon written notice. In the event of cancellation, termination, or expiration of any purchase order issued hereunder, all work in process thereunder in Contractor's possession shall be forwarded to IBM, and IBM shall make payment at the specified rates for satisfactory services performed to the effective date of cancellation, termination, or expiration of such purchase order. - -------------------------------------------------------------------------------- 1.36 Entire Agreement The foregoing terms and conditions, together with the referenced Attachments, are the complete and exclusive expression of the agreement between the parties, superseding any prior agreements, written or oral, relating to the subject matter of this Agreement notwithstanding anything contained in any document issued by Contractor. - -------------------------------------------------------------------------------- 1.37 Order of Precedence In the event of any inconsistency or conflict in the provisions of these documents, the order of precedence shall be: 1. The foregoing terms and conditions; 2. Attachments referenced herein. 3. Purchase orders 4. Purchase order attachments - -------------- 2.0 Signatures In witness whereof, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives. International Business Computer Generated Solutions, Inc. Machines Corporation By: /s/ Philip Friedman --------------------------- /s/ G. H. Tamura 10/5/95 Title: President --------------------------- G. H. Tamura Date: 10/6/95 Location Procurement Manager --------------------------- - ----------------------------------- 3.0 Attachment A: Statement of Work - -------------------------------------------------------------------------------- 3.1 Project Description When an IBM customer requires assistance, they place a request call through the Call Management Centers (CMCs). That call is taken by a Customer Service Representative (CSR) employee and entered into the appropriate system for assignment. These calls are taken for a variety of customers on a variety of customized applications. The Contractor Customer Service Representative (CSR) works directly with IBM's customers, IBM's Customer Service Engineers (CE) and IBM's internal support organizations. It is expected that the CSR will be courteous and professional at all times. They must be able to communicate clearly and effectively by phone while being complete, accurate and timely in gathering required information. In addition, they must provide navigational and informational services to customers who require additional service or information within the IBM support network. They are expected to search various databases, make appropriate updates, and maintain those databases within a specified criteria. In addition, each CSR is expected to adhere to the quality processes currently in place which measures timeliness, accuracy, and professionalism. See Section 3.9 for acceptance criteria. It is the goal of the CSR team to become a single point of value for each call received. That value may include, but is not limited to, information sharing, information gathering, product entitlement and call navigation. We anticipate the role of this function will continue to expand as more business opportunities are identified. It is vital that the Contractor be flexible in meeting the requirements of these future opportunities. Contractor agrees that, by October 30, 1995, Contractor shall have hired at least 90% of the supplemental employees currently employed by IBM in each of the Atlanta and Dallas Call Management Centers for the positions listed in Section 3.2 of this Statement of Work. The failure of Contractor to comply with this paragraph shall permit IBM to immediately cancel this Agreement at IBM's sole discretion and with no liability on the part of IBM. - -------------------------------------------------------------------------------- 3.2 Manpower The estimated number of personnel required to perform each task is listed below, however, the number of personnel may change with the written concurrence of the IBM Coordinator and Contractor Supervisor. Job descriptions are provided in Section 3.5.
Table 1. Estimated Headcount JOB DESCRIPTION ATLANTA DALLAS Customer Service Representative **** **** SESA Coordinator **** Senior Customer Service Representative **** **** Training Specialist **** **** Team Leader **** **** Receptionist **** **** Graphics Coordinator **** **** Operational Support Manager **** ****
- -------------------------------------------------------------------------------- 3.3 Work Schedules The following identifies the work schedules: . The CMC's operate 24 hours per day, 7 days per week . Holiday work will be required . Overtime may be required - -------------------------------------------------------------------------------- 3.4 Skill Requirements The following list outlines the general skills required to perform all job descriptions listed in this section: . Very good verbal communication skills which are clear, understandable and precise . Be professional and courteous at all times . Above average typing skills . Good listening skills . Above average reading comprehension skills . Learn and follow procedures . Strong customer service skills and temperament which includes diffusing upset customers. . Administrative and organizational skills . Multiplexing skills . Knowledge of OS/2 . Freelance skills for graphics person . Computer navigation skills . Telephone handling skills **** Confidential treatment is being requested for these portions of this agreement. - -------------------------------------------------------------------------------- 3.5 Job Descriptions The following job descriptions serve only as guide as to the types of responsibilities within each job category. They are subject to change at any time by the IBM Coordinator. 1. Customer Service Representative (CSR) Position Concept: As the initial customer contact for IBM service, the CSR's professional communications and ultimate decision making responsibility directly impact IBM customers' degree of service delivery satisfaction. Effective communication of service offerings and efficient execution of the call process facilitates the request for service. The CSR must extract pertinent call information from the customer to ensure the service request is handled timely and properly. Service delivery concerns are proactively communicated to appropriate escalation levels. CSRs utilize the NSS system to record information and assign calls to the appropriate service representative or organization. They must remain knowledgeable of new service offerings and call procedures. In addition, the CSR may be required to research customer entitlement, navigate informational requests, take Hardware/Software service calls, and/or track Finders M/A information. Responsibilities . Receive customer request for Hardware and Software service. Be thoroughly knowledgeable of current service offerings, billable information, and entitlement process. Question customer to obtain product service and entitlement options to properly assign provider of service and determine urgency of request. Take personal ownership of each call received and aggressively seek to improve customer satisfaction. . Utilize resource materials in directing customer inquiries that are not service related. Inform appropriate contact of information changes. Be thoroughly knowledgeable of resource materials and give assistance when required. Escalate unresolved inquiries to resolution. . Navigate informational and procedural calls as required. . Be thoroughly knowledgeable and assist with backup procedures when required. . Maintain a working knowledge of special operating procedures used to interface with internal organizations relating to critical customers. . Be thoroughly knowledgeable of special operating procedures to interface with external providers of service (Customized Operational Service, Multi Vendor Support (MVS), etc.). Ensure special operating procedures are understood and adhered to. . Recognize customer complaints that need to be escalated. Demonstrate quality communication skills and exhibit high level of professionalism and extreme sensitivity to customer satisfaction. Follow appropriate procedures and use good judgement in reporting complaints. . Identify any National Service Support (NSS), Computer Aided Dispatch (CAD) or OASIS discrepancies or omissions (i.e. prescreens, alias) and notify appropriate resource. . Use courtesy, tact and discretion in all communications with customers, vendors and IBM personnel. Exhibit a high level of professionalism and utilize good judgement to inform manager of potential problems. . Maintain knowledge and operation of all CSR equipment. Utilize basic problem determination and follow reporting procedures. . Follow internal IBM phone guidelines pertaining to professionalism, hold and knowledge. . Perform entitlement on service contracts when required. . Input Finders requests when notified by the field. 2. SESA Coordinator Position Concept: Is responsible for making follow-up survey calls to customers concerning their satisfaction with a specific process. The coordinator will extract all pertinent information through a database provided and complete a preset number of surveys per day. That preset number is described in Section 3.8, Measurements. Responsibilities . Obtains pertinent information from required databases. . Makes outgoing calls to customer contacts provided by IBM internal databases . Demonstrates courtesy, tact and discretion in communications, so as to present a favorable company image . Input customer comments and survey results so that they match the opinions of the customer . Make internal phone audits and record results as required . Escalate customer complaints using established processes 3. Senior Customer Service Representative Position Concept: Provide leadership to CSRs and be focal person for operational questions. Maintain expert knowledge of customer service duties and review/monitor to ensure procedures are followed. Aggressively monitor NSS in order to recognize and handle potential service delivery concerns. Take a pro-active role in identifying and resolving customer satisfaction inhibitors. Implement a strategy with other seniors and team leaders to maintain balanced workload for customer hold times. Offer first level of escalation to CSRs for customer complaint situations. Evaluate training. Maintain expert knowledge of all CSR responsibilities. Prepare regular and special reports for IBM. Maintain expert knowledge of backup system procedures. Perform CSR duties as required. Responsibilities . Become an expert resource for CSRs and assist in interpreting current service offerings, billable information and entitlement process. Administer training as required. Enhance customer satisfaction through personal ownership of identified problems and aggressively seek resolution. Escalate when appropriate. . Monitor/review receive call activity and pro-actively identify potential customer situations. . Become an expert in call management criteria, measurement objectives, and special programs. Identify problems when objectives will not be met and make recommendations to the management team. . Maintain an expert knowledge of resource materials utilized to direct customers' inquiries that are not service related. Act as a resource and focal escalation point for unresolved inquiries and updating resource materials. Responsible for timely follow-up and extreme responsiveness to customer inquiries. . Maintain expert knowledge of system backup procedures and initiate when required. Ensure each CSR has backup and that current backup materials are readily available. Resolve CSR difficulty in obtaining system backup and escalate if necessary. . Maintain expert knowledge in and ensure that special operating procedures are followed to interface with external providers of service. Provide CSR training and assistance when necessary. . Review, maintain, and ensure an accurate database using branch office input. Ensure database integrity and update procedures are followed. Responsible to coordinate database activity. Recommend solutions to database problems and implement. . Handle customer complaints effectively and recognize need for escalation. Follow appropriate procedures and exercise good judgement in escalation and resolving complaints. Maintain records. . Demonstrate courtesy, tact, and discretion in all communications with customers, vendors, and IBM personnel. Exhibit a high level of professionalism at all times. Utilize good judgement informing management of potential problems. Set example and give guidance to CSCs as required. . Provide work direction and support to CSRs for the implementation of special programs and for the short-term solution of temporary workload imbalances. Maintain CSR lunch schedules and track vacation. Ensure CSR coverage. 4. Training Specialist Position Concept: Provides training of suppliers personnel. Responsibilities . Provide training and assistance as required. Update training materials and conduct training seminars for CSR when needed. Evaluate training and make recommendations to management and assist with training difficulties. . Maintain thorough knowledge of and be able to operate all CSR workstations and ACD agent equipment. Follow correct problem determination and reporting procedures. Utilize good judgement when following the correct escalation procedures. 5. Team Leader Position Concept: Serves as a "functional" leader in an environment where employee to management ratios make it difficult to prioritize and balance workload and maintain a high level of operational efficiency. Responsibilities . Operates complex office systems to prepare correspondence, foils, and documents. . With minimal management assistance, coordinate flow and prioritize "team" workload. . Balances workload; ensuring coverage and a high level of operational efficiency. . Drives team quality measurements. . Monitors services support activity and exposures. . Develops and implements internal customer satisfaction plans and programs. . Ensures team self-assessment audits are conducted and based on outcomes recommends corrective action plan to management. . Coordinates meetings, training and other workload inhibitors. . Maintains a high level of systems expertise for required business area. . Assumes additional responsibilities as required. 6. Receptionist Position concept - Answers the "must answer" line in the Call Management Center while controlling entry to the branch office and receiving visitors. Responsibilities . Greets, ascertains pertinent information, and registers visitors. Helps identify, locate and contact persons to be visited. Gives internal and external directions. Ensures that no one is detained in the reception area beyond a reasonable length of time. . Answers the "must answer" line in the Call Management Center. Pages person to be contacted when appropriate or navigates the call to the requested function. Ensures callers are greeted professionally, given the proper information and not left on hold longer than the IBM standard. . Collects and distributes mail from/to the CMC personnel. . Ensures only authorized persons are permitted into the facility and ensures escorts are provided when necessary. Reports security concerns to appropriate Contractor/IBM management. . Handles special situations such as outside solicitations, providing information about employees, etc., in accordance with company policies and practices. . Demonstrate courtesy, tact and discretion in communications, so as to present a favorable company and site image. . As required, initiates and maintains appropriate files and reports. . Perform other administrative tasks such as typing, filing, scheduling conference rooms, conference rooms, ordering supplies, updating the organizational chart and updating calendars. . Back-up branch secretary when required. . Work requests will be received from IBM personnel. . Perform other duties as assigned. 7. Graphics Coordinator Position Concept: Is responsible for creating and updating quality process and presentation charts on a timely basis. Primarily uses Lotus Freelance as the software on a PS/2 type machine. Will operate equipment associated with producing high-quality charts such as printers and plotters. Responsibilities . Operates basic graphics equipment and programs. . Tracks due dates on process charts. . Updates and distributes process charts monthly. . Provides assistance for other presentation charts. . Performs other duties, as assigned. . Maintains softcopies of all charts created. . Ensures equipment used is maintained and usable. . Work requests will be received from IBM personnel. 8. Operational Support Manager (OSM) Position Concept: Is the first line manager responsible for resource planning and operational support in the CMC. Responsibilities . Interprets IBM's policies, practices and procedures for territory. . Maintains effective performance planning, counseling, evaluation and development programs to properly evaluate employee performance and to enhance career growth. . Analyze performance of functions within areas of responsibility. Makes recommendations for operational enhancements and implements action as appropriate. . Works closely with IBM as an interface to ensure high levels of performance, productivity and customer satisfaction. . Determines manpower requirements and develops plans for area of responsibility. . Analyzes financial performance and recommends a course of action to IBM. Maintains control of direct expense involved with operation of assigned area. . Organizes and conducts frequent department meetings. Makes presentations on areas of responsibility in branch meetings. . Responsible for records retention management and compliance and security for all pertinent documents. . Assumes additional responsibilities as required. - -------------------------------------------------------------------------------- 3.6 Training 1. Initial process training for contract initiation will be provided by IBM. Any new product training deemed necessary by IBM will be provided by IBM. The Contractor's training specialist will then assume responsibility for on- going training and orientation of new and replacement personnel at the training rate. 2. Contractor shall have sufficient personnel trained to ensure that quality of service is met throughout the term of this Agreement. IBM shall pay for this training only if conducted during the employee's first thirty (30) days of work under this Agreement and at the Customer Service Trainee rate specified in Section 3.12. This payment shall not exceed a percentage of the total productive time billed. This percentage shall be determined by IBM and the Contractor after the initial training of personnel under this Agreement. - -------------------------------------------------------------------------------- 3.7 Transitional Training In the event of cancellation or at the expiration of this Agreement, Contractor agrees to provide a minimum of fifteen (15) days transitional training to a supplier to be specified by IBM if other than Contractor. Said training shall be conducted by an adequate number of Contractor employees to ensure continuity of service at a competent level of performance. IBM shall pay for such training at the rates specified in the Statement of Work for the job descriptions of the employees providing such training. Contractor shall ensure that it continues to meet all performance and quality requirements specified in the Statement of Work throughout such training period. - -------------------------------------------------------------------------------- 3.8 Measurements Specific measurements will be developed by the supplier and IBM to gauge performance and quality requirements. Overall areas measured will include but are not limited to: . Qualification of staff . Adherence to CMC training modules provided to Contractor as may be modified/updated from time to time by IBM . Customer satisfaction . Quality control - Call Hold time less than 10 seconds on average - SESA calls greater than 99.7% - Accuracy in taking calls greater than 99.0% - Under 2% abandonment rate - Minimal CMCALERTS and Customer Situation Information System (CSIS) incidents (actual formula to be determined) - Average 32 complete SESA surveys per day per headcount - Failure to meet any of the measurements identified in this Section, as modified, shall be deemed material breach of this Agreement. However, Contractor shall have one hundred and twenty (120) days from the date hereof to meet those measurements that are currently not being met by the CMC's before this provision will take effect with respect to measurements. - -------------------------------------------------------------------------------- 3.9 Acceptance Criteria Initial acceptance will depend on evaluation of the vendor's ability to meet the scope defined in this document. Key criteria that will be reviewed includes but not limited to: . Cost . Quality . Management - -------------------------------------------------------------------------------- 3.10 IBM Responsibilities IBM is responsible for the following: . Existing CMC Processes and Procedures . IBM Site Safety, Security and personnel conduct policies . Hardware/Software/Tools as described below (IBM Business use only) . Office facilities in Dallas and Atlanta Call Management Centers . Personal shared workstation and required software . Phone, headset, and phone system . Access to required systems/tools - NSS - OASIS - RETAIN - VM - HONE - IS - AUTOQUALITY if used - P&Q REVIEW if used - PRMS - CSIS . Access to any additional required equipment . Badge access to assigned location Note: The Contractor shall follow the practices, procedures and priorities of IBM in the use of IBM equipment, systems, and tools. - -------------------------------------------------------------------------------- 3.11 Contractor Responsibilities The Contractor is responsible for the following: . Answer customer requests in a timely, professional, and accurate manner . Monitor quality using the Autoquality System or an equivalent system. . Perform entitlement on service requests . Ensure operating processes and procedures are accurately followed . Assist in updating these processes and procedures as required . Update customer database records . Ensure skill requirements are met, maintained and updated . Provide effective management of personnel and workload . Train any additional personnel required after initial training . Support and adhere to ISO9000 registration when complete and all other CMC quality programs (Contractor personnel will talk to ISO9000 auditors when asked) . Evaluate work performance and increase or decrease to allow for efficiencies or increased workload at IBM's approval . Contractor shall supply for IBM's review and approval, transition and implementation plans to meet targets . Contractor management is expected to have regular status meetings and provide written reports regularly . Adhere to IBM Site Safety, Security and personnel conduct policies . Define process which manages new requirements from IBM . Monthly Quality updates and action plans - -------------------------------------------------------------------------------- 3.12 Rate Schedule Table 2. Rate Schedule - Atlanta
Job Description $/HR $/HR Pay Rate Bill Rate Customer Service Rep. **** **** SESA Coordinator **** **** Customer Service Trainee* **** **** Senior Customer Service Rep. **** **** Training Specialist **** **** Team Leader **** **** Receptionist **** **** Graphics Coordinator **** **** Operations Support Manager **** ****
Table 3. Rate Schedule - Dallas
Job Description $/HR $/HR Pay Rate Bill Rate Customer Service Rep. **** **** SESA Coord. **** **** Customer Service Trainee* **** **** Senior Customer Service Rep. **** **** Training Specialist **** **** Team Leader **** **** Receptionist **** **** Graphics Coordinator **** **** Operations Support Manager **** ****
. Notes -- *CSR Trainee rate is based upon a **** reduction from the regular rate. This rate shall apply for the first thirty days of employment. -- IBM shall pay overtime at a rate of **** of the regular pay rate. -- Pay rate plus **** percent uplift equals the bill rate. -- It is IBM's intent to reimburse for "productive" hours worked. Contractor should plan on invoicing IBM for actual hours worked at the call center location. Vacation/sick and other time away from the job should be absorbed in overhead. **** Confidential treatment is being requested for these portions of this agreement. -- Contractor will submit invoices bi-weekly (occurring every two (2) weeks). -- IBM shall pay shift premium at a rate of **** for 2nd shift and a rate of **** for 3rd shift. 2nd Shift rates will be paid to employees with start times between 12:00PM and 10:00PM and 3rd shift rates will be paid to employees with start times between 10:00PM and 4:00AM. There will be no weekend premiums paid. -- IBM shall pay Holiday pay at a rate of **** of the regular pay. Those holidays include the nationally recognized days associated with New Years, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. The above rates shall be fixed for the first twelve (12) month period and may be revised annually on the anniversary of the effective date of this Agreement. Any rate increases shall not exceed **** percent over the rates for the preceding twelve (12) month period. - -------------------------------------------------------------------------------- 3.13 Glossary of Terms AUTOQUALITY System used in recording live customer calls for monitoring purposes CMC (Call Management Center)- The two Centers located in Dallas and Atlanta CMCALERT Vehicle our internal customers use to communicate problems to the CMC. CSIS (Customer Situation Information System) - Customer complaint system ENTITLEMENT The process of ensuring customers are entitled to receive warranty or maintenance service from IBM. FASTTRAK Vehicle the CMC uses to communicate problems to the field. FINDERS Maintenance program in which field representatives call the CMC when they find a machine does not have a maintenance agreement. HONE (Hands-On Network Environment) - Repository of IBM marketing information. IS (Information Systems) Systems that store pertinent customer account information such as inventories. ISO9000 ISO standards which identify the requirements for an effective quality management system. QRT (Quality Response Time) - The measurement of hold times within the CMC NSS (National Service System) - System used to receive and assign service calls OASIS (Order and Service Information System ) System used to Attachment A: Statement of Work 29 **** Confidential treatment is being requested for these portions of this agreement. Service Agreement Number 2165 receive assign customer calls. P&Q REVIEW System used to track results in the monitoring process RECEIVE CALL The process of receiving a request from a customer. RETAIN (Remote Technical Assistance Network) - IBM's world-wide database storing customer problem records. TRAILER CALL The process used to measure external customer's satisfaction with the way their call was handled. VM (Virtual Machine) - IBM mainframe operating system. - ----------------------------- 4.0 Travel Expense Guidelines IBM shall reimburse you in accordance with the following guidelines for reasonable & actual travel and living expenses authorized in advance by IBM in writing and incurred solely in connection with services furnished under this Agreement. Your employees should exercise reasonable cost effectiveness when incurring these expenses. 4.1.1 Expense Account Details 1. Expense accounts are to be submitted to you by your employees immediately upon return from a business trip. Actual daily expenses must be reported to you under the applicable expense category. All reimbursable expenses for a given period are to be included on one expense account. 2. When reporting expenses, the following information is required: A. dates of departure and return for each trip; B. travel departure point and destination, C. name of the IBM employee who authorized the trip; D. business reason for the travel; E. people met and business conducted; F. a statement that no reimbursement is due whenever expenses are not claimed for any workday your employee is on travel status; and G. explanation of out-of-the-ordinary amounts claimed; e.g., name(s) of individual(s) attending a luncheon if they have not paid for their own portion and claimed it individually. 4.1.2 Receipts 1. An itemized receipt (copy acceptable with original retained by you) must substantiate lodging costs, airline travel, rental car and all other expenditures of twenty-five dollars ($25.00) or more. The receipt must show the amount, date, place and nature of the expense. The receipts must be attached to, and submitted with, the expense account. Reimbursement for airline travel requires a copy of the actual airline passenger coupon receipt. 2. Reimbursement for car rental requires a copy of the actual car rental agreement. 4.1.3 Transportation 1. Only the most economical airline accommodations, e.g., economy, coach, tourist, excursion, discount and shuttle flights are to be used. Other airline accommodations, e.g., first and business class air fare WILL NOT be reimbursed unless specifically approved by IBM in advance. Travel should be planned to take advantage of any possible discount fares. Air travel will be reimbursed only for that portion thereof which is directly related to the services being performed under this Agreement. 2. Rail or bus travel will be reimbursed for regular coach class. Such travel is not to exceed one day. Any additional days actually used in making the trip will be considered nonreimbursable, personal business. 3. Ground transportation will be reimbursed for taxi, bus or car rental. Actual tolls and parking fees incurred will be reimbursed. 4. Use of personal automobiles to fulfill approved travel obligations under this Agreement (not applicable to normal commutation) shall be reimbursed at the rate of twenty-seven-and-a-half ($.275) cents per mile, for the most direct, practical route to the business destination. Your employees have the responsibility to maintain a "Weekly Mileage Log" which will be submitted as an attachment to your invoice. If more than one person travels in the same automobile, only your employee responsible for the automobile will be reimbursed. 5. IBM will not reimburse you for normal commutation expenses. 4.1.4 Lodging and Meals 1. IBM will reimburse reasonable and actual lodging and meal expenses incurred while traveling on approved business. Commercial type accommodations and rates are to be requested at all times. 2. When guaranteed reservations have been made and plans change, the reservation should be Travel Expense Guidelines 31 Service Agreement Number 2165 canceled in time to avoid being charged for the room. 3. Room expense, including tax, is to be entered on the expense account by day, and the hotel bill is to be attached to the expense account. Charges on the hotel bill for other than lodging are to be entered by day under their proper classifications. 4. IBM will reimburse reasonable and actual meal expense. When possible each individual is to pay for his/her own meal. 5. Should an occasion arise where one person pays for more than his/her own meal, the name(s) of the person(s) are to be written on the expense account and the explanation noted as to the business reason for the expense. Alcoholic beverage expenses are not reimbursable. 4.1.5 Personal Expenses 1. IBM will not reimburse personal expenses. If expenses of a personal nature, including hotel shop purchases, laundry, valet, non-business telephone calls, movie charges, health club use, alcoholic beverages, sundry items, are charged against the room, the amount so charged is to be deducted from the invoice presented to IBM. 2. Business telephone calls made in IBM's behalf by your employees while traveling on approved IBM business will be reimbursed. If your employees are at an IBM location, business calls should be made at that location, utilizing IBM tie-lines and WATS lines, when possible. When your employees charge business calls to their home telephone numbers or personal telephone credit cards, the detailed telephone company bill is to be attached to the expense account if the aggregate total is twenty-five dollars ($25.00) or more. 3. IBM will reimburse reasonable and actual gratuities disbursed for business purposes by your employees while traveling on approved IBM business. Amendment to Service Agreement Between International Business Machines Corporation and Computer Generated Solutions, Inc. February 06, 1996 Contact: Nancy Hiatt @ 303-924-5396 IBM Integrated Procurement Solutions 6300 Diagonal Highway P. O. Box 1900 Boulder, Colorado 80301-9191 Department: PRB1 Building: 001H Service Agreement Number 2165 Service Agreement Number 2165 - -------------------------------------------------------------------------------- Amendment # 01 This document shall constitute a formal amendment to Service Agreement Number 2165 dated October 04, 1995. Section 3.0 Statement of Work Amend Sections 3.5 "Job Descriptions" and 3.12 "Rate Schedule" to read per the enclosed revised Statement of Work. Except as hereby amended, all other terms and conditions of this Agreement shall remain in full force and effect as written. If you agree with the above modifications, this document shall constitute an Amendment to Agreement Number 2139. Please indicate your agreement by signing both copies of this document and returning one copy to IBM Corp., 6300 Diagonal Hwy., Boulder, CO 80301, Attention Nancy Hiatt, Dept. PRB1, Bld. 001H. In witness whereof, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives. International Business Computer Generated Solutions, Inc. Machines Corporation By: ----------------------- /s/ G. H. Tamura 2/6/96 Title: ----------------------- G. H. Tamura Date: Location Procurement Manager ----------------------- Service Agreement Number 2165 - ----------------------------------- 3.0 Attachment A: Statement of Work - -------------------------------------------------------------------------------- 3.1 Project Description When an IBM customer requires assistance, they place a request call through the Call Management Centers (CMCs). That call is taken by a Customer Service Representative (CSR) employee and entered into the appropriate system for assignment. These calls are taken for a variety of customers on a variety of customized applications. The Contractor Customer Service Representative (CSR) works directly with IBM's customers, IBM's Customer Service Engineers (CE) and IBM's internal support organizations. It is expected that the CSR will be courteous and professional at all times. They must be able to communicate clearly and effectively by phone while being complete, accurate and timely in gathering required information. In addition, they must provide navigational and informational services to customers who require additional service or information within the IBM support network. They are expected to search various databases, make appropriate updates, and maintain those databases within a specified criteria. In addition, each CSR is expected to adhere to the quality processes currently in place which measure timeliness, accuracy, and professionalism. See Section 3.9 for acceptance criteria. It is the goal of the CSR team to become a single point of value for each call received. That value may include, but is not limited to, information sharing, information gathering, product entitlement and call navigation. We anticipate the role of this function will continue to expand as more business opportunities are identified. It is vital that the Contractor be flexible in meeting the requirements of these future opportunities. Contractor agrees that, by October 30, 1995, Contractor shall have hired at least 90% of the supplemental employees currently employed by IBM in each of the Atlanta and Dallas Call Management Centers for the positions listed in Section 3.2 of this Statement of Work. The failure of Contractor to comply with this paragraph shall permit IBM to immediately cancel this Agreement at IBM's sole discretion and with no liability on the part of IBM. - -------------------------------------------------------------------------------- 3.2 Manpower The estimated number of personnel required to perform each task is listed below, however, the number of personnel may change with the written concurrence of the IBM Coordinator and Contractor Supervisor. Job descriptions are provided in Section 3.5. Service Agreement Number 2165 Table 1. Estimated Headcount
Job Description Atlanta Dallas Customer Service Representative **** **** SESA Coordinator **** Senior Customer Service Representative **** **** Training Specialist **** **** Team Leader **** **** Receptionist **** **** Graphics Coordinator **** **** Operational Support Manager **** ****
- -------------------------------------------------------------------------------- 3.3 Work Schedules The following identifies the work schedules: . The CMC's operate 24 hours per day, 7 days per week . Holiday work will be required . Overtime may be required - -------------------------------------------------------------------------------- 3.4 Skill Requirements The following list outlines the general skills required to perform all job descriptions listed in this section: . Very good verbal communication skills which are clear, understandable and precise . Be professional and courteous at all times . Above average typing skills . Good listening skills . Above average reading comprehension skills . Learn and follow procedures . Strong customer service skills and temperament which includes diffusing upset customers. . Administrative and organizational skills . Multiplexing skills . Knowledge of OS/2 . Freelance skills for graphics person . Computer navigation skills . Telephone handling skills 20 Amendment #01 **** Confidential treatment is being requested for these portions of this agreement. Service Agreement Number 2165 - -------------------------------------------------------------------------------- 3.5 Job Descriptions The following job descriptions serve only as guide as to the types of responsibilities within each job category. They are subject to change at any time by the IBM Coordinator. 1. Customer Service Representative (CSR) Position Concept: As the initial customer contact for IBM service, the CSR's professional communications and ultimate decision making responsibility directly impact IBM customers' degree of service delivery satisfaction. Effective communication of service offerings and efficient execution of the call process facilitates the request for service. The CSR must extract pertinent call information from the customer to ensure the service request is handled timely and properly. Service delivery concerns are proactively communicated to appropriate escalation levels. CSRs utilize the applicable system to record information and assign calls to the appropriate service representative or organization. They must remain knowledgeable of new service offerings and call procedures. In addition, the CSR may be required to research customer entitlement, navigate informational requests, take Hardware/Software service calls, and all other service offerings. Responsibilities . Receive customer request for service. Be thoroughly knowledgeable of current service offerings, billable information, and entitlement process. Question customer to obtain product service and entitlement options to properly assign provider of service and determine urgency of request. Take personal ownership of each call received and aggressively seek to improve customer satisfaction. . Utilize resource materials in directing customer inquiries that are not service related. Inform appropriate contact of information changes. Be thoroughly knowledgeable of resource materials and give assistance when required. Escalate unresolved inquiries. . Navigate informational and procedural calls as required. . Be thoroughly knowledgeable and assist with backup procedures when required. . Maintain a working knowledge of special operating procedures relating to critical customers. . Be thoroughly knowledgeable of special operating procedures to interface with external providers of service (Customized Operational Service, Multi Vendor Support (MVS), etc.). Ensure special operating procedures are understood and adhered to. . Recognize customer complaints that need to be escalated. Demonstrate quality communication skills and exhibit high level of professionalism and extreme sensitivity to customer satisfaction. Follow appropriate procedures and use good judgement in reporting complaints. . Identify any data base discrepancies or omissions (i.e., prescreens, alias) and notify appropriate resource (i.e., NSS, CAD, OASIS, RETAIN). . Use courtesy, tact and discretion in all communications with customers, vendors and IBM personnel. Utilize good judgment to inform manager of potential problems. . Maintain knowledge and operation of all CSR equipment. Utilize basic problem determination and follow reporting procedures . Follow internal IBM telephone etiquette guidelines. . Perform entitlement on service contracts when required. . Input Finders requests when notified by the field. 2. Commercialization Coordinator Position Concept: As the initial customer contact for Call Management Services, the CSR's professional communications and ultimate decision making responsibility directly impact IBM's customers' degree of Attachment A: Statement of Work 21 Service Agreement Number 2165 service delivery satisfaction. Effective communication of service offerings and efficient execution of the call process facilitate the request for service. The CSR must extract pertinent call information from the customer to ensure the service request is handled timely and properly. Service delivery concerns are proactively communicated to appropriate escalation levels. CSRs utilize the applicable system to record information and assign calls to the appropriate service representative or organization. They must remain knowledgeable of new service offerings and call procedures. Responsibilities . Receive customer request for service. Be thoroughly knowledgeable of current service offerings, billable information, and entitlement process. Question customer to obtain product service and determine urgency of request. Take personal ownership of each call received and aggressively seek to improve customer satisfaction. . Utilize resource materials in directing customer inquires that are not service related. Inform appropriate contact of information changes. Be thoroughly knowledgeable of resource materials and give assistance when required. Escalate unresolved inquires. . Navigate informational and procedural calls as required. . Be thoroughly knowledgeable and assist with backup procedures when required. . Maintain a working knowledge of special operating procedures relating to critical customers. . Recognize customer complaints that need to be escalated. Demonstrate quality communications skills and exhibit high level of professionalism and extreme sensitivity to customer satisfaction. Follow appropriate procedures and use good judgment in reporting complaints. . Identify any data base discrepancies or omissions (i.e., prescreens, alias) and notify appropriate resource (i.e., EUS, RETAIN, CLARIFY, MAAS). . Monitor on a daily basis group activity and ensure the efficient utilization of personnel. . Ensure that activity is centered on the handling of incoming service request during periods of greatest need as indicated by ACD information. . Provide training to trainees, associates and less experienced CSRs. . Support management in the implementation and operation of existing and new procedures. . Prepare special reports at management direction. . Make recommendations to enhance operations. . Use courtesy, tact and discretion in all communications with customers, vendors and IBM personnel. Utilize good judgment to inform manager of potential problems. . Maintain knowledge and operation of all CSR equipment. Utilize basic problem determination and follow reporting procedures. . Follow internal IBM telephone etiquette guidelines. 3. SESA Coordinator Position Concept: Is responsible for making follow-up survey calls to customers concerning their satisfaction with a specific process. The coordinator will extract all pertinent information through a database provided and complete a preset number of surveys per day. That preset number is described in Section 3.8, Measurements. Responsibilities . Obtains pertinent information from required databases. . Makes outgoing calls to customer contacts provided by IBM internal databases 22 Amendment #01 Service Agreement Number 2165 . Demonstrates courtesy, tact and discretion in communications, so as to present a favorable company image . Input customer comments and survey results so that they match the opinions of the customer . Make internal phone audits and record results as required . Escalate customer complaints using established processes 4. Finders Customer Service Coordinator Position Concept: To provide maintenance and inventory assistance to Technology Service Support (TSS), Customer Service Representatives (CSR), and Availability Service Customer Engineers (CE). The coordinator will research inventory databases and communicate billing information to CEs, TSSs, and CSRs. Coordinators will maintain a close relationship with all Customer Support Offices (CSO). Accuracy and professionalism are vital to the success of the Finders program. The Finders coordinator will ensure proper inventory corrections and maintenance updates occur in a timely and effective manner. Coordinators will escalate all CSR, CE, and field manager concerns to the appropriate senior, team leader, or manager. Responsibilities . Receive CSR and CE requests to research and correct customer inventory and maintenance discrepancies. . Search databases, i.e., ISI, SPIF, HONE, VM, and NSS for contact and billing information. . Process Finders requests for inventory discrepancies and updates, and forward to appropriate maintenance processing departments. . Notify CE and CSR when request is complete. . Using BILLMAPS and CETRACK, track and ensure all Finders logs are updated and closed in a timely and accurate manner. . Provide status of logs to CSR, CE, or field manager upon request. . Escalate to appropriate CSR when log closure objectives are not met. . Provide assistance with: -- M/A Rates -- Billing Rates -- Billable Activity (B/A) Codes -- Hourly Service Document and Hourly Service Invoice information. . Handle incoming Call Entitlement Team (CET) calls and warm transfer when needed. . Maintain knowledge of all databases and processes used in Finders. . Navigate informational and procedural call as required. . Use courtesy, tact, and discretion in all communications with customers, vendors, and IBM personnel. Exhibit a high level of professionalism and use good judgment to inform manager of potential problems. 5. Senior Customer Service Representative Position Concept: Provide leadership to CSRs and be focal person for operational questions. Maintain expert knowledge of customer service duties and review/monitor to ensure procedures are followed. Aggressively monitor NSS in order to recognize and handle potential service delivery concerns. Take a pro-active role in identifying and resolving customer satisfaction inhibitors. Implement a strategy with other seniors and team leaders to maintain balanced workload for customer hold times. Offer first level Attachment A: Statement of Work 23 Service Agreement Number 2165 of escalation to CSRs for customer complaint situations. Evaluate training. Maintain expert knowledge of all CSR responsibilities. Prepare regular and special reports for IBM. Maintain expert knowledge of backup system procedures. Perform CSR duties as required. Responsibilities . Become an expert resource for CSRs and assist in interpreting current service offerings, billable information and entitlement process. Administer training as required. Enhance customer satisfaction through personal ownership of identified problems and aggressively seek resolution. Escalate when appropriate. . Monitor/review receive call activity and pro-actively identify potential customer situations. . Become an expert in call management criteria, measurement objectives, and special programs. Identify problems when objectives will not be met and make recommendations to the management team. . Maintain an expert knowledge of resource materials utilized to direct customers' inquiries that are not service related. Act as a resource and focal escalation point for unresolved inquiries and updating resource materials. Responsible for timely follow-up and extreme responsiveness to customer inquiries. . Maintain expert knowledge of system backup procedures and initiate when required. Ensure each CSR has backup and that current backup materials are readily available. Resolve CSR difficulty in obtaining system backup and escalate if necessary. . Maintain expert knowledge in and ensure that special operating procedures are followed to interface with external providers of service. Provide CSR training and assistance when necessary. . Review, maintain, and ensure an accurate database using branch office input. Ensure database integrity and update procedures are followed. Responsible to coordinate database activity. Recommend solutions to database problems and implement. . Handle customer complaints effectively and recognize need for escalation. Follow appropriate procedures and exercise good judgement in escalation and resolving complaints. Maintain records. . Demonstrate courtesy, tact, and discretion in all communications with customers, vendors, and IBM personnel. Exhibit a high level of professionalism at all times. Utilize good judgement informing management of potential problems. Set example and give guidance to CSCs as required. . Provide work direction and support to CSRs for the implementation of special programs and for the short-term solution of temporary workload imbalances. Maintain CSR lunch schedules and track vacation. Ensure CSR coverage. 6. Training Specialist Position Concept: Provides training of suppliers personnel. Responsibilities . Provide training and assistance as required. Update training materials and conduct training seminars for CSR when needed. Evaluate training and make recommendations to management and assist with training difficulties. . Maintain thorough knowledge of and be able to operate all CSR workstations and ACD agent equipment. Follow correct problem determination and reporting procedures. Utilize good judgement when following the correct escalation procedures. 7. Team Leader Position Concept: Serves as a "functional" leader in an environment where employee to management ratios make it difficult to prioritize and balance workload and maintain a high level of operational efficiency. Responsibilities 24 Amendment #01 Service Agreement Number 2165 . Operates complex office systems to prepare correspondence, foils, and documents. . With minimal management assistance, coordinate flow and prioritize "team" workload. . Balances workload; ensuring coverage and a high level of operational efficiency. . Drives team quality measurements. . Monitors services support activity and exposures. . Develops and implements internal customer satisfaction plans and programs. . Ensures team self-assessment audits are conducted and based on outcomes recommends corrective action plan to management. . Coordinates meetings, training and other workload inhibitors. . Maintains a high level of systems expertise for required business area. . Assumes additional responsibilities as required. 8. Receptionist Position concept - Answers the "must answer" line in the Call Management Center while controlling entry to the branch office and receiving visitors. Responsibilities . Greets, ascertains pertinent information, and registers visitors. Helps identify, locate and contact persons to be visited. Gives internal and external directions. Ensures that no one is detained in the reception area beyond a reasonable length of time. . Answers the "must answer" line in the Call Management Center. Pages person to be contacted when appropriate or navigates the call to the requested function. Ensures callers are greeted professionally, given the proper information and not left on hold longer than the IBM standard. . Collects and distributes mail from/to the CMC personnel. . Ensures only authorized persons are permitted into the facility and ensures escorts are provided when necessary. Reports security concerns to appropriate Contractor/IBM management. . Handles special situations such as outside solicitations, providing information about employees, etc., in accordance with company policies and practices. . Demonstrate courtesy, tact and discretion in communications, so as to present a favorable company and site image. . As required, initiates and maintains appropriate files and reports. . Perform other administrative tasks such as typing, filing, scheduling conference rooms, conference rooms, ordering supplies, updating the organizational chart and updating calendars. . Back-up branch secretary when required. . Work requests will be received from IBM personnel . Perform other duties as assigned. 9. Graphics Coordinator Position Concept: Is responsible for creating and updating quality process and presentation charts on a timely basis. Primarily uses Lotus Freelance as the software on a PS/2 type machine. Will operate equipment associated with producing high-quality charts such as printers and plotters. Responsibilities . Operates basic graphics equipment and programs. Attachment A: Statement of Work 25 Service Agreement Number 2165 . Tracks due dates on process charts. . Updates and distributes process charts monthly. . Provides assistance for other presentation charts. . Performs other duties, as assigned. . Maintains softcopies of all charts created. . Ensures equipment used is maintained and usable. . Work requests will be received from IBM personnel 10. Operational Support Manager (OSM) Position Concept: Is the first line manager responsible for resource planning and operational support in the CMC. Responsibilities . Interprets IBM's policies, practices and procedures for territory. . Maintains effective performance planning, counseling, evaluation and development programs to properly evaluate employee performance and to enhance career growth. . Analyze performance of functions within areas of responsibility. Makes recommendations for operational enhancements and implements action as appropriate. . Works closely with IBM as an interface to ensure high levels of performance, productivity and customer satisfaction. . Determines manpower requirements and develops plans for area of responsibility. . Analyzes financial performance and recommends a course of action to IBM. Maintains control of direct expense involved with operation of assigned area. . Organizes and conducts frequent department meetings. Makes presentations on areas of responsibility in branch meetings. . Responsible for records retention management and compliance and security for all pertinent documents. . Assumes additional responsibilities as required. - -------------------------------------------------------------------------------- 3.6 Training 1. Initial process training for contract initiation will be provided by IBM. Any new product training deemed necessary by IBM will be provided by IBM. The Contractor's training specialist will then assume responsibility for on-going training and orientation of new and replacement personnel at the training rate. 2. Contractor shall have sufficient personnel trained to ensure that quality of service is met throughout the term of this Agreement. IBM shall pay for this training only if conducted during the employee's first thirty (30) days of work under this Agreement and at the Customer Service Trainee rate specified in Section 3.12. This payment shall not exceed a percentage of the total productive time billed. This percentage shall be determined by IBM and the Contractor after the initial training of personnel under this Agreement. 26 Amendment #01 Service Agreement Number 2165 - -------------------------------------------------------------------------------- 3.7 Transitional Training In the event of cancellation or at the expiration of this Agreement, Contractor agrees to provide a minimum of fifteen (15) days transitional training to a supplier to be specified by IBM if other than Contractor. Said training shall be conducted by an adequate number of Contractor employees to ensure continuity of service at a competent level of performance. IBM shall pay for such training at the rates specified in the Statement of Work for the job descriptions of the employees providing such training. Contractor shall ensure that it continues to meet all performance and quality requirements specified in the Statement of Work throughout such training period. - -------------------------------------------------------------------------------- 3.8 Measurements Specific measurements will be developed by the supplier and IBM to gauge performance and quality requirements. Overall areas measured will included but are not limited to: . Qualification of staff . Adherence to CMC training modules provided to Contractor as may be modified/updated from time to time by IBM . Customer satisfaction . Quality control -- Call Hold time less than 10 seconds on average -- SESA calls greater than 99.7% -- Accuracy in taking calls greater than 99.0% -- Under 2% abandonment rate -- Minimal CMCALERTS and Customer Situation Information System (CSIS) incidents (actual formula to be determined) -- Average 32 complete SESA surveys per day per headcount -- Failure to meet any of the measurements identified in this Section, as modified, shall be deemed material breach of this Agreement. However, Contractor shall have one hundred and twenty (120) days from the date hereof to meet those measurements that are currently not being met by the CMC's before this provision will take effect with respect to measurements. - -------------------------------------------------------------------------------- 3.9 Acceptance Criteria Initial acceptance will depend on evaluation of the vendor's ability to meet the scope defined in this document. Key criteria that will be reviewed includes but not limited to: . Cost . Quality . Management Attachment A: Statement of Work 27 Service Agreement Number 2165 - -------------------------------------------------------------------------------- 3.10 IBM Responsibilities IBM is responsible for the following: . Existing CMC Processes and Procedures . IBM Site Safety, Security and personnel conduct policies . Hardware/Software/Tools as described below (IBM Business use only) . Office facilities in Dallas and Atlanta Call Management Centers . Personal shared workstation and required software . Phone, headset, and phone system . Access to required systems/tools -- NSS -- OASIS -- RETAIN -- VM -- HONE -- IS -- AUTOQUALITY if used -- P&Q REVIEW if used -- PRMS -- CSIS . Access to any additional required equipment . Badge access to assigned location Note: The Contractor shall follow the practices, procedures and priorities of IBM in the use of IBM equipment, systems, and tools. - -------------------------------------------------------------------------------- 3.11 Contractor Responsibilities The Contractor is responsible for the following: . Answer customer requests in a timely, professional, and accurate manner . Monitor quality using the Autoquality System or an equivalent system. . Perform entitlement on service requests . Ensure operating processes and procedures are accurately followed . Assist in updating these processes and procedures as required . Update customer database records . Ensure skill requirements are met, maintained and updated . Provide effective management of personnel and workload . Train any additional personnel required after initial training . Support and adhere to ISO9000 registration when complete and all other CMC quality programs (Contractor personnel will talk to ISO9000 auditors when asked) 28 Amendment #01 Service Agreement Number 2165 . Evaluate work performance and increase or decrease to allow for efficiencies or increased workload at IBM's approval . Contractor shall supply for IBM's review and approval, transition and implementation plans to meet targets . Contractor management is expected to have regular status meetings and provide written reports regularly . Adhere to IBM Site Safety, Security and personnel conduct policies . Define process which manages new requirements from IBM . Monthly Quality updates and action plans - -------------------------------------------------------------------------------- 3.12 RATE SCHEDULE - -------------------------------------------------------------------------------- Table 2. Rate Schedule - Atlanta - -------------------------------------------------------------------------------- JOB DESCRIPTION $/HR $/HR PAY RATE BILL RATE - -------------------------------------------------------------------------------- Customer Service Rep. **** **** Commercialization **** **** Customer Service Trainee* **** **** Finders **** **** Senior Customer Service Rep. **** **** Training Specialist **** **** Team Leader **** **** Receptionist **** **** Graphics Coordinator **** **** Operations Support Manager **** **** - -------------------------------------------------------------------------------- Attachment A: Statement of Work 29 **** Confidential treatment is being requested for these portions of this agreement. SERVICE AGREEMENT NUMBER 2165 - -------------------------------------------------------------------------------- Table 3. Rate Schedule - Dallas - -------------------------------------------------------------------------------- JOB DESCRIPTION $/HR $/HR PAY RATE BILL RATE - -------------------------------------------------------------------------------- Customer Service Rep. **** **** SESA Coord. **** **** Customer Service Trainee* **** **** Finders **** **** Senior Customer Service Rep. **** **** Training Specialist **** **** Team Leader **** **** Receptionist **** **** Graphics Coordinator **** **** Operations Support Manager **** **** - -------------------------------------------------------------------------------- . Notes - -- *CSR Trainee rate is based upon a **** reduction from the regular rate. This rate shall apply for the first thirty days of employment. - -- IBM shall pay overtime at a rate of **** of the regular pay rate. - -- Pay rate plus **** percent uplift equals the bill rate. - -- It is IBM's intent to reimburse for "productive" hours worked. Contractor should plan on invoicing IBM for actual hours worked at the call center location. Vacation/sick and other time away from the job should be absorbed in overhead. - -- Contractor will submit invoices bi-monthly (occurring twice a month). - -- IBM shall pay shift premium at a rate of **** for 2nd shift and a rate of **** for 3rd shift. 2nd Shift rates will be paid to employees with start times between 12:00PM and 10:00 PM and 3rd shift rates will be paid to employees with start times between 10:00PM and 4:00AM. There will be no weekend premiums paid. - -- IBM shall pay Holiday pay at a rate of **** of the regular pay. Those holidays include the nationally recognized days associated with New Years, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. - -- Overtime will be reimbursed at a maximum of **** of Total Regular number of hours authorized per billing cycle. - -- No other overtime or premium rate will be paid without the prior approval of the IBM Contract Manager. The above rates shall be fixed for the first twelve (12) month period and may be revised annually on the anniversary of the effective date of this Agreement. Any rate increases shall not exceed **** over the rates for the preceding twelve (12) month period. 30 Amendment #01 **** Confidential treatment is being requested for these portions of this agreement. Service Agreement Number 2165 - -------------------------------------------------------------------------------- 3.13 Glossary of Terms AUTOQUALITY System used in recording live customer calls for monitoring purposes CMC (Call Management Center)- The two Centers located in Dallas and Atlanta CMCALERT Vehicle our internal customers use to communicate problems to the CMC. CSIS (Customer Situation Information System) - Customer complaint system ENTITLEMENT The process of ensuring customers are entitled to receive warranty or maintenance service from IBM. FASTTRAK Vehicle the CMC uses to communicate problems to the field FINDERS Maintenance program in which field representatives call the CMC when they find a machine does not have a maintenance agreement. HONE (Hands-On Network Environment) - Repository of IBM marketing information. IS (Information Systems) Systems that store pertinent customer account information such as inventories. ISO9000 ISO standards which identify the requirements for an effective quality management system. QRT (Quality Response Time) - The measurement of hold times within the CMC NSS (National Service System) - System used to receive and assign service calls OASIS (Order and Service Information System) System used to receive assign customer calls. P&Q REVIEW System used to track results in the monitoring process RECEIVE CALL The process of receiving a request from a customer. RETAIN (Remote Technical Assistance Network) - IBM's world-wide database storing customer problem records. TRAILER CALL The process used to measure external customer's satisfaction with the way their call was handled. VM (Virtual Machine) - IBM mainframe operating system. Attachment A: Statement of Work 31 Service Agreement Number 2165 32 Amendment #01 Amendment to Service Agreement Between International Business Machines Corporation and Computer Generated Solutions, Inc. April 02, 1996 Contact: Nancy Hiatt Tel. 303-924-5396 IBM Integrated Procurement Solutions 6300 Diagonal Highway P.O. Box 1900 Boulder, Colorado 80301-9191 Department: PRB1 Building: 001H Service Agreement Number 2165 - -------------------------------------------------------------------------------- Amendment # 02 This document shall constitute a formal amendment to Service Agreement Number 2165 dated October 04, 1995. Add Attachment B Statement of Work Add Attachment B as an additional Statement of Work per the enclosed document to be performed under this Service Agreement. Except as hereby amended, all other terms and conditions of this Agreement shall remain in full force and effect as written. If you agree with the above modifications, this document shall constitute an Amendment to Agreement Number 2165. Please indicate your agreement by signing both copies of this document and returning one copy to IBM Corp., 6300 Diagonal Hwy., Boulder, CO 80301, Attention: Nancy Hiatt, Dept. PRB1, Bld. 001H. In Witness whereof the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives. International Business Computer Generated Solutions, Inc. Machines Corporation By: /s/ -------------------------- /s/ G. H. Tamura 4/2/96 Title: President -------------------------- G. H. Tamura Date: 4/11/96 Location Procurement Manager -------------------------- 1 Attachment B Statement of Work March 11, 1996 Contact: Nancy Hiatt Tel. 303-924-5396 IBM Integrated Procurement Solutions 6300 Diagonal Highway P.O. Box 1900 Boulder, Colorado 80301-9191 Department: PRB1 Building: 001H Service Agreement Number 2165 - -------- Contents 1.0 Term ..................................... 1 1.1 Project Description ...................... 1 1.2 Responsibilities As An IBM Subcontractor.. 1 1.3 Coordinators/Supervisors ................. 1 1.4 Work Schedules ........................... 2 1.5 IBM Workstation Support Locations ........ 2 1.5.1 "C" Programmer Support Group, Atlanta ................................. 2 1.5.2 Advanced Workstation Support Center, Chicago.................................. 2 1.5.3 Desktop Support Center, Atlanta ..... 3 1.5.4 Network Support Center, Atlanta ..... 3 1.5.5 EUS Center, Tampa ................... 5 1.6 IBM Large Computing Support Location...... 5 1.6.1 MVS Support Group, Atlanta .......... 5 1.7 Graphics Coordinator ..................... 5 1.8 Training ................................. 6 1.9 Transitional Training .................... 6 1.10 Measurements ............................ 6 1.10.1 Basic Understanding ................ 7 1.10.2 Minimum Customer Satisfaction Level. 7 1.10.3 Quality Measurements/Reporting ..... 7 1.11 Acceptance Criteria...................... 7 1.12 IBM Responsibilities..................... 7 1.13 CGS Responsibilities..................... 8 1.14 Rate Schedule............................ 9 1.15 Glossary of Terms........................ 12 Contents ii - -------------------------------------------------------------------------------- 1.0 Term The term of this Statement of Work dated March 11, 1996 is effective from January 1, 1996 through December 31, 1996. - -------------------------------------------------------------------------------- 1.1 Project Description Helpdesk Services (HDS) is an IBM Workstation Support services capability, which provides helpdesk support for many hardware and software products, both IBM and non-IBM (specifics by location follow). CGS employees must be able to provide support for all of these environments. The number of CGS employees performing tasks may change with the concurrence of both parties. This number can fluctuate based on the number of customers being supported and the cost of support from CGS as compared to alternate sources. CGS will periodically be asked to supply additional employees (either full time or part time) to meet these needs. When requesting additional CGS employees IBM will identify specific product skills which the CGS employees must possess before being assigned to work in IBM. - -------------------------------------------------------------------------------- 1.2 Responsibilities As An IBM Subcontractor CGS employees shall be responsible for: . Answering requests for service received via telephone from customers and providing the required information/resolution of customer issues. The requests will involve questions and/or problems related to the use, configuration, or installation of the supported products. The questions must be answered in a complete, accurate, and timely fashion. . Demonstrating sufficient technical knowledge of the supported products listed to provide problem determination for the customer and usage assistance to customers, and to obtain information as needed from the product vendor. . Demonstrating tact, sound business judgement, and good communication skills when dealing with customers, with IBM employees, and with product vendors. . Demonstrating effective telephone communication skills. . Provide efficient use and successful completion of customer requests using the call management system to handle call activity and to record symptom/fix information. . Utilizing call handling/routing processes and procedures established between IBM and CGS. . Training of CGS employees on additional products to assist IBM when workload peaks occur or when other responsibilities listed above are not being pursued. . Recognizing when a customer situation warrants the intervention of an IBM manager and reporting the situation immediately. . Maintaining an acceptable business appearance and conduct. . Providing technical representatives capable of delivering prompt, quality solutions as described in the "IBM Helpdesk Services Locations" section. - -------------------------------------------------------------------------------- 1.3 Coordinators/Supervisors IBM and CGS shall appoint Site Coordinators. Each party shall inform the other of the name(s) of the coordinators appointed at the date of contract execution. CGS shall appoint a Site Coordinator, who shall supervise and direct the work of CGS employees and shall handle all personnel issues. This supervisor will interface with the IBM Site Coordinator(s) and will be the focal point for all on-site CGS interaction. This CGS Site Coordinator will be provided at no additional charge. The CGS Site Coordinator is expected to attend regularly scheduled technical meetings and reviews. The CGS Site Coordinator is expected to review CGS employee contributions on a regular basis to ensure CGS employees are achieving the quality/productivity goals as described later in the "Quality Assurance" section. The CGS Site Coordinator will receive reports on a regular basis, detailing call activity for all CGS employees. The CGS Site Coordinator is expected to actively assist the IBM Site Coordinator in improving overall HDS services. 1 - -------------------------------------------------------------------------------- 1.4 Work Schedules The IBM Support Centers provide customer assistance 24 hours per day, 7 days per week. CGS must be able to fulfill all shift requirements. Exact work hours will be determined by the IBM Site Coordinator in conjunction with CGS. CGS will be asked to supply part time employees to work 3-5 hours during "peak" workload times. Job descriptions are provided in Section 1.13. Since IBM Support Centers operate on a 24 hours per day, 7 days per week schedule, employees, including some number of CGS employees, will be required to work on IBM designated Holidays. - -------------------------------------------------------------------------------- 1.5 IBM Workstation Support Locations The following are the current IBM locations where CGS employees are required to provide telephone assistance to remotely diagnose customer problems/questions and communicate a correct response: 1.5.1 "C" Programmer Support Group, Atlanta "C" Programmer Design, develop and test programming tools written with "C". Requires strong "C" level programming skills. Prepare high level component designs from general requirement statements and provide component design documentation. Requires minimal supervision and is capable of designing drivers to test integrated modules. Senior "C" Programmer - same as above, plus: . Provide technical direction a group of "C" programmers . Provide informal and/or formal training in areas of expertise . Provide debugging, PD and system assistance to application developers . Provide consulting and programming services on operating systems software and other areas of expertise, including database internals and system utilities 1.5.2 Advanced Workstation Support Center, Chicago CGS employees will have all necessary skills, knowledge and expertise to provide support on: . RISC/6000 Hardware Problem Determination Provide prompt, quality support for hardware and usage problems related to the RISC/6000 operating environment. Responders require one to two years experience on the RISC/6000 hardware platform, support experience, strong interpersonal skills, attention to detail, demonstrated call leadership, ability to follow center procedures, team player, and potential to qualify as an AIX/UNIX support rep. . MULTIVENDOR SUPPORT - Provide remote hardware and software support for UNIX platforms. Responders require two to three years experience as a UNIX Administrator, knowledge of SUN, HIP, and SCO, ability to apply administrative knowledge in a variety of environments, attention to detail, strong interpersonal skills. . RISC/6000 CUSTOMER CALL SCREENING - Provide hardware and software RISC/6000 and AIX call screening and problem resolution. Responders require two to three years with the RISC/AIX platform as an administrator or equivalent experience. Strong communication skills, attention to detail, ability to follow center procedures, customer orientation, sensitive to escalation process, and a team player. . PNID/PARTS NUMBER SERVICE - Provide remote parts number identification services to IBM customers. Responders require strong organizational and communication skills, operational knowledge of a PC, be a team player and customer focused. 2 1.5.3 Desktop Support Center, Atlanta Desktop Support Representative CGS employees will have all necessary skills, knowledge and expertise including A + Certification to: provide assistance on and have a good working knowledge of PC, PS/2 Point of Sale terminals, and/or associated workstation equipment. Senior Desktop Support Representative - same as above, plus: . Provide strong computer skills specific to the product supported . Provide strong problem determination skills . Capable of training and assisting Desktop representatives . Provide excellent customer service techniques . Possess excellent oral and written communications skills Desktop Support Center Team Leader - This position is limited to one (l) team leader per twenty-five (25) employees within the Desktop Support Center. The team leader is expected to respond to customer/ce calls 50% of the time as describe in the position above, plus: . Schedule assigned resources to workload and alert IBM when available skills and/or resources will not satisfy a known engagement . Provide overall work direction to a team of technical resources sufficient to satisfy assigned service level objectives . Identify and respond to critical changes within assigned mission (technical, distribution of workload, etc.) with action plans for IBM review and implementation . Demonstrate ability to serve as escalation point for all critical customer calls System Installation Technician Position Concept: Travel to various customer locations to install computer systems and disconnect existing equipment. Responsibilities . Travel to customer locations based on a provided schedule . Unpack hardware systems and install according to procedures. Back up data from existing system. Load data to new system. Diagnose any system problem discovered during process. Disconnect existing system. Pack specified items for return. . Accurately complete online electronic form with the required information for the new system and the disconnected system. . Perform customer training on the new system. . Communicate any problems/discrepancies to Project Manager(s). . Utilize good judgement when handling any unusual situations. . Submit accurate labor and expense data on a timely basis. 1.5.4 Network Support Center, Atlanta The Network Support Center is comprised of four groups; LAN SERVICES Support, IDNX, LAN/WAN Connectivity, and Wireless/Cellular Helpdesk. The LAN Services environment is separated into three (3) skill requirements: l. Remote LAN Monitoring & Administration; 2. LAN Software - level II to perform Network Operating System (NOS) single product certification required and must be assigned workload in one of the following: Netware, Microsoft NT, Banyan, OS/2 Lanserver, etc.; and 3. LAN Software - Level II multiple NOS product certification and assigned workload. A Team Leader may be named and is limited to one (l) per twenty-five (25) employees within the Network Support Center. The team leader is expected to respond to customer/ce calls 50% of the time. Other duties are described in the job description. 1.5.4.1 LAN SERVICES SUPPORT CGS employees will have all necessary skills, knowledge and expertise to: . Provide remote support to IBM internal Lan installations in a LAN Administration support role. Must be able to troubleshoot over the phone all hardware/software problems associated with IBM Lanserver and OS/2 related 3 problems. Requires in-depth knowledge of IBM Lanserver and OS/2. . Provide remote telephone support to customer's to isolate LAN failures to the failing component. Interface with other IBM resources on LAN related issues and OEM vendor conference calls as a technical resource for the customer. . Provide direct dial in support for servers, includes monitoring critical resources, error and event logs, tuning, down loading software code, backing up critical files and operating system configurations, adding/ deleting users, resetting passwords, creating print servers, etc. . Products Supported: - - Servers: file, print, gateway, domain, MAU's, LAM's, CAU'S connectivity, token ring and ETHERNET topologies, LAN operating systems (OS/2 LANServer, NOVELL, etc.), IBM and OEM LAN adapter cards. . Environments supported: - - Hardware, software, configuration, tuning, multi-vendor product connectivity. . Certifications: - - Novell CNE, Banyan, Windows NT, OS/2 Operating system, Netware, LAN Network Manager, etc. Environment will require assigned workload in either single product or multiple product certified skills. - - Billing Rates: - - Bill Rates are based on each of the three (3) skill groups and on length of time in skill group based on entry, 3 months, and 6 months. CGS employees currently in these skill groups as of March 8, 1996 will remain at their present bill rate. A listing is to be provided to IPS with the employees name and bill rate as of March 8. All subsequent CGS employees will be at the rates listed in the Rate Schedule of this document. 1.5.4.2 IDNX SUPPORT CENTER CGS employees will provide direct support to IBM end users customers, and other IBM organizations, on workstations and remotely diagnosing event and error logs, to resolve hardware problems with voice and data equipment, working with TELCO and other equipment supplier vendors identified by IBM. Requires an in-depth knowledge of multiplexors, data communications devices, and switches. . Products supported: - IDNX - ADNX - STM . Environment Supported: - Wide area high bandwidth, PBX/CBX, Channel banks, echo cancellors, T-l/T-3, LWX Lan adapter, voice, data, video, image, frame relay, all speeds of data transmission. 1.5.4.3 LAN/WAN CONNECTIVITY SUPPORT CENTER CGS will isolate all network failures to a failing component, invoke and coordinate IBM resources, as required, participate in OEM vendor and TELCO conference calls as a technical resource for the customer. Interface with product and software engineering on defects and quality issues. . Products Supported: - - All IBM communication type products (modems, controllers, adapters, CPU's, etc.), over 200 in number. OEM communication type products. . Environment Supported: - - Hardware, software, configuration, TELCO carriers, OEM vendors. 1.5.4.4 WIRELESS/CELLULAR HELPDESK Wireless/Cellular Helpdesk Representative CGS employees will provide support to IBM end user customers that have contracted for cellular helpdesk services. Strong technical knowledge and/or experience in the cellular/wireless industry 4 to accurately and quickly perform problem determination and resolution. Must have thorough knowledge of a11 PC Laptops (IMB and OEM). Must be "Modem literate" pertaining to all types, capabilities, and standards, compression and error protocols, and completed range of asynchronous terminology. Familiar with CDPD for purpose of installation assistance, trouble-shooting, including some knowledge of TCP/IP concepts and protocols. Senior Wireless/Cellular Helpdesk Representative - same as above, plus: . In-depth knowledge of all laptops, modems, cellular protocols . Able to train and assist Cellular/wireless helpdesk representative . In-depth knowledge of TCP/IP protocols and networks . Be escalation point for difficult technical problems 1.5.4.5 NETWORK TEAM LEADER Network Support Center Team Leader -This position is limited to one (l) team leader per twenty-five (25) employees within the Network Support Center. The team leader is expected to respond to customer/ce calls 50% of the time as described in the position above plus: . Schedule assigned resources to workload and alert IBM when available skills and/or resources will not satisfy a known engagement . Provide overall work direction to a team of technical resources sufficient to satisfy assigned service level objectives . Identify and respond to critical changes within assigned mission (technical, distribution of workload, etc.) with action plans for IBMS review and implementation . Demonstrate ability to serve as escalation point for all critical customer calls 1.5.5 EUS Center, Tampa End User Support (EUS) supports over 250 IBM and non-IBM and commercially available, cross industry, PC software applications and PC hardware products: this includes DOS, OS/2, and Apple Macintosh operating systems. EUS also provides support on custom software/hardware. A custom product is an application developed by an IBM end user or its vendor to meet unique needs. CGS employees must have the capability to learn and support products that IBM is or may be supporting and have the ability to learn new custom products which IBM may elect to support in the future. Certifications include Microsoft Certified Professional, OS/2 Certified Engineer/Instructor, Microsoft Windows 95 Certification, Certified Novell Engineer. Additional acceptable certifications require prior written approval of both IBM Procurement and the IBM Site Coordinator. - -------------------------------------------------------------------------------- 1.6 IBM Large Computing Support Location The following are the current IBM locations where contract employees are required to provide telephone assistance to remotely diagnose customer problems/questions and communicate a correct response: 1.6.1 MVS Support Group, Atlanta Provide remote systems support to MVS customers worldwide. Requires an in-depth knowledge of MVS internals, sub-systems, and program products. - -------------------------------------------------------------------------------- 1.7 Graphics Coordinator Position Concept: Is responsible for creating and updating quality process and presentation charts on a timely basis. Primarily uses Lotus Freelance as the software on a PS/2 type machine. Will operate equipment associated with producing high-quality charts such as printers and plotters. 5 Responsibilities . Operates basic graphics equipment and programs. . Tracks due dates on process charts. . Updates and distributes process charts monthly. . Provides assistance for other presentation charts. . Performs other duties, as assigned. . Maintains soft copies of all charts created. . Ensures equipment used is maintained and usable. - -------------------------------------------------------------------------------- 1.8 Training Training provided by CGS to its employees supporting IBM will fall into one of three categories new employee, continuing. or new support. "New employee" training is a combination of technical and process education. CGS is responsible for the "new employee" technical education required for CGS employees prior to being assigned to IBM. This training must ensure that new CGS employees have sufficient technical knowledge of the supported products to provide reliable problem determination and usage assistance to customers, and to provide an efficient interface with the product vendor. CGS is responsible for providing IBM with a detailed outline of their "new employee" technical training plan, and the criteria used to certify completion of the training plan for each employee. All CGS employees are expected to complete this certification process prior to being assigned to work supporting IBM. IBM will not be responsible for any charges associated . with this training. CGS employees will be expected to maintain currency on new versions and new releases of supported products. This training is described as "continuing" training. Time spent on "continuing" training activities is on-going for uniform improvement of technical skills. "New support" training applies to time spent on education required to provide new or improved support to customers. IBM will provide for "new support" training for CGS Site Coordinators. This type of training may occasionally involve certification tests or exams. IBM will pay all costs associated with the training of site coordinators (unless special provisions are made in advance). CGS is expected to provide this training, testing and certification to its employees and to pay for the cost of the certification tests or exams. When a certified CGS employee leaves, CGS will be responsible to provide an equivalent skill replacement or be responsible for associated certification training expense. IBM will provide "new employee" process education on specific items which are considered to be unique to IBM. This education will be conducted once for the CGS Site Coordinator (or their designated representative). Thereafter, the CGS Site Coordinator is responsible for the "new employee" process education for all other CGS employees. The IBM Site Coordinator shall coordinate all IBM activities in support of the "new employee" process training. - -------------------------------------------------------------------------------- 1.9 Transitional Training In the event of cancellation or at the expiration of this Agreement, CGS agrees to provide a minimum of fifteen (15) days transitional training to a supplier to be specified by IBM if other than CGS. Said training shall be conducted by an adequate number of CGS employees to ensure continuity of service at a competent level of performance. IBM shall pay for such training at the rates specified in the Statement of Work for the job descriptions of the employees providing such training. CGS shall ensure that it continues to meet all performance and quality requirements specified in the Statement of Work throughout such training period. - -------------------------------------------------------------------------------- 1.10 Measurements CGS shall be responsible for Customer satisfaction survey results for calls responded to by CGS employees. The surveys will be conducted under IBM's authorization on a random basis. The sample should include a minimum of 5% to 8% of IBM end users whose problems have been resolved. Customer satisfaction results are a key indicator of service and will be shared between IBM and CGS 6 on a weekly basis. Improvement plans, as required, will be jointly developed and implemented. 1.10.1 Basic Understanding CGS will provide employees who can meet or exceed a minimum customer satisfaction level (see detail below) for all sites where it provides services to IBM. CGS will track these levels and replace any employees not meeting the minimum customer satisfaction level within two weeks. If a CGS employee leaves or is dismissed, CGS will be fully responsible for all regular hourly reimbursement (equivalent hours at IBM site, not to be greater than 90 days) associated with training a replacement. 1.10.2 Minimum Customer Satisfaction Level CGS employees must maintain an average of 95% minimum customer satisfaction level based on IBM's customer satisfaction survey. The satisfaction level is to be measured quarterly using a rolling three month average. Should any CGS employee not maintain an average of 95% minimum customer satisfaction level, CGS will notify IBM that the situation will be corrected within two weeks. CGS will be liable for up to three month's regular hourly reimbursement to train any necessary replacement(s). 1.10.3 Quality Measurements/Reporting IBM will provide the CGS Site Coordinator with reports and/or information detailing CGS's performance against the quality goals. This information will be supplied on a weekly and/or monthly basis. The CGS Site Coordinator is expected to work with the IBM Site Coordinator to ensure attainment of quality goals. CGS employees will participate and demonstrate commitment to quality improvement programs such as IBM Business Management Measurements (BMM) and ISO 9000 assessments/certification. Specific measurements will be developed by IBM and CGS to gauge performance and quality requirements. Overall areas measured will include but are not limited to: . Qualification of staff - Calls per day per rep . Adherence to procedures . Customer satisfaction . Quality control - Problem Duration - Call Response time/Call Abandon Rate - First Call Resolution - Minimal Customer Situation Information System (CSIS) incidents (actual formula to be determined) - -------------------------------------------------------------------------------- 1.11 Acceptance Criteria Initial acceptance will depend on evaluation of the vendor's ability to meet the scope defined in this document. Key criteria that will be reviewed includes but not limited to: . Cost . Quality . Management - -------------------------------------------------------------------------------- 1.12 IBM Responsibilities IBM is responsible for the following: . Existing Processes and Procedures . IBM Site Safety, Security and personnel conduct policies . Hardware/Software/Tools as described below (IBM Business use only) IBM will provide and maintain ownership of IBM PC'S or PS/2'S, printers, as well as any IBM and OEM software/hardware and all related technical manuals it deems necessary. Maintenance of the equipment will be performed by IBM. . Office facilities . Personal shared workstation and required software . Phone, headset, and phone system . Access to required systems/tools - RETAIN - KBS - VM - EUS ON-LINE 7 . Access to any additional required equipment . Badge access to assigned location Note: The supplier shall follow the practices, procedures and priorities of IBM in the use of IBM equipment, systems, and tools. - -------------------------------------------------------------------------------- 1.13 CGS Responsibilities CGS is responsible for the following: . Answer customer requests in a timely, professional, and accurate manner . Monitor call quality using a remote call monitoring system . Ensure operating processes and procedures are accurately followed . Assist in updating these processes and procedures as required . Update customer database records . Ensure skill requirements are met, maintained and updated . Provide effective management of personnel and workload . Train any additional personnel required after initial training . Support and adhere to ISO 9000 registration when complete and all other quality programs (CGS personnel will talk to ISO 9000 auditors if asked) . Evaluate work performance and increase or decrease to allow for efficiencies or increased workload at IBM's approval . CGS shall supply for IBM's review and approval, transition and implementation plans to meet targets . CGS management is expected to have regularly scheduled status meetings and provide written reports to the IBM Site Coordinator monthly. . Adhere to IBM Site Safety, Security and personnel conduct policies . Define process which manages new requirements from IBM . Monthly Quality updates and action plans . Perform configuration and setup of hardware and installation of software packages for the equipment assigned to them. 8 - -------------------------------------------------------------------------------- 1.14 Rate Schedule - -------------------------------------------------------------------------------- Table 1. Rate Schedule - -------------------------------------------------------------------------------- Job Description - "C" Programmer - $/HR $/HR Atlanta Pay Rate Bill Rate - -------------------------------------------------------------------------------- Programmer **** **** Senior "C" Programmer **** **** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 2. Rate Schedule - -------------------------------------------------------------------------------- Job Description - Atlanta Desktop $/HR $/HR Pay Rate Bill Rate - -------------------------------------------------------------------------------- Desktop Support Representative **** **** Senior Desktop Support Represen- **** **** tative Desktop Support Team Leader **** **** System Installation Technician **** **** - -------------------------------------------------------------------------------- **** Confidential treatment is being requested for these portions of this agreement. 9 - -------------------------------------------------------------------------------- Table 3. Rate Schedule - -------------------------------------------------------------------------------- Job Description - Atlanta Network $/HR $/HR Support Pay Rate Bill Rate - -------------------------------------------------------------------------------- LAN Monitoring & Administration - **** **** Entry LAN Monitoring & Administration - **** **** 3 months in position LAN Monitoring & Administration - **** **** 6 months in position LAN Software- Single NOS Product **** **** Certification Assigned - Entry LAN Software- Single NOS Product **** **** Certification Assigned - 3 Months LAN Software - Single NOS Product **** **** Certification Assigned - 6 Months LAN Software - Multi-NOS Product **** **** Certification Assigned - Entry LAN Software - Multi-NOS Product **** **** Certification Assigned - 3 Months LAN Software- Multi-NOS Product **** **** Certification Assigned - 6 Months IDNX Remote Support Represen- **** **** tative LAN/WAN Connectivity Support **** **** Representative Wireless/Cellular Support Represen- **** **** tative Senior Wireless/Cellular Support **** **** Representative Network Support Team Leader **** **** - -------------------------------------------------------------------------------- **** Confidential treatment is being requested for these portions of this agreement. 10 - -------------------------------------------------------------------------------- Table 4. Rate Schedule - -------------------------------------------------------------------------------- Job Description- Chicago Advanced $/HR $/HR Workstation Support Pay Rate Bill Rate - -------------------------------------------------------------------------------- RISC/6000 Hardware PD **** **** Multivendor Support Representative **** **** - - UNIX RISC/6000 Call Screening - **** **** RISC/AIX PNID/Parts Number Service **** **** - -------------------------------------------------------------------------------- Table 5. Rate Schedule - -------------------------------------------------------------------------------- Job Description - Tampa EUS $/HR $/HR Pay Rate Bill Rate - -------------------------------------------------------------------------------- SW Application Support Represen- **** **** tative up to 3 years IBM experience SW Application Support Represen- **** **** tative with IBM approved certif- ication or 3 years IBM experience - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 6. Rate Schedule - -------------------------------------------------------------------------------- Job Description - MVS Support Rep- $/HR $/HR resentative Pay Rate Bill Rate - -------------------------------------------------------------------------------- MVS Support Representative **** **** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 7. Rate Schedule - -------------------------------------------------------------------------------- Job Description - Graphics Coordi- $/HR $/HR nator Pay Rate Bill Rate - -------------------------------------------------------------------------------- Graphics Coordinator **** **** - -------------------------------------------------------------------------------- . Notes -- IBM shall pay overtime at a rate of ****% of the regular pay rate. -- IBM will not pay shift premium -- IBM will not pay overtime for CGS managers/CGS Site Coordinator -- Pay rate times uplift equals the bill rate **** Confidential treatment is being requested for these portions of this agreement. 11 -- It is IBM's intent to reimburse for "productive" hours worked. Supplier should plan on invoicing IBM for actual hours worked at the support center location. Vacation/sick and other time away from the job should be absorbed in overhead. -- CGS will not use an employee assigned to an IBM location for any outside consulting work without receiving advanced authorization, in writing, from IBM. - -------------------------------------------------------------------------------- 1.15 Glossary of Terms . "Technical Representative" is a person who is skilled in the use of a product and is considered to be of an advisory capacity on the product. . "Help Desk" Services (HDS) are a bundle of separate services available through IBM's Workstation Technical Support organization to provide a comprehensive array of services that uniquely address a customer's needs in today's complex mixed vendor computer processing environments. . "OEM" is the original equipment manufacturer (e.g. Compaq, Apple, etc.). . "Problem" is a singular request for assistance on a specific product. Requests for assistance on multiple products, or different problems with the same product will be considered to be multiple problems. If an initial answer does not resolve the problem, subsequent calls may be placed under the original problem number. A problem may involve multiple conversations or actions: the initial request, off-line research, a callback. and closure. . "NOS" is a Network Operating System such as OS/2 LANServer, BANYAN, MICROSOFT NT, etc. . "Supported Product" is an eligible software/hardware product which is on a current Workstation Technical Support supported product list. Supported implies trained personnel are ready and available to handle calls on the product. . "Workstation" is a machine of an eligible type and at least one eligible program listed on the supported product list. . "CSIS" (Customer Situation Information System) is IBM's customer complaint system for tracking, monitoring, and ensuring satisfactory resolution. . "Entitlement" is the process of ensuring customers are entitled to receive warranty/maintenance service or helpdesk services from IBM. . "Retain" (Remote Technical Assistance Network) is IBM's world-wide database storing customer problem records. . "VM" (Virtual Machine) is the IBM mainframe operating system. . "Trailer Call" is the process used to measure a customer's level of satisfaction with the way their call was handled. . "ISO 9000" are internationally recognized industry standards which identify the requirements for an effective quality management system. AMENDMENT TO SERVICE AGREEMENT BETWEEN INTERNATIONAL BUSINESS MACHINES CORPORATION AND COMPUTER GENERATED SOLUTIONS INC. DECEMBER 20, 1996 Vivian Valvo 212-745-6011 IBM CUSTOMER SOLUTIONS PROCUREMENT 590 MADISON AVENUE NEW YORK,NY 10022 SERVICE AGREEMENT NUMBER 2165 Amendment #3 This document shall be a formal amendment to Service Agreement Number 2165 dated October 04, 1995. Except as hereby amended, all other terms and conditions of this Agreement shall remain in full force and effect as written. This Agreement can be canceled by both IBM or CGS. By 30 days written notice. If you agree with the above modifications, this document shall constitute an Amendment to Agreement Number 2165. Please indicate your agreement by signing both copies of this document and returning one copy to IBM Corp., 590 Madison Avenue, New York, N.Y. 10022, Attention: Vivian Valvo, Dept. 001H. In witness whereof, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives. International Business Machines Corporation Computer Generated Solutions Inc. By: /s/ By: /s/ Philip Friedman ---------------------------------- ----------------------------- Title: Contracts Admin. Title: President ------------------------------- --------------------------- Date: 1/29/97 Date: 1/23/97 -------------------------------- --------------------------- CONTENTS
1.0 Term 1 1.5.4.4 Network Team Leader 4 1.1 Project Description 1 1.6 EUS Center, Tampa 4 1.2 Responsibilities as an IBM Subcontractor 1 1.7 IBM Large Computing Support Location 4 1.3 Coordinators/Supervisors 1 1.7.1 MVS Support Atlanta 4 1.4 Work Schedules 1 1.8 Training 4 1.5 IBM Workstation Support Locations 1 1.9 Transitional Training 5 1.5.1 Advanced Workstation Support Center 2 1.10 Service Level Agreement 5 Chicago 1.5.2 Desktop Support Center, Atlanta 2 1.10.1 Basic Understanding 5 1.5.3 Network Support Center, Atlanta 2 1.10.2 Minimum Customer Satisfaction Level 5 1.5.4 LAN Services Support 3 1.10.3 Duality Measurement/Reporting 5 1.5.4.1 IDNX Support Center 3 1.10.4 Risk/Reward Incentives 5 1.5.4.2 LAN/WAN Connectivity Support Center 3 1.10.5 IBM Responsibilities 5 1.5.4.3 Wireless/Cellular HelpDesk 3 1.10.6 CGS Responsibilities 6 1.11 Glossary of Terms 6
Pricing for 1997 IBM Technical Support Relationship
At IBM At CGS Atlanta** Per Call - Desktop $ **** $ N/A ------- Point of Sale $ **** $ N/A ------- Server $ **** $ N/A ------- Per Hour - Uncertified $ **** ------- Certified $ **** ------- Desktop / Network *Team Leader $ **** ------- CHICAGO:** Per Call - Call Screening $ **** $ N/A ------- CE Support $ **** $ N/A ------- Parts Tier II $ **** $ N/A ------- PNID $ **** $ N/A ------- Per Hour - UNIX Admin $ **** ------- Stand $ **** ------- <****> **** call / mo. Tampa:*** Per Call Express $ **** $ **** / $ **** ---- ----- ----- Lite $ **** $ **** / $ **** ---- ----- ----- Comprehensive $ **** $ N/A ----- Per Hour - Uncertified $ **** $ N/A ----- Lotus Certified* $ **** $ N/A -----
* Two Levels Of Admin. Certification only Implementation of Scheduling; Risk Reward start dates for the following queues are as follows: **Atlanta: Desktop 2/16/97 Point of Sale 2/16/97 Server 3/16/97 **Chicago: Call Screening 2/16/97 CE Support 3/16/97 Parts Tier II 1/16/97 PNID 1/16/97 ***Tampa: Please refer to 1.10.4 for Risk Reward start dates **** Confidential treatment is being requested for these portions of this argument. 1.0 Term The term of this Statement of Work dated Jan. 1 effective from January 1,1997 through December 31, 1999. 1.1 PROJECT DESCRIPTION Helpdesk Services (IIDS) is an IBM Workstation Support services capability, which provides helpdesk support for many hardware and software products, both IBM and non-IBM (specifies by location follow), CGS employees must be able to provide support for all of these environments. The number of CGS employees performing hourly tasks may change with the concurrence of both parties. This number can fluctuate based on the number of customers being supported and the cost of support from CGS as compared to alternate sources. CGS will periodically be asked to supply additional employees (either full time or part time) to meet these needs. When requesting additional CGS employees, IBM will identify specific product skills which the CGS employees must possess before being assigned to work in IBM. The member that are performing non-hourly task (standard rate per call) will be determined by CGS to maintain IBM's standard of measure. Further, both parties have agreed that a number (to be determined) of calls may be redirected from an IBM HDS center to a CGS owned facility for resolution. 1.2 RESPONSIBILITIES AS AN IBM SUBCONTRACTOR CGS employees shall be responsible for: . Answering requests for service received via telephone from customers and providing the required information/resolution of customer issues. The requests will involve questions and/or problems related to the use, configuration, or installation of the supported products. The questions must be answered in a complete, accurate, and timely fashion. . Demonstrating sufficient technical knowledge of the supported products listed to provide problem determination for the customer and usage assistance to customers, and to obtain information as needed from the product vendor. . Demonstrating tact, sound business judgment, and good communication skills when dealing with customers, with IBM employees, and with product vendors. . Demonstrating effective telephone communication skills. . Provide efficient use and successful completion of customer requests using the call management system to handle call activity and to record sympton/fix information. . Utilizing call handling/routing processes and procedures established between IBM and CGS. . Training of CGS employees on additional products to assist IBM when workload peaks occur or when other responsibilities listed above are net being pursued. . Recognizing when a customer situation warrants the intervention of an IBM manager and reporting the situation immediately. . Maintaining an acceptable business appearance and conduct. . Providing technical representatives capable of delivering prompt, quality solutions as described in the "IBM Helpdesk Services Locations" section. 1.3 COORDINATORS/SUPERVISORS IBM and CGS shall appoint Site Coordinators. Each party shall inform the other of the name(s) of the coordinators appointed at the date of contract execution. CGS shall appoint a Site Coordinator, who shall supervise and direct the work of CGS employees and shall handle all personnel issues. This supervisor will interface with the IBM Site Coordinator(s) and will be the focal point for all on-site CGS interaction. This CGS Site Coordinator will be provided at no additional charge. The CGS Site Coordinator is expected to attend regularly scheduled technical meetings and reviews. The CGS Site Coordinator is expected to review CGS employee contributions on a regular basis to ensure CGS employees are achieving the quality/productivity goals as described later in the "Quality Assurance" section. The CGS Site Coordination will receive reports on a regular basis, detailing call activity for all CGS employees. The CGS Site Coordinator is expected to actively assist the IBM Site Coordination in improving overall HDS services. 1.4 WORK SCHEDULES The IBM Support Centers provide customer assistance 24 hours per day, 7 days per week. CGS must be able to fulfill all shift requirements. Since IBM Support Centers operate on a 24 hours per day, 7 days per week schedule, employees, including some number of CGS employees, will be required to work on IBM designated Holidays. 1.5 IBM WORKSTATION SUPPORT LOCATIONS The following are the current IBM locations where CGS employees are required to provide telephone assistance to remotely diagnose customer problem/questions and communicate a correct response: 1.5.1 ADVANCED WORKSTATION SUPPORT CENTER, CHICAGO CGS employees will have all necessary skills, knowledge and expertise to provide support on: . RISC/6000 Hardware Problem Determination. Provide prompt, quality support for hardware and usage problems related to the RISC/6OOO operating environment. Responders require one to two years experience on the RISC/6000 hardware platform, support experience, strong interpersonal skills, attention for detail, demonstrated call leadership, ability to follow center procedure, team player, and potential to qualify as an AIX/UNIX support rep. . MULTIVENDOR SUPPORT - Provide remote hardware and software support for UNIX platforms. Responders require two to three years experience as a UNIX Administrator, knowledge of SUN, IIP, and SOC, ability to apply administrative knowledge in a variety of environments, attention to detail, strong interpersonal skills. . RISC/6000 CUSTOMER CALL SCREENING - Provide hardware and software RISC/6000 and AIX call screening and problem resolution. Responders require two to three years with RISC/AIX platform as an administrator or equivalent experience. Strong communication skills, attention to detail, ability to follow center procedures, customers, orientation, sensitive to escalation process, and a team player. . PNID/PARTS NUMBER SERVICE - Provide remote parts number identification services to IBM customers. Responders require strong organizational and communication skills, operational knowledge of a PC, be a team player and customer focused. 1.5.2 DESKTOP SUPPORT CENTER, ATLANTA Desktop Support Representative CGS employees will have all necessary skills, knowledge and expertise including A+ Certification to: provide assistance on and have a good working knowledge of PC, PS/2 Point of Sale terminals, and/or associated workstation equipment. Senior Desktop Support Representative - same as above, plus: . Provide strong computer skills specific to the product supported. . Provide strong problem determination skills. . Capable of training one assisting Desktop representatives. . Provide excellent customer service techniques. . Possess excellent oral and written communications skills. Desktop Support Center Team Leader - This position is imited to one (1) team leader per twenty-five (25) employees within the Desktop Support Center. The team leader is expected to respond to customer/ce calls 50% of the time as describe in the position above, plus: . Schedule assigned resources to workload and alert IBM when available skills and/or resources will not satisfy a known engagement. . Provide overall work direction to a team or technical resources sufficient to satisfy assigned service level objectives. . Identify and respond to critical changes within assigned mission (technical, distribution of workload, etc.) with action plans for IBM review and implementation. . Demonstrate ability to serve as escalation point for all critical customer calls. System Installation Technician Position Concept: Travel to various customer locations to install computer systems and disconnect existing equipment. Responsibilities . Travel to customer locations based on a provided schedule. . Unpack hardware systems and install according to procedures. Back up data from existing system. Load data to new system. Diagnose any system problem discovered during process. Disconnect existing system. Pack specified items for return. . Accurately complete on-line electronic term with the required information for the new system and the disconnected system. . Perform customer training on the new system. . Communicate any problems/discrepancies to Project Manager(s). . Utilize good judgment when handling any unusual situations. . Submit accurate labor and expense data on a timely basis. 1.5.3 NETWORK SUPPORT CENTER, ATLANTA The Network Support Center is comprised of four groups; LAN SERVICES Support, IDNX, LAN/WAN Connectivity, and Wireless/Cellular Helpdesk. The LAN Services environment is separated into three (3) skill requirements: 1. Remote LAN Monitoring & Administration: 2. LAN Software - level II to perform Network Operating System (NOS) single product certification required and must be assigned workload in one of the following: Netware, Microsoft NT, Banyan, OS/2 Lanserver, etc.; and 3. LAN Software - level II multiple NOS product certification and assigned workload. A Team Leader may be named and is limited to one (1) per twenty-five (25) employees within the Network Support Center. The team leader is expected to respond to customer/ce calls 50% of the time. Other duties are described in the job description. 1.5.4 LAN SERVICES SUPPORT CGS EMPLOYEES will have all necessary skills, knowledge and expertise to: . Provide remote support to IBM internal LAN installation in a LAN Administration support role. Must be able to troubleshoot over the phone all hardware/software problems associated with IBM Lanserver and OS/2 related problems. Requires in-depth knowledge of IBM Lanserver and OS/2. . Provide remote telephone support to customer's to isolate LAN failures to the failing component. Interface with other IBM resources on LAN related issues and OEM vendor conference calls as a technical resource for the customer. . Provide direct dial in support for servers, includes monitoring critical resources, error and event logs, tuning, down loading software code, backing up critical files and operating system configurations, adding/deleting users, resetting passwords, creating print servers, etc. . Products Supported: . Servers, file, print, gateway, domain MAU's, LAM's, CAU's connectivity token ring and ETHERNET topologies, LAN operating systems (OS/2 Lanserver, NOVELL, etc.), IBM and OEM LAN adapter cards. . Environments supported: . Hardware, software, configuration, tuning, multi-vendor product connectivity. . Certifications: . Novell CNE, Banyan, Windows NT, OS/2 Operating system, Netware, LAN Network Manager etc. Environment will require assigned workload in either single product or multiple product certified skills. See Bill Rate Appendix A 1.5.4.1 IDNX SUPPORT CENTER CGS employees will provide direct support to IBM end users customers, and other IBM organizations on workstations and remotely diagnosing event and error legs, to resolve hardware problems with voice and data equipment, working with TELCO and other equipment supplier vendors identified by IBM. Requires an in-depth knowledge of multiplexors, data communications devices, and switches. . Products supported: . IDNX . ADNX . STM . Environment Supported: . Wide area high bandwidth, PBX/CBX, Channel banks, echo cancellors, T-1/t-3, LWX LAN adapter, voice, data, video, image, frame relay, all speeds of data transmission. 1.5.4.2 LAN/WAN CONNECTIVITY SUPPORT CENTER CGS will isolate all network failures to a failing component, invoke and coordinate IBM resources, as required, participate in OEM vendor and TELCO conference calls as a technical resource for the customer. Interface with product and software engineering on defects and quality issues. . Products Supported: . All IBM communication type products (modems, controllers, adapters, CPU's, etc.), over 200 in number. OEM communication type products. . Environment Supported: . Hardware, software, configuration, TELCO carriers, OEM vendors. 1.5.4.3 WIRELESS/CELLULAR HELPDESK Wirless/Cellular Helpdesk Representatives CO's employees will provide support to IBM end user customers that have contracted for cellular helpdesk services. Strong technical knowledge and/or experience in the cellular/wireless industry to accurately and quickly perform problem determination and resolution. Must have thorough knowledge of all PC Laptops (IBM and OEM). Must be "modem literate" pertaining to all types, capabilities, and standards, compression and error protocols, and completed range of asynchronous terminology. Familiar with CDPD for purpose of installation assistance, trouble-shooting installing some knowledge of TCP/IP concepts and protocols. Senior Wireless/Celluar Helpdesk Representative - same as above, plus: . In-depth knowledge of all laptops, modem, cellular protocols . Able to train and assist Cellular/wireless helpdesk representative . In-depth knowledge of TCP/IP protocols and networks . Be escalation point for difficult technical problems 1.5.4.4 NETWORK TEAM LEADER Network Support Center Team Leader - This position is limited to one (1) team leader per twenty-five (25) employees within the Network Support Center. The team leader is expected to respond to customer/ce calls 50% of the time as described in the position above, plus: . Schedule assigned resources to workload and alert IBM when available skills and/or resources will not satisfy a known engagement. . Provide overall work direction to a team of technical resources sufficient to satisfy assigned service level objectives. . Identify and respond to critical changes within assigned mission (technical, distribution of workload, etc.) with action plans for IBM review and implementation . Demonstrate ability to serve as escalation point for all critical customer calls 1.6 EUS CENTER, TAMPA End User Support (EUS) supports over 250 IBM and non-IBM commercially available, cross industry, PC software applications and PC hardware products: this includes DOS, OS/2, and Apple Macintosh operating systems. EUS also provides support on custom software/hardware. A customer product is an application developed by an IBM end user or its vendor to meet unique needs. CGS employees must have the capability to learn and support products that IBM is or may be supporting and have the ability to learn new custom products which IBM may elect to support in the future. Certification inlude Microsoft Certified Professional, 0S/2 Certified Engineer/Instructor, Microsoft Windows 95 Certification, Certified Novell Engineer. Additional acceptable certifications require prior written approval of both IBM Procurement and the IBM Site Coordinator. 1.7 IBM LARGE COMPUTING SUPPORT LOCATION The following are the current IBM locations where contract employees are required to provide telephone assistance to remotely diagnose customer problems/questions and communicate a correct response. 1.7.1 MVS SUPPORT GROUP, ATLANTA Provide remote systems support to MVS customers worldwide. Requires an in-depth knowledge of MVS internals, sub-systems, and programs products. 1.8 TRAINING Training provided by CGS to its employees supporting IBM will fall into one of three categories - new employee, continuing, of new support. "New employee" training is a combination of technical and process education. CGS is responsible for the "new employee" technical education required for CGS employees prior to being assigned to IBM. This training must ensure that new CGS employees have sufficient technical knowledge of the supported products to provide reliable problem determination and usage assistance to customers, and to provide an efficient interface with the product vendor. CGS is responsible for providing IBM with a detailed outline of their "new employees" technical training plan, and the criteria used to certify completion of the training plan for each employee. All CGS employees are expected to complete this certification process prior to being assigned to work supporting IBM. IBM will not be responsible for any charges associated with this training. CGS employees will be expected to maintain currency on new versions and new releases of supported products. This training is described as "continuing" training. Time spent on "continuing" training activities is ongoing for uniform improvement of technical skills. "New support" training applies to time spent on education required to provide new or improved support to customers. IBM will provide for "new support" training for CGS Site Coordinators. This type of training may occasionally involve certification tests or exams. IBM will pay all costs associated with the training of site coordinators (unless special provisions are made in advance). CGS is expected to provide this training, testing and certification to its employees and to pay for the cost of the certification tests or exams. IBM will provide "new employees" process education on specific items which are considered to be unique to IBM. This education will be conducted once for the CGS Site Coordinator (or their designated representative). Thereafter, the CGS Site Coordinator is responsible for the new employee" process education for all other CGS employees. The IBM Site Coordinator shall coordinate all IBM activities in support of the "new employees" process training. 1.9 TRANSITIONAL TRAINING In the event of cancellation or at the expiration of this Agreement, CGS agrees to provide a minimum of fifteen (15) days transitional training to a supplier to be specified by IBM if other than CGS. Said training shall be conducted by an adequate number of CGS employees to ensure continuity of service at a competent level of performance. IBM shall pay for such training at the rates specified in the Statement of Work for the job descriptions of the employees providing such training. CGS shall ensure that it continues to meet all performance and quality requirements specified in the Statement of Work throughout such training period. 1.10 SERVICE LEVEL AGREEMENTS CGS shall be responsible for customer satisfaction survey results for calls responded to by CGS employees. On an exception basis only, an appeal process may apply when root cause analysis has detected a defect in the customer satisfaction survey beyond CGS's control. However, the appeal process will only exist if the IBM location has been successful in removing these defects from the center's customer satisfaction measurements. The surveys will be conducted under IBM's authorization at random on a monthily basis. The sample should include a minimum of 3% to 5% of IBM end users whose problems have been resolved. Customer satisfaction results are a key indicator of service and will be shared between IBM and CGS Survey Data must be provided at an agent level. Please refer to exhibits 1 to 6. 1.10.1 BASIC UNDERSTANDING CGS will provide employees who can meet or exceed a minimum customer satisfaction level for all sites where it provides servIces to IBM. CGS will track these levels and replace any employees not meeting the minimum customer satisfaction level. 1.10.2 MINIMUM CUSTOMER SATISFACTION LEVEL CGS employees must maintain an average of 95% minimum customer satisfaction level based on IBM's customer satisfaction survey. The satisfaction level is to be measured quarterly using a rolling three month average. 1.10.3 QUALITY MEASUREMENTS/REPORTING IBM will provide the CGS Site Coordinator with reports and/or information detailing CGS's performance against the quality goals. This information will be supplied on a weekly and/or monthly basis. The CGS Site Coordinator is expected to work with the IBM Site Coordinator to ensure attainment of quality goals. CGS employees will participate and demonstrate commitment to quality improvement programs such as IBM Business Management Measurements (BMM) and ISO 9000 assessments/certification. Specific measurements will be developed by IBM and CGS to gauge performance and quality requirements. Overall areas measured will include but are not limited to: . Qualification of staff . Adherence to procedures . Customer satisfaction . Quality control . Problem Duration . Call Response time/Call Abandon Rate . First Call Resolution . Minimal Customer Situation Information System (CSIS) incidents (actual formula to be determined) 1.10.4 RISK/REWARD INCENTIVES Risk/reward inventive was established and agreed to by both IBM and CGS to maximize service level agreements. It is agreed that risk/reward provision for service CGS provides at the IBM Tampa facility only will not be implemented until technology capable of supporting intelligent, skill based call routing (updated phone switch) has been installed, programmed & operational for 30 days. (CGS will provide an estimate to provide that capability if requested) Further, it is agreed that risk provisions will be waived for the month in Tampa facility only where actual call volumes exceed projected call volumes by 15% or more. CGS is still eligible for any rewards earned. However CGS will not be subject to risk. This provision will not apply if IBM provides CGS within 45 days, notice of changes to projected volumes. Exhibit No. 2, Chicago Customer Call Screening: Measurements must be defined by IBM and CGS by March 31,1997 as agreed to by IBM and CGS. Rewards will be paid on a quarterly bases for monthly results. 1.10.5 IBM RESPONSIBILITIES IBM is responsible for the following: . Existing Processes and Procedures . IBM Site Safety, Security and personnel conduct policies . Hardware/Software/Tools as described below (IBM Business use only) IBM will provide and maintain ownership of IBM PC's or PS/2'S printers, as well as any IBM and OEM software/hardware and all related technical manuals it deems necessary. Maintenance of the equipment will be performed by IBM. . Office facilities . Personal shared workstation and required software . Access to required systems/tools . RETAIN . KBS . VM . FUS ON-LINE . Access to any additional required equipment . Badge access to assigned location . Intelligent skill based call routing capability Note: The supplier shall follow the practices, procedures and priorities of IBM in the use of IBM equipment, systems, and tools. 1.10.6 CGS Responsibilities CGS is responsible for the following: . Answer customer requests in a timely, professional, and accurate manner . Monitor call quality using a remote call monitoring system . Ensure operating processes and procedures are accurately followed . Assist in updating these processes and procedures as . Updates customer database records . Ensure skill requirements are met, maintained and updated . Provide effective management of personnel and workload . Train any additional personnel required after initial training . Support and adhere to ISO 9000 registration when complete and all other quality programs (CGS personnel will talk to ISO 9000 auditors if asked) . Evaluate work performance and increase or decrease to allow for efficiencies or increased workload at IBM's approval . CGS shall supply for IBM's review and approval, transition and implementation plans to meet targets . CGS management is expected to have regularly scheduled status meetings and provide written reports to the IBM Site Coordinator monthly. . Adhere to IBM Site Safety, Security and personnel conduct policies . Define process which manages new requirements for IBM . Monthly Quality updates and action plans . Perform configuration and setup of hardware and installation of software packages for the equipment assigned in them . CGS will be responsible for all IBM assets replace cost covered by CGS for: Lost, theft & breakage for anything other than normal wear and tear 1.11 GLOSSARY OF TERMS . "Technical Representative" is a person who is skilled in the use of a product and is considered to be of an advisory capacity on the product . "Help Desk" Services (HDS) are a bundle of separate services available through IBM's Workstation Technical Support organization to provide a comprehensive array of services that uniquely address a customer's needs in today's complex mixed vendor computer processing environments. . "OEM" is the original equipment manufacturer (e.g., Compaq, Apple, etc.), . "Problem" is a singular request for assistance on a specific product. Requests for assistance on multiple products, or different problems with the same product will be considered to be multiple problems. If an initial answer does not resolve the problem, subsequent calls may be placed under the original problem number. A problem may involve multiple conversations or actions, the initial request, off-line research, a callback, and closure. . "NOS" is a Network Operating System such as OS/2 Lanserver, BANYAN, MICROSOFT NT., etc. . "Supported Product" is an eligible software/hardware product which is on a current Workstation Technical Support supported product list. Supported implies trained personnel are ready and available to handle calls on the product . "Workstation" is a machine of an eligible type and at least one eligible program listed on the supported . "CSIS" (Customer Situation Information System) is IBM's customer complaint system for tracking, monitoring, and ensuring satisfactory resolution. . "Entitlement" is the process of ensuring customers are entitled to receive warranty/maintenance service or helpdesk services from IBM. . "Retain" Remote Technical Assistance Network) is IBM's world-wide database storing customer problem records. . "VM" (Virtual Machine) is the IBM mainframe operating system . "Trailer Call" is the process used to measure a customer's level of satisfaction with the way their call was handled. . "ISO 9000" are internationally recognized industry standards which identify the requirements for an effective quality management system. EX-10.9 10 TERM LOAN DATED JUNE 29, 1994 EXHIBIT 10.9 NOTE: Fill in all blanks before signing. If a particular provision is not desired or has no applicability, delete the provision or, if it contains a blank space, insert "N/A" or the words "Not Applicable" in such space. All deletions should be initialled by the Borrower and the Bank. - -------------------------------------------------------------------------------- [LOGO]Bank Leumi INSTALLMENT PROMISSORY NOTE Trust Company of New York MEMBER FDIC New York. N.Y. June 29, 1994 ----------------- --- $ 800,000.00 ---------------------- A. GENERAL; TERMS OF PAYMENT 1. FOR VALUE RECEIVED, the undersigned, Computer Generated Solutions, Inc. ------------------------------------ (Exact Name of Borrower) a Corporation (1) organized under the laws of the State of - ---------------, ----------------- Delaware (the "Borrower"), hereby promises to pay to the order of BANK - --------------- LEUMI TRUST COMPANY OF NEW YORK (the "Bank"), at its office at 535 Seventh ------------------ (Address of Branch Office) Avenue, New York, N.Y. 10018 the principal sum of Eight Hundred Thousand and - ---------------------------- ------------------------------ (Write Out Principal Sum) 00/100 Dollars ($ 800,000.00 ): - ------- -------------- [x] in Thirty-six ( 36 ) consecutive Monthly (2) installments; -------------- ------------- the first Thirty-five ( 35 ) installments of which shall each be in the -------------- amount of $ 22,222.22 and the last installment of which shall be in the --------------- amount of $ 22,223.30 , payable on the last day of each month (3) in --------------- -------- --------- each year, commencing July , 1994 ; (or) -------- ---- [ ] in ( ) installments, to be paid on the dates and in ------------- the amounts set forth in the following schedule: Date Principal Payment Due Amount of Payment ----------- ------------------- The Borrower will pay interest on the unpaid principal amount hereof from time to time outstanding, computed on the basis of a 360-day year (the charging of interest on the basis of a 360-day year results in the payment of more interest than would be required if interest were charged on the basis of the actual number of days in the year), at a rate per annum which shall be equal to [ ] % per annum; or --------- [x] 1 1/4 % per annum above the rate of interest designated by the Bank, -------- and in effect from time to time, as its "Reference Rate", adjusted when said Reference Rate changes. (The Borrower acknowledges that the Reference Rate may not necessarily represent the lowest rate of interest charged by the Bank to customers.) The Borrower will pay interest, at the rate described above, monthly on the last day of each month in each year, commencing June , 19 94 , at maturity ------------- ------ (whether by acceleration or otherwise) and upon the making of any prepayment, as hereinafter provided. In addition, the Borrower will pay interest on any overdue installment of principal for the period for which overdue, on demand, at a rate equal to 3% per annum above the rate of interest hereinabove indicated. In no event shall interest exceed the maximum legal rate permitted by law. - ----------------------- (1) Insert the word "corporation" or "partnership," as applicable, or strike the phrase if Borrower is an individual. (2) Insert the word "monthly," "quarter-annual" or "semi-annual," as applicable. (3) Insert the word "month" if installments are payable monthly or, if the installments are payable quarterly or semi-annually, the names of the months in each quarter or 6-month period in which payable. Form No. 640 (R10/86) 2. All Property (as hereinafter defined) held by the Bank shall be subject to a security interest in favor of the Bank as security for any and all Liabilities (as hereinafter defined). The term "Property" shall mean the balance of every deposit account of the Borrower with the Bank or any of the Bank's nominees or agents and all other obligations of the Bank or any of its nominees or agents to the Borrower, whether now existing or hereafter arising, and all other personal property of the Borrower (including without limitation all money, accounts, general intangibles, goods, instruments, documents and chattel paper) which, or evidence of which, are now or at any time in the future shall come into the possession or under the control of or be in transit to the Bank or any of its nominees or agents for any purpose, whether or not accepted for the purposes for which it was delivered. The term "Liabilities" shall mean the indebtedness evidenced by this Note and all other indebtedness, liabilities and obligations of any kind of the Borrower (or any partnership or other group of which the Borrower is a member) to (a) the Bank, (b) any group of which the Bank is a member, or (c) any other person if the Bank has a participation or other interest in such indebtedness, liabilities or obligations, whether (i) for the Bank's own account or as agent for others, (ii) acquired directly or indirectly by the bank from the Borrower or others, (iii) absolute or contingent, joint or several, secured or unsecured, liquidated or unliquidated, due or not due, contractual or tortious, now existing or hereafter arising, or (iv) incurred by the Borrower as principal, surety, endorser, guarantor or otherwise, and including without limitation all expenses, including attorneys' fees, incurred by the Bank in connection with any such indebtedness, liabilities or obligations or any of the Property (including any sale or other disposition of the Property). 3. Prepayment. The Borrower shall have the right to prepay this Note in whole at any time or in part from time to time (but if in part, in the principal amount of $5,000.00 or any whole multiple thereof), in each case upon not less than 10 days prior written notice to the Bank, without penalty or premium, provided that on each prepayment the Borrower shall pay accrued interest on the principal amount so prepaid to the date of such prepayment, and each partial prepayment shall be applied to the installments of this Note in the inverse order of their stated maturities. 4. Manner of Payment. All payments by the Borrower on account of principal, interest or fees hereunder shall be made in lawful money of the United States of America, in immediately available funds. The Borrower authorizes (but shall not require) the Bank to debit any account maintained by the Borrower with the Bank, at any date on which a payment is due under this Note, in an amount equal to any unpaid portion of such payment. If any payment of principal or interest becomes due on a day on which the Bank is closed (as required or permitted by law or otherwise), such payment shall be made not later than the next succeeding business day, and such extension shall be included in computing interest in connection with such payment. B. EVENTS OF DEFAULT: REMEDIES If any of the following events shall occur and be continuing: 1. the Borrower shall fail to make any payment of principal of or interest on this Note, or any fee provided for herein, when due; 2. the Borrower shall default in the performance or observance of any covenant or agreement contained herein; 3. an event of default or default shall occur and be continuing under any other agreement, document or instrument executed and delivered to the Bank by the Borrower or any guarantor or hypothecator relating to any Liabilities; 4. any representation or warranty made by or on behalf of the Borrower in this Note or in any other certificate, agreement, instrument or statement delivered to the Bank by or on behalf of the Borrower shall at any time prove to have been incorrect when made in any material respect; 5. the Borrower or any Subsidiary (as hereinafter defined) shall default in the payment of principal of or interest on any indebtedness for borrowed money (including any such indebtedness in the nature of a lease) or shall default in the performance or observance of the terms of any instrument pursuant to which such indebtedness was created or is secured, the effect of which default is to cause or permit any holder of any such indebtedness to cause the same to become due prior to its stated maturity (and whether or not such default is waived by the holder thereof); 6. any change in the condition or affairs (financial or otherwise) of the Borrower or any Subsidiary shall occur which, in the opinion of the Bank, increases its risk with respect to the loan evidenced by this Note or impairs any security therefor; 7. any judgment against the Borrower or any Subsidiary or any attachment, levy or execution against any of their properties for any amount shall remain unpaid, or shall not be released, discharged, dismissed, stayed or fully bonded for a period of thirty (30) days or more after its entry, issue or levy, as the case may be; 8. the Borrower or any Subsidiary shall become insolvent (however evidenced) or be unable, or admit in writing its inability, to pay its debts as they mature; or 9. the Borrower or any Subsidiary shall make an assignment for the benefit of creditors, or a trustee, receiver or liquidator shall be appointed for the Borrower or any Subsidiary or for any of their property, or the commencement of any proceedings by the Borrower or any Subsidiary under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt, receivership, liquidation or dissolution law or statute (including, if the Borrower is a partnership, its dissolution pursuant to any agreement or statute), or the commencement of any such proceedings without the consent of the Borrower or any Subsidiary and such proceedings shall continue undischarged for a period of 30 days, or the death of the Borrower (if an individual) or any member of the Borrower (if a partnership) [or] 10. [Other] (4) - Philip Friedman shall not at all times be active in the management of the borrower. then and in any such events the Bank may declare the entire unpaid principal amount of this Note and all interest and fees accrued and unpaid hereon to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. The balance of every account of the Borrower with, and each claim of the Borrower against, the Bank existing from time to time shall be subject to a lien and subject to be set off against any and all Liabilities, including those hereunder. For purposes of this Note, the term "Subsidiary" shall mean and include any corporation of which more than 50% of the outstanding shares of capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time, directly or indirectly, owned by the Borrower or by one or more other Subsidiaries. C. MISCELLANEOUS 1. Covenants. So long as this Note shall remain outstanding, the Borrower agrees to (a) furnish to the Bank within 90 days after the end of each fiscal year of the Borrower, financial statements (including a balance sheet and an operating statement), prepared and certified by independent accountants acceptable to the Bank, and within 45 days after the end of each fiscal quarter of the Borrower, unaudited quarterly financial statements (including a balance sheet and an operating statement), (b) furnish to the Bank, with reasonable promptness, such other information concerning the business, operations, properties and condition, financial or otherwise, of the Borrower as the Bank may reasonably request from time to time, and (c) at any reasonable time and from time to time, permitted Bank or any of its agents or representatives to examine and make copies of and abstracts from its records and books of account, visit its properties and discuss its affairs, finances and accounts with any of its officers, directors or independent accountants. 2. No Waiver; Remedies Cumulative. No failure on the part of the Bank to exercise, and no delay in exercising any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Bank of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 3. Costs and Expenses. The Borrower shall reimburse the Bank for all costs and shall pay the pay the reasonable fees and disbursements of counsel to the Bank in connection with enforcement of the Bank's rights hereunder. The Borrower shall also pay any and all taxes (other than taxes on or measured by net income of the holder of this Note) incurred ar payable in connection with the execution and delivery of this Note. 4. Amendments. No amendment, modification or waiver of any provision of this Note nor consent to any departure by the Borrower therefrom shall be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 5. Construction. This Note shall be deemed to be a contract made under the laws of the State of New York and shall be construed in accordance with the laws of said State. 6. Successors and Assigns. This Note shall be binding upon the Borrower and its heirs, legal representatives, successors and assigns and the terms hereof shall inure to the benefit of the Bank and its successors and assigns, including subsequent holders hereof. 7. Severability. The provisions of this Note are severable, and if any provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall not in any manner affect such provision in any other jurisdiction or any other provision of this Note in any jurisdiction. - ----------------------- (4) Insert the word "None" if no additional events of default are to be included in this Note. 8. Jurisdiction; Waiver of Jury Trial. The Borrower hereby irrevocably consents to the jurisdiction of any New York State or Federal court located in New York City over any action or proceeding arising out of any dispute between the Borrower and the Bank and the Borrower further irrevocably consents to the service of process in any such action or proceeding by the mailing of a copy of such process to the Borrower at the address set forth below. In the event of litigation between the Borrower and the Bank over any matter connected with this Note or resulting from transactions hereunder, the right to a trial by jury is hereby waived by the Borrower and the Bank. D. ADDITIONAL PROVISIONS (5) So long as the Note shall remain outstanding, and unless the Bank shall otherwise consent in writing, the Borrower will not: 1) Tangible Net Worth ------------------ Permit Tangible Net Worth of the Borrower, plus Subordinated Debt to be less than $1,400,000.00 at 12/31/94 and anytime thereafter. "Tangible Net Worth" shall mean the excess of the total assets of the Borrower over its Total Liabilities, excluding, however, from the determination of total assets, all assets which would be classified as intangible under generally accepted accounting principles, including, without limitation, patents, trademarks, trade names, copyrights, franchises, deferred charges and goodwill, and any writeup of the book value of assets since 12/31/93. "Subordinated Debt" shall mean debt subordinated to the Bank only. 2) Working Capital --------------- Permit the Working Capital of the Borrower at any time to be less than $1,200,000.00. "Working Capital" shall mean the excess of Current Assets over Current Liabilities of the Borrower, both determined in accordance with generally accepted accounting principle. 3) Ratio of Liabilities to Net Worth plus Subordinated Debt -------------------------------------------------------- Permit the Total Liabilities of the Borrower less at Subordinated Debt at any time to be greater than (375%) of the Tangible Net Worth of the Borrower plus Subordinated Debt. "Total Liabilities" shall mean all items of liability, indebtedness and obligation of the of Borrower which would, in accordance with generally accepted accounting principals, be classified as liabilities on the balance sheet of the Borrower. Computer Generated Solutions, Inc. --------------------------------------------- (Name of Borrower) By: /s/ Philip Friedman ----------------------------------------- Philip Friedman, President (Title) By: ----------------------------------------- (Title) 1250 Broadway, New York, N.Y. 10001 --------------------------------------------- (Address of Borrower) [Corporate Seal] - ----------------------- (5) Insert the word "None" if no additional provisions are to be included in this Note. FIRST AMENDMENT TO INSTALLMENT PROMISSORY NOTE ---------------------------------------------- AGREEMENT, made as of the 13 day of July 1995 between BANK LEUMI TRUST COMPANY OF NEW YORK, a New York banking corporation, having an office at 562 Fifth Avenue, New York, New York 10036 ( "Bank" ) and COMPUTER GENERATED SOLUTIONS, INC., a Delaware corporation , having an office at 535 Seventh Avenue, New York, New York 10018 (" Borrower") . W I T N E S S E T H: WHEREAS: (a) Borrower executed an Installment Promissory Note in favor of the Bank dated June 29, 1994, in the original principal amount of $800,000 ("Note"); (b) For good and valuable consideration, the Bank and the Borrower desire to modify the Tangible Net Worth covenant in the Note as hereinafter set forth. NOW, THEREFORE, the parties hereto intending to be legally bound and in consideration of the mutual covenants and conditions herein contained, hereby agree as follows: (1) The first sentence of section D(1) of the Note is hereby deleted and replaced with the following, "Permit Tangible Net Worth of the Borrower, plus Subordinated Debt, to be less than $1,400,000 at December 31, 1994, $1,600,000 at December 31, 1995 and any time thereafter." (2) The Note, as modified hereby, shall continue to be secured by an all asset lien on assets of the Borrower and the Limited Guaranty of Philip Friedman. (3) Except as herein set forth, the terms and conditions of the Note, and all other documents and instruments in connection therewith shall remain unmodified and in full force and effect. The Borrower certifies that no offsets or defenses exist in connection with the Note, as modified hereby. This Agreement will be binding upon the Borrower and its successors and assigns and the terms hereof shall inure to the benefit of the Bank and its successors and assigns. IN WITNESS WHEREOF, the Borrower and the Bank have executed this Agreement the day and year first above written BANK LEUMI TRUST COMPANY OF NEW YORK By: /s/ _____________________________________ (Title) By:______________________________________ (Title) COMPUTER GENERATED SOLUTIONS, INC. By: /s/ PRESIDENT _____________________________________ (Title) By: _____________________________________ (Title) -2- SECOND AMENDMENT TO INSTALLMENT PROMISSORY NOTE ----------------------------------------------- AGREEMENT, made as of the as of the 21 day of December 1995 between BANK LEUMI TRUST COMPANY OF NEW YORK, a New York banking corporation, having an office at 562 Fifth Avenue, New York, New York 10036 ("Bank") and COMPUTER GENERATED SOLUTIONS, INC., a Delaware corporation having an office at 1675 Broadway, New York, New York 10019 ("Borrower"). W I T N E S S E T H: WHEREAS: (a) Borrower executed an Installment Promissory Note in favor of the Bank dated June 29, 1994, in the original principal amount of S800,000 ("Note"); (b) Borrower executed a First Amendment to the Note on July 13, 1995. The Note as modified is hereinafter referred to as the Amended Note. (c) For good and valuable consideration, the Bank and the Borrower desire to modify the Amended Note as hereinafter set forth. NOW, THEREFORE, the parties hereto intending to be legally bound, and in consideration of the mutual covenants and conditions herein contained, hereby agree as follows: (1) The first sentence of section D(1) of the Amended Note is hereby deleted and replaced with the following: "Permit Tangible Net worth of the Borrower, plus Subordinated Debt, to be less than $1,400,00o at December 31, 1994 and $2,500,000 at December 31, 1995 or any time thereafter." (2) The first sentence of section D(2) of the Amended Note is hereby deleted and replaced with the following: "Permit the Working Capital of the Borrower to be less than $1,200,000 any time prior to December 31, 1995, $1,600, 000 at December 31, 1995, $2,000,000 at June 30, 1996 or any time thereafter." (3) The first sentence of section D(3) of the Amended Note is hereby deleted and replaced with the following: "Permit the Total Liabilities of the Borrower less Subordinated Debt to be greater than 375% of the Tangible Net Worth of the Borrower plus Subordinated Debt at any time prior to December 31, 1995 and 300% at December 31, 1995 or any time thereafter." (4) The Amended Note, as modified hereby, shall continue to be secured by a lien on all assets of the Borrower and the Limited Guaranty of Philip Friedman. (5) Except as herein set forth, the terms and conditions of the Amended Note, and all other documents and instruments in connection therewith shall remain unmodified and in full force and effect. The Borrower certifies that no offsets or defenses exist in connection with the Amended Note, as modified hereby. This Agreement will be binding upon the Borrower and its successors and assigns and the terms hereof shall inure to the benefit of the Bank and its successors and assigns. IN WITNESS WHEREOF, the Borrower and the Bank have executed this Agreement the day and year first above written. BANK LEUMI TRUST COMPANY OF NEW YORK By: /s/ ____________________________________ (Title) By:____________________________________ (Title) COMPUTER GENERATED SOLUTIONS, INC. By: /s/ PRESIDENT ------------------------------------ (Title) By:____________________________________ (Title) -2- EX-10.10 11 S TERMINATION AGREEMENT EXHIBIT 10.10 S CORPORATION TERMINATION AGREEMENT This S CORPORATION TERMINATION AGREEMENT (the "Agreement") dated March __, 1997 among Computer Generated Solutions, Inc., a Delaware corporation (the "Company"), and Philip Friedman and Victor Friedman (individually a "Stockholder" and collectively the "Stockholders"). WHEREAS, the Company contemplates offering its stock to the public pursuant to a Registration Statement on Form S-1 filed with the Securities and Exchange Commission (the "Public Offering"); WHEREAS, the Company plans to distribute a dividend to the Stockholders subsequent to the completion of such Public Offering, in an aggregate amount equal to the Company's undistributed Accumulated Adjustments Account ("AAA"), as defined in Section 1368(e) of the Internal Revenue Code of 1986, as amended (the "Code"), as of the Termination Date (as hereinafter defined); WHEREAS, the Company has been an S corporation since incorporation and will continue to be an S corporation until the Termination Date, upon which it will be a C corporation; WHEREAS, Real Time Technology, Inc. ("RTT") was an S corporation at the time of its acquisition by the Company on October 1, 1994; WHEREAS, the Company and the Stockholders wish to enter into an agreement to apply (and elect) the method provided in Code Section 1362(e)(3) to allocate the Company's income during its S Termination Year (as hereinafter defined) between the S Short Year (as hereinafter defined) and the C Short Year (as hereinafter defined); and WHEREAS, the Company and the Stockholders wish to provide for a tax allocation and indemnification agreement in connection with the Company's termination as an S corporation; NOW, THEREFORE, the parties agree as follows: 1. THE TERMINATION --------------- (a) Termination of S Status. The Stockholders agree to terminate the ------------------------ S corporation status of the Company by revoking the S corporation election pursuant to Code Section 1362(d)(1), effective on the day preceding the closing of the sale of shares of the Company's common stock under the Public Offering (the "Termination Date"). (b) S Termination Year. The calendar year 1996 will be the Company's ------------------- S Termination Year for federal income tax purposes, as defined in Section 1362(e)(4) of the Code. Pursuant to Section 1362(e)(1) of the Code, the S Termination Year of the Company shall be divided into two short taxable years: an S Short Year and a C Short Year. As defined in Section 1362(e)(1)(A) of the Code, the S Short Year shall be that portion of the Company's S Termination Year ending on the day immediately preceding the Termination Date, and pursuant to Section 1362(e)(1)(B) of the Code, the C Short Year shall be that portion of the Company's S Termination Year beginning on the Termination Date and ending on the last day of the calendar year. For federal income tax purposes, the Company will be treated as an S corporation during its S Short Year and as a C corporation during its C Short Year. 2. ELECTION TO ALLOCATE INCOME --------------------------- (a) Allocation Election. The Company shall elect, and the -------------------- Stockholders shall consent, pursuant to Section 1362(e)(3) of the Code, to allocate tax items to its S Short Year and C Short Year pursuant to normal tax accounting rules (the "closing of the books method") rather than by the pro rata allocation method contained in Section 1362(e)(2) of the Code. Pursuant to the attached resolution, the Company shall make the election and the Stockholders, as the only Stockholders of the Company on the first day of its C Short Year, shall sign the requisite consents to said election on the Termination Date. 3. DISTRIBUTIONS ------------- (a) Distribution of Accumulated Adjustments Account. Immediately ------------------------------------------------ after the closing of the Public Offering, the Company shall distribute to the Stockholders the sum of $4,750,000 ("Estimated AAA"), in proportion to the percentages in which they own the common stock of the Company as of the Termination Date. Any distributions provided for in the preceding sentences shall be subject to the limitations set 2 forth in Section 170 of the Delaware General Corporation Law. (b) Post Termination Date Adjustment. Within forty-five (45) days --------------------------------- after the Termination Date, the Company shall calculate the actual balance of the AAA as of the day immediately prior to the Termination Date ("Actual AAA"). If the Actual AAA is greater than the Estimated AAA, the Company shall make an additional distribution to the Stockholders, or if the Actual AAA is less than the Estimated AAA, the Stockholders shall make a contribution to the Company, in proportion to the percentages in which they own the common stock of the Company as of the Termination Date, in an amount equal to such excess or shortfall. The Company or the Stockholders, as the case may be, shall also pay interest on the amount of such distribution or contribution, from the closing under the Public Offering to the date of the distribution or contribution, at the rate which The Bank of New York announces from time to time as its prime lending rate, as in effect from time to time, compounded annually. Any such additional distribution and interest shall be due and payable by the Company within three (3) business days of the determination of the Actual AAA, and any such contribution and interest shall be due and payable by each Stockholder within three (3) business days after receipt by such Stockholder of a written notice from the Company showing the amount of the Actual AAA and the amounts of the contribution and interest payable by such Shareholder. (c) Filing of Tax Return. The Company shall file the federal income --------------------- tax return of the Company for the S Termination Year and such return shall reflect the Actual AAA and the distributions made pursuant to this Section 3. 4. INDEMNIFICATION --------------- (a) Indemnification by Stockholders. The Stockholders jointly and -------------------------------- severally hereby indemnify and agree to hold the Company harmless from, against and in respect of (i) any increase in federal, state and local income tax liability (including interest and penalties, if any), incurred by the Company (after taking into account any federal tax savings realized by the Company as a result of an increase in state or local taxes), resulting from a final determination (whether by judicial decision, administrative settlement, closing agreement or otherwise) of an adjustment (in connection with an amended return, claim for refund, audit or otherwise) which has the effect of decreasing the S Corporation Taxable Income (as hereinafter defined) of such Stockholder and correspondingly increasing the taxable 3 income of the Company for a period ending after the Termination Date, or (ii) any federal and New York State income tax liability (including interest and penalties, if any) resulting from a final determination (whether by judicial decision, administrative settlement, closing agreement or otherwise) that the Company failed to qualify as an S Corporation for federal and New York State income tax purposes for any year or years ending on or prior to December 31, 1995 or for the S Short Year; provided, however, that the amount of a payment made by a Stockholder pursuant to clause (i) of this Section 4(a) shall not exceed the amount of such Stockholder's S Corporation Taxable Income that was shifted to a C corporation taxable year of the Company less the amount of federal, state and local taxes paid (and not refunded) by such Stockholder with respect thereto. "S Corporation Taxable Income" of a Stockholder shall mean such Stockholder's allocable share of taxable income of the Company (or RTT) from all sources for all periods in which it and RTT qualified as an S Corporation for federal income tax purposes through and including the close of business on the last day of the S Short Year of the Company. (b) Indemnification by Company. The Company hereby indemnifies and --------------------------- agrees to hold each of the Stockholders harmless from, against and in respect of any federal, state and local income tax liability (including interest and penalties, if any), incurred by each such Stockholder resulting from a final determination (whether by judicial decision, administrative settlement, closing agreement or otherwise) of an adjustment (in connection with an amended return, claim for refund, audit or otherwise) which has the effect of decreasing the Company's taxable income for a period ending after the Termination Date and correspondingly increasing the S Corporation Taxable Income of such Stockholder; provided, however, that for purposes of this Section 4(b), the tax liability of a Stockholder resulting from an adjustment described herein shall be calculated without regard to any tax benefit such Stockholder may realize from an increase in the basis of his common stock that results from such adjustment. Any payment to a Stockholder pursuant to this Section 4(b) made more than one year after the S Termination Date shall be increased by the amount of all federal, state and local income taxes incurred by such Stockholder with respect to such payment (as increased pursuant to this sentence). (c) Payments. The Stockholders or the Company, as the case may be, --------- shall make any payment required under this Agreement within thirty (30) days after receipt of 4 notice from the other party that a payment is due by such party to the appropriate taxing authority. (d) Subrogation. The party (or parties) providing the indemnity under ----------- either Section 4(a) or 4(b) (defined solely for purposes of this Section 4(d) as the "Indemnifying Party") shall be subrogated to all rights to recovery (the "Subrogation Claims") that the party (or parties) being indemnified under Section 4(a) or 4(b), respectively (defined solely for purposes of this Section 4(d) as the "Indemnified Party"), may have against any person or organization in respect of the tax liabilities for which the Indemnifying Party is providing indemnity. Such right of subrogation shall not exceed the amount paid by the Indemnifying Party to the Indemnified Party. The Indemnified Party shall execute and deliver instruments and papers and do whatever else is reasonably necessary to secure such rights of subrogation for the Indemnifying Party. The Indemnified Party shall provide all reasonable assistance as requested by the Indemnifying Party in order for the Indemnifying Party to pursue the Subrogation Claims. The Indemnified Party shall do nothing after any Subrogation Claim arises to prejudice the rights of the Indemnifying Party. 5. MISCELLANEOUS ------------- (a) Governing Law. This Agreement shall be governed by the laws of ------------- the State of New York (excluding its choice of law rules). (b) Notices. All notices, requests, demands and other communications ------- hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, or mailed by certified mail, return receipt requested, addressed to the addresses as shall be furnished in writing by either party in like manner. Any such notice or communication shall be deemed to have been given as of the date delivered in person or mailed. (c) Assignment. This Agreement may not be assigned by any of the ---------- parties hereto without the prior written consent of the other parties. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, their heirs, legal representatives, successors and permitted assigns. (d) Entire Agreement. This Agreement supersedes all prior agreements ---------------- and understandings between the parties hereto with respect to the subject matter contained herein. It shall constitute the entire agreement between the parties 5 with respect to such subject matter and may not be modified or terminated orally. No modification, termination, or attempted waiver shall be valid unless in writing signed by the party against whom the same is sought to be enforced. (e) Severability. The invalidity or unenforceability of any provision ------------ hereof shall not in any way affect the validity or enforceability of any other provision. (f) Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed an original, but all of which counterparts collectively shall constitute an instrument representing the Agreement between the parties hereto. (g) Construction of Terms. Nothing herein expressed or implied is --------------------- intended, or shall be construed, to confer upon or give any person, firm or corporation, other than the parties hereto or their respective successors and assigns, any rights or remedies under or by reason of this Agreement. (h) Headings. The headings contained in this Agreement are solely for -------- the purposes of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPUTER GENERATED SOLUTIONS, INC. By: ------------------------- Fred B. Schlossberg Vice President, Finance & Administration STOCKHOLDERS: - ------------------------------------ ------------------------------- Philip Friedman Victor Friedman 6 EX-10.11 12 INDEMNIFICATION AGREEMENT EXHIBIT 10.11 INDEMNIFICATION AGREEMENT ------------------------- AGREEMENT dated as of February , 1997 by and among Computer Generated Solutions, Inc., a Delaware corporation (the "Company"), and Philip Friedman and Victor Friedman (collectively, the "Selling Stockholders"). WHEREAS, the Company has filed a registration statement (Registration Number 333-09297) on Form S-1, as amended (the "Registration Statement"), under the Securities Act of 1933, as amended (the "Securities Act"); and WHEREAS, the Selling Stockholders are selling certain shares of the Company's common stock (the "Common Stock") pursuant to such Registration Statement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties agree as follows: 1. Definitions. ------------ (a) As used herein, the term "Underwriting Agreement" shall mean the Underwriting Agreement to be entered into among the parties to this Agreement and Oppenheimer & Co., Inc. and Furman Selz LLC, as representatives of the several underwriters to be identified therein pertaining to the Registration Statement. (b) As used herein, all other capitalized terms, unless the context otherwise requires, shall have the meaning set forth in the Underwriting Agreement. 2. Indemnification --------------- (a) The Company hereby agrees to indemnify and holds harmless, to the fullest extent permitted by law, the Selling Stockholders from and against any and all losses, claims, damages and liabilities (including, without limitation, the legal fees and other expenses reasonably incurred in connection with any suit, action or proceeding or any claim asserted) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Selling Stockholder furnished to the Company in writing by such Selling Stockholder, expressly for use therein. (b) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Selling Stockholder in respect of which indemnity may be sought pursuant to the preceding paragraph (a), such Selling Stockholder (the "Indemnified Person") ------------------ shall promptly notify the Company (the "Indemnifying Person") in writing, and ------------------- such Indemnifying Person, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may designate in such proceeding and shall pay the reasonable fees and expenses incurred by such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) such Indemnifying Person and such Indemnified Person shall have mutually agreed to the contrary, (ii) such Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to such Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include an Indemnifying Person and an Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that an Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for the Selling Stockholders shall be designated in writing by the Selling Stockholders. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, such Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the preceding sentence, if at any time an Indemnified Person shall have requested an Indemnifying Person to reimburse the Indemnified Person for fees and expenses incurred by counsel as contemplated by the third sentence of this paragraph, such Indemnifying Person agrees that it shall be liable for any settlement of any proceeding 2 effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding. (c) If the indemnification provided for hereunder is unavailable to an Indemnified Person in respect of any losses, claims, damages or liabilities referred to herein, then the Indemnifying Person, in lieu of indemnifying such Indemnified Person hereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand, and the Selling Stockholders, on the other hand, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Selling Stockholders, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Selling Stockholders, on the other hand, shall be deemed to be in the same respective proportion as the net proceeds from the offering (before deducting expenses) received by the Company and such Selling Stockholder, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Shares. The relative fault of the Company, on the one hand, and the Selling Stockholders, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 3 (d) Each of the Company and the Selling Stockholders agrees that it would not be just and equitable if contribution pursuant to this Section 2 were determined by pro rata allocation (even if the Company on the one hand, and the --- ---- Selling Stockholders, on the other hand, were each treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2, in no event shall a Selling Stockholder be required to contribute any amount in excess of the amount by which the net proceeds received by it through the sale of its Shares to the Underwriters exceeds the amount of any damages that such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for hereunder are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 4. Confirmation of Shares to be Sold. Each Selling Stockholder agrees that the --------------------------------- disclosure contained under "Principal and Selling Stockholders" in the Company's Preliminary Prospectus dated February 14, 1997, correctly sets forth the number of shares of Common Stock that such Selling Stockholder has agreed to sell. 5. Miscellaneous. -------------- (a) The indemnification and contribution agreements of the Company and the Selling Stockholders in this Agreement shall remain in full force and effect regardless of (i) any termination of the Underwriting Agreement, (ii) any investigation made by or on behalf of the Company, any Selling Stockholders, any Underwriter or any controlling person, and (iii) delivery of and payment for the Shares under the Underwriting Agreement. 4 (b) Changes in or additions to this Agreement may be made, and compliance with any provision of this Agreement may be omitted or waived, only by a written instrument executed by the parties hereto. (c) No failure or delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. (d) The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. (e) Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. (f) This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all previous agreements, negotiations, commitments and writings in respect of such subject matter. (g) This Agreement shall be binding upon and inure to each of the parties hereto and its respective successors and permitted assigns. (h) This Agreement shall be governed by the law of the State of New York, United States of America, without regard to its principles of conflict of laws. (i) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above. COMPUTER GENERATED SOLUTIONS, INC. By: ------------------------------- Name: -------------------------- Title: ------------------------- ---------------------------------- Philip Friedman ---------------------------------- Victor Friedman 6 EX-16.1 13 LETTER FROM BDO SEIDMAN EXHIBIT 16.1 To: Securities and Exchange Commission We audited the financial statements of Computer Generated Solutions, Inc. (the "Company") at December 31, 1994, and for the year then ended. In this regard, we agree with the statements made by the Company in the Company's Registration Statement on Form S-1 dated the date hereof under the caption "Change of Auditors." BDO Seidman, LLP New York, NY March 3, 1997 EX-23.1 14 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS Computer Generated Solutions, Inc. New York, New York We consent to the reference to our firm under the captions "Experts" and "Selected Financial Information" and to the use of our reports dated January 30, 1997 (except for paragraph 8 of Note 12, as to which the date is February 28, 1997), in Amendment No. 3 to the Registration Statement (Form S-1 No. 333- 09297) and related Prospectus of Computer Generated Solutions, Inc. for the registration of shares of its common stock. Ernst & Young LLP New York, New York March 3, 1997 EX-23.2 15 CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Computer Generated Solutions, Inc. New York, New York We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated February 21, 1995, relating to the financial statements of Computer Generated Solutions, Inc. which is contained in that Prospectus. We also consent to the reference to us under the captions "Selected Financial Information" and "Experts" in the Prospectus. BDO Seidman, LLP New York, New York March 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----