-----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, Inp639mF3I/cJKdf4NbOQqqsctSfoG4d0CL9L+nzb4rS6GCT4k1QvJKqYatOjE89 HuJ+ZX9SRKGtO9X2TNNT9w== 0000950152-99-001464.txt : 19990303 0000950152-99-001464.hdr.sgml : 19990303 ACCESSION NUMBER: 0000950152-99-001464 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONLEY CANITANO & ASSOCIATES INC CENTRAL INDEX KEY: 0001066780 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 341357501 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-59909 FILM NUMBER: 99554717 BUSINESS ADDRESS: STREET 1: CCAI RENAISSANCE CENTRE STREET 2: 5800 LANDERBROOK DRIVE CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 4406846600 MAIL ADDRESS: STREET 1: CCAI RENAISSANCE CENTRE STREET 2: 5800 LANDERBROOK DRIVE CITY: MAYFIELD STATE: OH ZIP: 44124 S-1/A 1 CONLEY, CANITANO & ASSOCIATES, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999 REGISTRATION NO. 333-59909 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CONLEY, CANITANO & ASSOCIATES, INC. (Exact Name of Registrant as Specified in Its Charter) OHIO 34-1375019 7373 (State or Other Jurisdiction of (I.R.S. Employer (Primary Standard Industrial Incorporation or Organization) Identification Number) Classification Code Number)
CCAI RENAISSANCE CENTRE 5800 LANDERBROOK DRIVE MAYFIELD HEIGHTS, OHIO 44124 TELEPHONE: (440) 684-6600 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) PAUL A. FARMER CHIEF FINANCIAL OFFICER CCAI RENAISSANCE CENTRE 5800 LANDERBROOK DRIVE MAYFIELD HEIGHTS, OHIO 44124 TELEPHONE: (440) 684-6600 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------------ Copies to: DAVID P. PORTER, ESQ. ELLEN B. CORENSWET, ESQ. JONES, DAY, REAVIS & POGUE BABAK YAGHMAIE, ESQ. NORTH POINT, 901 LAKESIDE AVENUE BROBECK, PHLEGER & HARRISON LLP CLEVELAND, OHIO 44114 1633 BROADWAY, 47TH FLOOR NEW YORK, NEW YORK 10019
------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be 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, please check the following box and list the Securities Act 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, check the following box and list the Securities Act 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(d) under the Securities Act, 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 REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 2 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 1, 1999 PROSPECTUS , 1999 5,000,000 SHARES CCAI LOGO COMMON STOCK Of the 5,000,000 shares (the "Shares") of common stock, no par value (the "Common Stock"), being offered hereby (the "Offering"), 4,000,000 shares are being sold by Conley, Canitano & Associates, Inc. ("CCAi" or the "Company") and 1,000,000 shares are being sold by certain shareholders (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. Prior to the Offering, there has been no public market for the Shares. It is currently anticipated that the initial offering price will be between $10.00 and $12.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Company's Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "CCAI." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. 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.
- ----------------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS(1) COMPANY(2)(3) SHAREHOLDERS(3) - ----------------------------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ $ Total (3).......................... $ $ $ $ - -----------------------------------------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting expenses estimated at $1,500,000, payable by the Company. (3) The Company and certain Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to an aggregate of 750,000 additional shares at the Price to Public less Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to the Company and Proceeds to the Selling Shareholders will be $ , $ , $ and $ , respectively. See "Principal and Selling Shareholders" and "Underwriting." The Shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York, on or about , 1999. DONALDSON, LUFKIN & JENRETTE BANCBOSTON ROBERTSON STEPHENS LEHMAN BROTHERS MCDONALD INVESTMENTS INC. The undersigned is facilitating Internet distribution. DLJDIRECT INC. 3 [INSIDE FRONT COVER] [Description of graphics: In the top left corner appears the Company's logo. In the top right corner appears a picture of the Company's headquarters with a description labeled "Conley-Canitano High Technology Headquarters."] [STYLIZED TEXT]: "Harnessing the Power of Information Technology" [TEXT]: "Empowered by a seasoned crew of IT consultants with a blend of functional and technical experience, Conley-Canitano provides rapid Enterprise Resource Planning implementation services and a comprehensive range of related services demanded by middle market organizations." [STYLIZED TEXT]: "Company of Employees" [STYLIZED TEXT]: "Extensive Experience" [STYLIZED TEXT]: "Rapid ERP Implementations" 4 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 5 This Prospectus includes forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. The words "believe," "expect," "anticipate," "project" and similar expressions identify forward- looking statements. These forward-looking statements speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ------------------------ CCAi and FIRM are trademarks of the Company. This Prospectus also includes names, trademarks, service marks and registered trademarks and service marks of companies other than the Company. 3 6 [THIS PAGE INTENTIONALLY LEFT BLANK] 4 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the financial statements and Notes thereto included elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 8. Unless otherwise indicated, all information contained in this Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option and (ii) reflects the conversion of all of the outstanding shares of the Company's Convertible Preferred Stock, $0.01 par value per share (the "Convertible Preferred Stock") into 2,504,000 shares of Common Stock and 250,400 shares of Series A Redeemable Preferred Stock, $0.01 par value per share (the "Redeemable Preferred Stock"), all to be effected immediately prior to the consummation of the Offering. Unless otherwise indicated, the terms "Company" and "CCAi" refer to Conley, Canitano & Associates, Inc. THE COMPANY CCAi is a leading provider of rapid implementations of Enterprise Resource Planning ("ERP") applications. CCAi also offers its clients a comprehensive range of related services, including post-implementation and platform independent services, such as network and Windows NT support, custom application development, mainframe and legacy application support, Year 2000 compliance and remote support. The Company's services are primarily targeted at middle market organizations, or divisions of larger organizations, with annual revenues between $50 million and $2.5 billion. The Company's rapid ERP implementation services enable its clients to reduce the length and risks of implementations, lower overall costs and achieve early realization of ERP-related benefits. The Company provides its services to clients across a broad spectrum of industries, including aerospace, automotive, chemical process, communications, consumer products, energy, financial and professional services, industrial, pharmaceutical and health care, publishing, retail, semiconductor and technology. CCAi's clients include Aluminum Company of America, BP America Inc., Brush Wellman Inc., Dow Chemical Co., Eaton Corporation, General Motors Corporation ("GM"), Goodyear Tire & Rubber Co., KeyCorp, Master Builders, Inc., OfficeMax, Inc. and Rockwell Semiconductor Systems, Inc. CCAi has established strategic relationships with leading software application vendors, hardware vendors and other information technology ("IT") service providers, including multinational consulting firms. For example, the Company has a relationship with SAP America, Inc. ("SAP") dating from 1989 and has been an SAP National Implementation Partner since 1994. In addition, the Company is a member of SAP's National Advisory Board and was involved in the development of SAP's Accelerated SAP methodology ("ASAP"), which has become an industry standard for rapid SAP implementations. In 1997, the Company became one of SAP's first ASAP Partners and has since become one of the first organizations to certify 100 consultants in the ASAP methodology. CCAi recently received the 1998 Partner Award of Excellence from SAP. Also, CCAi has been an Oracle Corporation ("Oracle") Alliance Member since 1997 and has recently been selected to become one of 26 Oracle Service Providers in the United States. The Company utilizes its own rapid implementation methodology, known as Fast Implementation Roadmap Methodology ("FIRM"), for Oracle ERP applications. In 1998, CCAi was named by Compaq Computer Corporation ("Compaq") as one of its first regional configuration support centers to provide rapid implementation and related services in connection with R/3PAQ, a preconfigured ERP solution jointly developed by Compaq and SAP. In addition, the Company has been an integral member of implementation teams managed by Andersen Consulting LLP ("Andersen Consulting"), Ernst & Young LLP ("Ernst & Young") and SAP. The successful implementation of ERP applications requires extensive resources, specific software expertise, end-user training and significant ongoing modifications to support an organization's evolving business processes. Organizations are increasingly using third-party service providers to implement ERP applications in order to reduce the length and risks of implementations, lower overall costs and achieve early realization of ERP-related benefits. According to AMR Research, Inc., a market research company, the worldwide market for ERP applications and services totaled approximately $15 billion in 1998 and is projected to grow to approximately $52 billion by 2002, representing a compound annual growth rate of approximately 37%. In addition, according to industry sources, for every dollar spent on ERP applications, four to six dollars are spent on ERP implementation and related services. The Company believes that a large portion of this market is represented by middle market organizations and that the need for third-party ERP implementation and related services is 5 8 particularly acute among these organizations. Middle market organizations expect timely and substantial economic returns from their ERP investments and are particularly sensitive to the risk of cost overruns and delays associated with poorly managed ERP implementations. In addition, these organizations are under growing pressure from their Fortune 500 customers to rapidly implement compatible ERP applications. CCAi is a "company of employees" and has adopted a business model focused on establishing and maintaining long-term relationships with its employees. The Company believes, that in a resource constrained industry, it distinguishes itself from its competitors by recruiting and retaining consultants with both practical business and relevant IT experience, thereby enhancing the Company's ability to identify industry-specific business issues and develop practical IT solutions to address such issues. CCAi's consultants who perform ERP implementations generally have 10 to 15 years of business or IT experience, including three to five years of ERP implementation experience. The Company's objective is to be a leading provider of IT solutions to the middle market by continuing to deliver rapid ERP implementations and related services. CCAi intends to achieve this objective by (i) expanding its base of highly skilled employees and promoting an entrepreneurial culture; (ii) leveraging its existing strategic relationships and seeking new relationships with leading developers of complementary enterprise-wide applications; (iii) broadening its presence in targeted geographic regions; (iv) expanding its service offerings; and (v) pursuing strategic acquisitions. In April 1998, the Company completed the acquisition of Kelly-Levey & Associates, Inc. ("KLA"). In January 1999, the Company completed the acquisition of Bureau van Dijk Computer Services, Inc. ("BVD"). These acquisitions enabled the Company to acquire highly skilled ERP consultants, obtain additional recruiting and sales and marketing opportunities, gain ERP implementation expertise in the automotive, semiconductor and financial services industries and enhance its presence in the Atlanta, Cincinnati and San Diego markets. For a description of the consideration paid in these acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Overview." The Company is an Ohio corporation formed in 1983 and maintains its principal executive office at the CCAi Renaissance Centre, 5800 Landerbrook Drive, Mayfield Heights, Ohio 44124. The Company's telephone number is (440) 684-6600. THE OFFERING Common Stock offered by the Company......................... 4,000,000 shares Common Stock offered by the Selling Shareholders............ 1,000,000 shares Common Stock to be outstanding after the Offering........... 13,626,950 shares (1) Use of Proceeds............................................. To repay indebtedness of approximately $23.3 million, to redeem all outstanding shares of Redeemable Preferred Stock for approximately $15.8 million and for general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market symbol............................... CCAI
- --------------- (1) Excludes (i) 64,734 shares of Common Stock subject to outstanding compensatory options as of December 31, 1998 issued in connection with the KLA acquisition (the "KLA Options"); (ii) 195,266 shares of Common Stock subject to outstanding warrants as of December 31, 1998 issued in connection with the KLA acquisition (the "KLA Warrants"); (iii) 360,600 shares of Common Stock subject to options outstanding under the Company's 1997 Equity and Performance Incentive Plan (the "1997 Equity and Performance Plan"); (iv) 2,062,450 additional shares of Common Stock reserved for issuance under the 1997 Equity and Performance Plan; and (v) 500,000 additional shares of Common Stock reserved for issuance pursuant to the Company's Employee Stock Purchase Plan (the "Purchase Plan"). See "Management -- Employee Benefits Plans" and Notes 11 and 12 of Notes to Financial Statements. 6 9 SUMMARY FINANCIAL DATA
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- PRO FORMA 1995 1996 1997 1998 1998(1) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF INCOME DATA: Revenues..................................... $ 11,107 $ 17,994 $ 32,218 $ 50,505 $ 67,500 Cost of revenues............................. 6,985 10,978 19,222 30,462 41,548 Gross profit................................. 4,122 7,016 12,996 20,043 25,952 Income from operations....................... 380 1,135 3,706 4,491 4,779 Net income (loss) per share (prior to accretion): Basic...................................... $ 0.01 $ 0.04 $ 0.16 $ 0.18 $ 0.07 Diluted.................................... $ 0.01 $ 0.04 $ 0.15 $ 0.18 $ 0.07 Net income (loss) per share: Basic...................................... $ 0.01 $ 0.04 $ 0.15 $ 0.14 $ 0.03 Diluted.................................... $ 0.01 $ 0.04 $ 0.15 $ 0.14 $ 0.03 Weighted average shares outstanding: Basic...................................... 13,836,080 13,836,080 13,579,423 13,326,950 13,626,950 Diluted.................................... 14,098,649 14,098,649 13,841,992 13,589,519 13,889,519
AS OF DECEMBER 31, 1998 ---------------------------------------------- ACTUAL PRO FORMA(2) PRO FORMA AS ADJUSTED (UNAUDITED)(3) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................ $ 863 $ 1,210 $ 1,605 Working capital.......................................... 2,859 2,692 3,087 Total assets............................................. 19,572 42,795 42,878 Line of credit........................................... 5,500 23,275 -- Redeemable securities.................................... 18,427 18,427 -- Total shareholders' equity (deficit)..................... (11,364) (8,559) 33,226
- --------------- (1) The pro forma statement of summary income data for the year ended December 31, 1998 is presented as if the acquisitions of KLA and BVD had been consummated as of January 1, 1998. See "Unaudited Pro Forma Statements of Operations Data" and Notes thereto. (2) The pro forma balance sheet data as of December 31, 1998 is presented as if the acquisition of BVD had been completed on December 31, 1998. (3) Pro forma as adjusted to give effect to (i) the acquisition of BVD as if it had been completed on December 31, 1998; (ii) the conversion of all outstanding shares of Convertible Preferred Stock into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock immediately prior to the consummation of the Offering; (iii) the sale of 4,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share, after deducting estimated underwriting discounts and commissions and Offering expenses payable by the Company; and (iv) the application of the estimated net proceeds of the Offering, including the redemption of the 250,400 shares of Redeemable Preferred Stock. See "Use of Proceeds" and "Capitalization." 7 10 RISK FACTORS The following risk factors should be considered carefully in addition to the other information contained in this Prospectus before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in this Prospectus. Dependence on SAP and Other Relationships. The Company has historically derived, and expects to continue to derive, a significant portion of its revenues from implementations of SAP's ERP applications and related services. For the years ended December 31, 1996, 1997 and 1998, approximately 69%, 75% and 80%, respectively, of CCAi's revenues were derived from engagements in which the Company implemented SAP applications. CCAi's future success depends largely on its continued relationship with SAP, including its continued status as an SAP National Implementation Partner and as an ASAP Partner. CCAi's status as an SAP National Implementation Partner is awarded by SAP on an annual basis pursuant to contract. To achieve such status, CCAi was required to demonstrate: (i) customer satisfaction with the Company's SAP-related services; (ii) expertise with SAP software; and (iii) an employee base containing an appropriate number of SAP- experienced consultants. Annual renewal of CCAi's contract and its National Implementation Partner status is subject to SAP's review of the Company's performance according to certain criteria, including: (i) customer satisfaction; (ii) number and scope of engagements completed; and (iii) thoroughness of consultant training. There can be no assurance that the Company's contract and its National Implementation Partner status will be renewed or amended by SAP on terms acceptable to the Company, if at all. The Company has a strategic relationship with Oracle and has been an Oracle Alliance Member since 1997. The Company has recently been selected to become one of 26 Oracle Service Providers in the United States. CCAi's future success in its Oracle-related services depends on its continued relationship with Oracle and its continued status as an Oracle Alliance Member. This status is awarded by Oracle pursuant to contract and may be terminated by Oracle upon 30 days' notice to the Company. The Company also maintains relationships with software and hardware vendors and other IT service providers, such as multinational consulting firms. These relationships, whether contractual or otherwise, may be terminated by either party with little or no notice. There can be no assurance that CCAi's relationship with Oracle or with these other vendors and IT service providers will continue under terms acceptable to the Company, if at all. If CCAi's relationship with SAP, Oracle or the other organizations with which the Company maintains strategic relationships deteriorates, or if SAP, Oracle or one of the other organizations with which the Company maintains strategic relationships elects to compete directly with the Company, the Company's business, operating results and financial condition could be materially adversely affected. Moreover, in the event that the demand for such organizations' products and services lessens or fails to grow, the Company's business, operating results and financial condition could be materially adversely affected. The Company also intends to pursue other strategic relationships with leading client/server software solution providers. There can be no assurance that CCAi will be successful in establishing relationships with the vendors of such software or that such relationships will be successful once established. The Company's failure to establish or maintain any such relationships could materially adversely affect the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- The CCAi Solution" and " -- Competition." Dependence on Recruiting and Retaining Consultants. CCAi's business entails the delivery of professional IT services, and its success depends in large part upon its ability to recruit, motivate and retain highly skilled consultants with the functional and technical skills and experience necessary to deliver the Company's services. Because there is a limited pool of such qualified employee candidates, competition for such consultants is intense and is likely to remain so. There can be no assurance that the Company will be able to recruit, motivate and retain sufficient numbers of highly skilled consultants in the future. A failure to do so could materially adversely affect the Company's business, operating results and financial condition, including its ability to secure and complete engagements. See "Business -- Human Resources" and "-- Competition." 8 11 Management of Growth. CCAi has experienced, and expects to continue to experience, rapid growth that has challenged, and may continue to challenge, the Company's managerial and other resources. As of December 31, 1998, the number of consultants employed by the Company increased to 279 from 191 as of December 31, 1997, and further significant increases are anticipated. In addition, the Company's revenues increased 56.8% to $50.5 million for the year ended December 31, 1998 from $32.2 million for the year ended December 31, 1997. The Company has recently opened offices in Cincinnati, Dallas and San Francisco and plans to open additional offices over the next 12 months. As a result of the acquisition of BVD, the Company now has an office in Atlanta and an established presence in San Diego. The Company's inability to generate sufficient additional revenues to offset the costs associated with such expansion, or to successfully integrate these offices into the Company's operations, could materially adversely affect the Company's business, operating results and financial condition. CCAi's success in managing its growth will depend on its ability to continue to enhance its operating, financial and managerial resources and to recruit, motivate and retain its expanding work force. If CCAi is unable to manage growth effectively, the quality of the Company's services, its ability to retain key employees and its business, operating results and financial condition could be materially adversely affected. Moreover, there can be no assurance that CCAi's business will continue to grow. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Growth Strategy" and "-- Human Resources." Variability and Seasonality of Quarterly Operating Results. CCAi's revenues and operating results are subject to significant variation from quarter-to-quarter as a result of a number of factors, including employee hiring, consultant billing and utilization rates, the mix, size and timing of client engagements commenced and completed during a quarter, the number of billable days in a quarter, the timing of office and service expansion and the timing of expenditures. Because a high percentage of CCAi's expenses are relatively fixed, a variation in the number of engagements or the timing of the initiation or the completion of such engagements, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter-to-quarter and could result in losses to the Company. In addition, CCAi's engagements are generally terminable by the client without penalty. Unanticipated termination of an engagement, a client's decision not to proceed to the next phase of an engagement as anticipated by the Company, completion during a quarter of several engagements without the deployment of consultants to new engagements or expansion of existing engagements could result in the Company's underutilization of employees and could, therefore, materially adversely affect the Company's business, operating results and financial condition. To the extent that increases in the number of employees do not result in corresponding increases in revenues, the Company's business, operating results and financial condition could be materially adversely affected. Further, it is difficult for the Company to forecast the timing of revenues because engagement cycles depend on factors such as the size and scope of engagements and circumstances specific to particular clients. Because the Company derives revenues only when its consultants are billing on engagements, its business, operating results and financial condition are materially adversely affected due to vacations, training schedules, sick days, holidays, inclement weather or other similar events. For example, the Company has historically generated lower margins during the second and fourth quarters of the year due to a lower number of billable days resulting from training schedules and the number of vacations and holidays in those quarters. Given all of the foregoing, the Company believes that quarter-to-quarter comparisons of its operating results are not necessarily meaningful, and that such results for one quarter should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Demand for IT consulting services is also significantly affected by the general level of economic activity. When economic activity slows, clients may delay or cancel plans that involve the hiring of IT consultants. The Company is unable to predict the level of economic activity at any particular time, and fluctuations in the general economy could materially adversely affect the Company's business, operating results and financial condition. Risks Associated With Acquisition of KLA and BVD. The Company acquired KLA in April 1998 and BVD in January 1999. The success of these acquisitions will depend on a number of factors, including the Company's ability to integrate their businesses and operations with those of the Company, to retain certain key employees formerly employed by KLA and BVD and to preserve and expand their businesses and operations. There can be no assurance that the Company will be able to successfully integrate and operate their businesses or that it will not experience losses as a result of the acquisitions. Failure to achieve the anticipated benefits of the acquisitions 9 12 or to successfully integrate the operations of KLA and BVD could materially adversely affect the business, operating results and financial condition of the Company. Moreover, goodwill as a result of the acquisitions is being amortized by the Company on a straight-line basis over 20 years. In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company will continually evaluate whether later events and circumstances have occurred that indicate the remaining goodwill may warrant revision. There can be no assurance that the Company will not be required to undertake such revisions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Risks of Acquisition Strategy. The Company intends to further expand its business and operations by pursuing acquisitions of complementary ERP implementation and IT consulting businesses. The timing, size and success of the Company's acquisition efforts and the associated capital commitments cannot be predicted. CCAi expects to face competition for acquisition candidates, which may limit the number of acquisition opportunities available to the Company and may lead to higher purchase prices or transaction costs. There can be no assurance that CCAi will be able to identify, acquire or profitably manage additional businesses or successfully integrate any acquired businesses without substantial costs, including costs in pursuing and negotiating with acquisition candidates, delays in consummating such acquisitions or other operational or financial difficulties. In addition, such a strategy involves a number of other risks, including failure of the acquired businesses to achieve expected results, diversion of management's attention and resources to acquisitions, failure to retain key clients or personnel of the acquired businesses and risks associated with unanticipated events, liabilities or contingencies. Client dissatisfaction or performance problems relating to an acquired business could negatively affect the reputation of CCAi as a whole. Acquisitions accounted for under the purchase method of accounting may result in substantial annual noncash amortization charges for goodwill and other intangible assets in the Company's statements of operations. In addition, the Company could be obligated to make substantial cash payments related to any such acquisition. There can be no assurance that the Company will derive any value or benefit from any such payments. If CCAi is unable to acquire complementary ERP implementation and IT consulting businesses on reasonable terms or successfully integrate and manage acquired companies, or if performance problems occur at acquired companies, CCAi's business, operating results and financial condition may be materially adversely affected. See "Use of Proceeds" and "Business -- Growth Strategy." Rapid Technological Change; Dependence on New Solutions. The IT industry is characterized by rapid technological change, evolving industry standards, changing client preferences and new and frequent product and service introductions. CCAi's continued success is dependent in part on its ability to stay abreast of such continuing changes. There can be no assurance that CCAi will be successful in identifying and addressing these developments on a timely basis or that, if CCAi does identify and address such developments, CCAi will be successful in the marketplace. In addition, there can be no assurance that products, technologies or services developed or offered by others will not render the Company's services noncompetitive. CCAi's failure to identify and address these developments could materially adversely affect the Company's business, operating results and financial condition. Highly Competitive Information Technology Services Industry. The market for CCAi's services is highly competitive. CCAi believes that its principal competitors include the internal information systems groups of its prospective clients, IT consulting companies, systems integration firms and the consulting divisions of software applications vendors, some of which are also clients of the Company. Many of CCAi's competitors have longer operating histories, possess greater industry and name recognition and have significantly greater financial, technical and marketing resources than the Company. In addition, there are relatively low barriers to entry into CCAi's market, and the Company has faced, and expects to continue to face, additional competition from new entrants into its market, including new entrants operating offshore who may have lower fixed operating costs than the Company and new entrants who may develop new or innovative means of delivering IT services. CCAi believes that the principal competitive factors in its market include quality of service, speed of development and implementation, price, engagement management capability, technical and business expertise and reputation. The Company believes it competes favorably with respect to such factors. The Company believes its ability to compete also depends in part on a number of competitive factors outside its control. These include the ability of its competitors to recruit, motivate and retain project managers and other senior professionals, 10 13 develop services that are competitive with the Company's services and respond to customer needs. There can be no assurance that the Company will be able to compete successfully with its competitors. See "Business -- The CCAi Solution" and "-- Competition." Engagement Risks. Many of CCAi's engagements are critical to the operations of its clients' businesses and provide benefits that may be difficult to quantify. The Company's inability to meet a client's expectations in any engagement, especially in performing mission and time critical projects such as Year 2000 compliance services, could have a material adverse effect on the client and, therefore, could give rise to claims against the Company or damage the Company's reputation, which could in turn materially adversely affect the Company's business, operating results and financial condition. In addition, most of the Company's contracts are terminable by its clients with little or no notice to the Company and without penalty. The cancellation or a significant change in the scope of engagements could materially adversely affect the Company's business, operating results and financial condition. The Company faces increased pressure to undertake engagements on a fixed-fee basis, instead of on a time and materials basis. The failure of the Company to complete a fixed-fee engagement within budget could expose the Company to risks associated with cost overruns, which could materially adversely affect the Company's business, operating results and financial condition. These risks may be heightened if the Company acts as a subcontractor on a fixed-fee engagement because of its limited ability to control engagement variables and to negotiate directly with the client. Concentration of Revenues. Since its inception, the Company has derived a significant portion of its revenues from a relatively limited number of clients. For example, for the years ended December 31, 1996, 1997 and 1998, the Company's 10 largest clients accounted for approximately 43%, 39% and 43% of its revenues, respectively. There can be no assurance that these clients will continue to hire the Company for additional engagements or do so at the same revenue levels. Clients engage the Company on an engagement-by-engagement basis, and a client can generally terminate a contract with little or no notice to the Company and without penalty. The loss of any such client, or a reduction in the scope of engagements undertaken for such a client, could materially adversely affect the Company's business, operating results and financial condition. In addition, there can be no assurance that the portion of the Company's revenues attributable to a relatively limited number of clients will not increase in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Clients and Representative Engagements." Reliance on Key Executives. The success of CCAi has been highly dependent upon certain key executives and senior managers, particularly the Company's founders, Nicholas A. Canitano, Kenneth L. Conley, Karen M. Conley and Annette M. Canitano (collectively, the "Founders"). None of these individuals has entered into an employment agreement with CCAi, and there is no guarantee that any of these individuals will continue his or her employment with the Company. The loss of the services of any of these persons for any reason could materially adversely affect the Company's business, operating results and financial condition. The Company maintains, and is the beneficiary of, key person life insurance on the lives of Nicholas A. Canitano and Kenneth L. Conley, each in the face amount of $2,000,000, and on the lives of Karen M. Conley and Annette M. Canitano, each in the face amount of $1,000,000. In the event of the death of any of the Founders, the applicable sum would be paid to the Company to offset the financial effect of such death. No assurance can be given, however, that such amount of insurance would be adequate for that purpose. The Company does not maintain key life insurance on any of its other executive officers or employees. See "Management." Government Regulation of Immigration. The Company recruits certain of its IT professionals from countries outside the United States to avail itself of the best available consulting talent and, therefore, must comply with the immigration laws in the countries in which it operates, particularly in the United States and Canada. There is a limit on the number of new H-1B permits that may be approved in any year. In years in which this limit is reached, the Company may be unable to obtain enough H-1B permits to meet its requirements. If the Company were unable to obtain H-1B permits for its employees in sufficient quantities or at a sufficient rate, the Company's business, operating results and financial condition could be materially adversely affected. Furthermore, Congress and administrative agencies with jurisdiction over immigration matters have periodically 11 14 expressed concerns over the levels of legal and illegal immigration into the U.S. These concerns have often resulted in proposed legislation, rules and regulations aimed at reducing the number of work permits that may be issued. Any changes in such laws and regulations that make it more difficult to hire foreign nationals or that limit the ability of the Company to retain employees who are foreign nationals could require the Company to incur additional unexpected labor costs and other expenses and limit the Company's ability to implement its expansion strategy. Any such restrictions or limitations on the Company's ability to hire professionals from countries outside the United States could materially adversely affect the Company's business, operating results and financial condition. See "Business -- Human Resources." Significant Influence of Principal Shareholders. Upon consummation of the Offering, the Founders will beneficially own approximately 39% of the outstanding shares of Common Stock. The Founders anticipate that they will enter into a shareholders agreement prior to the consummation of the Offering. Under the proposed shareholders agreement, the Founders would agree to vote all of their shares of Common Stock as determined by any three of the Founders. In addition, the Founders would agree to restrictions on the transfer of their shares. As a result of the shareholders agreement, the Founders could effectively control the outcome of any matters requiring shareholder approval, including the election of the members of the Board of Directors. Further, as a result of the 70% approval requirement for certain transactions contained in the Company's Second Amended and Restated Articles of Incorporation (the "Articles of Incorporation"), the Founders, voting together, can block the approval of any such transactions. This could materially adversely affect the market price of the Common Stock or delay or prevent a change in control of the Company. See "Principal and Selling Shareholders." Dependence on Intellectual Property Rights. CCAi's success is dependent upon certain methodologies and other proprietary intellectual property rights. Software developed by the Company for a client is typically assigned to the client. CCAi also independently develops certain foundation and application software products, or software "tools" that remain the property of the Company. CCAi relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. CCAi enters into confidentiality agreements with its employees and limits distribution of proprietary information. There can be no assurance that the steps taken by CCAi in this regard will be adequate to deter misappropriation of the Company's proprietary information, that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights or that such steps will prevent the Company's employees from using intellectual property belonging to others. Although CCAi believes its services do not infringe on the intellectual property rights of others and it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of claims alleging infringement of third-party intellectual property rights, including the rights of its clients. Any such claims could require CCAi to expend significant resources in litigation, pay damages, cease using infringing intellectual property, develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of asserted infringement. See "Business -- Intellectual Property Rights." Risks Associated With Year 2000 Compliance. Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date code field, and were not designed to account for the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process dates in the Year 2000 and beyond. The Company and its clients rely on their systems, applications and devices in operating and monitoring all major aspects of their businesses, including financial systems (such as general ledger, accounts payable and accounts receivable modules), customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company and its clients also rely directly and indirectly, on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governmental entities, both domestic and international, for accurate exchange of data. The Company's Year 2000 assessment is conducted by the Company's IT department and executive management. The Company's assessment of the Year 2000 issue has been broadly divided among hardware systems, software systems, telecommunications, data communications, facilities, internal business applications, external business applications and services offered by CCAi. All hardware systems are being inventoried, audited 12 15 and tested for Year 2000 compliance. All personal computer systems are in material compliance or will be replaced in 1999. Software systems include operating systems, applications and utilities. All business critical software systems have been assessed and are in material compliance. The telecommunications systems in use at CCAi are comprised of voice, facsimile, voice mail and video teleconferencing. All telecommunications systems have been assessed and are in material compliance. The data communications systems employed by CCAi include local area as well as wide area networking. The Company's data communications systems are in material compliance. CCAi employs two major internal business applications, which are significant in its business operations. These applications are its financial and payroll systems, which are commercial off-the-shelf items and include ongoing support. Both the systems have been assessed for Year 2000 compliance and are in material compliance. CCAI has implemented a training program and has created an environment in which issues and solutions relating to Year 2000 problems are exchanged and implemented. The Year 2000 issues with regard to CCAi's facilities have also been assessed and found to be in material compliance. There is a combination of hardware, software and communications elements involved with CCAI's headquarters and other offices. These are broadly grouped into physical security systems, fire alarm and fire control systems, heating and cooling systems, elevator systems, irrigation systems, lighting and emergency services. Based on the information currently available, the Company does not anticipate any significant investments and therefore, believes that the costs associated with the Year 2000 issue, and the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse effect on its business, operating results and financial condition. However, there can be no assurance that the Company, or its clients, will not encounter unexpected costs or disruption in their businesses as a result of the Year 2000 issue. In addition, even if the internal system of the Company are not materially affected by the Year 2000 issue, the Company's business, operating results and financial condition could be materially adversely affected through disruption in the operation of the enterprises with which the Company interacts. No Prior Public Market; Possible Volatility of Stock Price. Prior to the Offering, there has been no public market for the Common Stock, and there is no assurance an active trading market will develop or be sustained after the Offering. The initial public offering price will be determined through negotiations among the Company and the representatives of the Underwriters and may not be indicative of the market price of the Common Stock after the Offering. The trading price of the Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcements of technological innovations, new products or new contracts by the Company or its competitors, developments with respect to patents, copyrights or proprietary rights, conditions and trends in the IT consulting industry, changes in financial estimates by securities analysts, general market conditions and other factors. In addition, the public equity markets from time to time have experienced significant price and volume fluctuations that particularly have affected the stock prices of technology companies. These broad market fluctuations, as well as shortfalls in sales or earnings as compared with securities analysts' expectations, changes in such analysts' recommendations or projections and general economic and market conditions, may materially adversely affect the market price of the Common Stock. See "Underwriting." Certain Anti-Takeover Effects. Certain provisions of the Articles of Incorporation and Amended and Restated Code of Regulations (the "Code of Regulations"), as well as Ohio statutes, may be deemed to have certain anti-takeover effects. Such provisions, including those providing for the possible issuance of preferred stock, the 70% majority approval requirement for certain transactions, and the division of the Company's Board of Directors into two classes of directors, may make it more difficult for other persons, without the approval of the Company's Board of Directors, to make a tender offer or acquisitions of substantial amounts of the Common Stock or to launch other takeover attempts that a shareholder might consider to be in such shareholder's best interest. These provisions could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. See "Description of Capital Stock -- Certain Articles of Incorporation and Code of Regulations Provisions and Ohio Law; Anti-Takeover Effects." 13 16 Shares Eligible for Future Sale; Registration Rights Agreements. Sales of significant amounts of Common Stock in the public market after the Offering or the perception that such sales will occur could materially adversely affect the market price of the Common Stock or the future ability of the Company to raise capital through an offering of its equity securities. Of the 13,626,950 shares of Common Stock to be outstanding upon completion of the Offering, the 5,000,000 shares offered hereby will be eligible for immediate sale in the public market without restriction unless such Shares are purchased by "affiliates" of the Company within the meaning of Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 8,626,950 shares of Common Stock held by existing shareholders upon completion of the Offering will be "restricted securities" as that term is defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under the Securities Act. Of the restricted securities, 10,000 shares of Common Stock will be available for sale in the public market on the date of this Prospectus. Directors, officers and certain shareholders of the Company holding the remaining 8,616,950 shares of Common Stock that are restricted securities have agreed that they will not sell, directly or indirectly, any Common Stock without the prior consent of Donaldson, Lufkin & Jenrette Securities Corporation for a period of 180 days from the date of this Prospectus (the "Lock-up Agreements"). Subject to these Lock-up Agreements, additional shares of Common Stock will be available for sale in the public market (subject in the case of shares held by affiliates in compliance with certain volume restrictions) as follows: (i) 8,316,950 shares will be eligible for sale upon the expiration of the Lock-Up Agreements 180 days after the date of this Prospectus; (ii) 150,000 shares will be eligible for sale after January 2000; and (iii) 150,000 shares will be eligible for sale after January 2001. Following the date of this Prospectus, the Company intends to register on one or more registration statements on Form S-8 up to 3,000,000 shares of Common Stock issuable under the 1997 Equity and Performance Plan and the Purchase Plan (collectively, the "Stock Plans"). Of the 3,000,000 shares of Common Stock issuable under the Stock Plans, 360,600 shares are subject to outstanding options as of December 31, 1998, none of which will be exercisable at the time of the Offering. The Company also has reserved 195,266 shares of Common Stock for issuance upon exercise of the KLA Warrants and 64,734 shares of Common Stock for issuance upon exercise of the KLA Options. Upon completion of the Offering, the holders of 2,873,860 shares of Common Stock will be entitled to certain registration rights with respect to such shares. If such holders, by exercising their registration rights, cause a large number of shares of Common Stock to be registered and sold in the public market, such sales could have an adverse effect on the market price of the Common Stock. In addition, if the Company is required, pursuant to such registration rights, to include shares held by such persons in a registration statement, which the Company files to raise additional capital, the inclusion of such shares could adversely affect the Company's ability to raise needed capital. See "Certain Transactions," "Management -- Employee Benefit Plans," "Shares Eligible for Future Sale," and "Principal and Selling Shareholders." Significant Unallocated Net Proceeds. The principal purposes of the Offering are to obtain additional working capital, create a public market for the Common Stock, provide liquidity to the Company's shareholders, enhance the Company's ability to use its Common Stock as a means of recruiting, motivating and retaining key employees and facilitate the Company's future access to public equity markets. A substantial portion of the anticipated net proceeds of the Offering has not been designated for specific uses. CCAi expects to use the net proceeds from the Offering for: (i) repayment in full of estimated indebtedness of approximately $23.3 million; (ii) redemption of all outstanding shares of Redeemable Preferred Stock for approximately $15.8 million; and (iii) general corporate purposes, including working capital. Although the Company has no plans, commitments or agreements with respect to any material acquisitions as of the date of this Prospectus, the Company may seek acquisitions of businesses or service offerings that are complementary to those of the Company, and a portion of the net proceeds may be used for such acquisitions. Accordingly, the Company will have significant flexibility in applying the net proceeds of the Offering. See "Use of Proceeds." Benefits Of Offering To Current Shareholders. In addition to the Selling Shareholders receiving an estimated $10.2 million in net proceeds from the Offering, the Offering will benefit the current shareholders by establishing a public market for the Common Stock and providing significantly increased liquidity to current 14 17 shareholders for the shares of Common Stock they will own after the Offering. The shares of Common Stock that will be owned by the Selling Shareholders after this Offering will have a value of approximately $31.6 million, assuming a market price equal to the initial public offering price (assumed to be $11.00 per share and assuming no exercise of the Underwriters' over-allotment option). The shares of Common Stock that will be owned by all executive officers and directors as a group after this Offering will have a value of approximately $60.0 million, assuming a market price equal to the initial public offering price (assumed to be $11.00 per share and assuming no exercise of the Underwriters' over-allotment option). The existing shareholders acquired their shares of Common Stock for approximately $19.0 million. See "Dilution" and "Principal and Selling Shareholders." Dilution. Investors participating in the Offering will incur immediate and substantial dilution of net tangible book value per share of $10.61 from an assumed initial public offering price of $11.00 per share. To the extent outstanding options to purchase shares of Common Stock are exercised, there will be further dilution to investors participating in the Offering. There can be no assurance that the Company will not require additional funds to support its working capital requirements or for other purposes, in which case the Company may seek to raise such additional funds through public or private equity financing or from other sources. There can be no assurance that such additional financing will be available or that, if available, such financing will be obtained on terms favorable to the Company and would not result in additional dilution of the Company's shareholders. See "Dilution." 15 18 USE OF PROCEEDS The net proceeds to CCAi from the sale of the 4,000,000 shares offered by the Company pursuant to the Offering are estimated to be approximately $39.4 million ($45.6 million if the Underwriters' over-allotment option is exercised in full), at an assumed offering price of $11.00 per share after deducting the estimated underwriting discounts and commissions and Offering expenses payable by the Company. The principal purposes of the Offering are to obtain additional working capital, create a public market for the Common Stock, provide liquidity to the Company's shareholders, enhance the Company's ability to use its Common Stock as a means of attracting, motivating and retaining key employees and facilitate the Company's future access to public equity markets. CCAi expects to use the net proceeds from the Offering: (i) to repay in full existing indebtedness of approximately $23.3 million (of which approximately $17.8 million was incurred in connection with the acquisition of BVD in January 1999) under the Company's revolving line of credit with Fleet National Bank ("Fleet Bank") with an interest rate equal to LIBOR (5.544% at December 31, 1998) plus up to 3.25% or the bank's prime rate (7.75% at December 31, 1998) plus up to 1.50%; (ii) to redeem all outstanding shares of Redeemable Preferred Stock for approximately $15.8 million; and (iii) for general corporate purposes, including working capital. The Company may also use a portion of the net proceeds to fund acquisitions of complementary businesses or service offerings. Although the Company may periodically review potential acquisition opportunities, there are no current agreements with respect to any such transactions. Pending such uses, the Company intends to invest the net proceeds from the Offering in short-term, investment-grade, interest-bearing securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders." DIVIDEND POLICY The Company has never declared or paid any dividends. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business. The payment of dividends in the future, if any, will be at the discretion of the Board of Directors. 16 19 CAPITALIZATION The following table sets forth as of December 31, 1998 the capitalization of the Company, the pro forma capitalization of the Company after giving effect for the BVD acquisition as if the acquisition had been completed on December 31, 1998 and pro forma as adjusted to give effect to (i) the conversion of all outstanding shares of Convertible Preferred Stock into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock immediately prior to the consummation of the Offering, (ii) the redemption of the 250,400 outstanding shares of Redeemable Preferred Stock to be effected immediately upon consummation of the Offering, (iii) the acquisition of BVD as if the acquisition had been completed on December 31, 1998, (iv) the amendment to the Articles of Incorporation adopted by the Company's Board of Directors and shareholders increasing the number of authorized shares of preferred stock and Common Stock, (v) the sale of 4,000,000 shares offered hereby at an assumed initial public offering price of $11.00 per share, after deducting estimated underwriting discounts and commissions and Offering expenses payable by the Company and (vi) the application of the estimated net proceeds of the Offering. See "Use of Proceeds." The information set forth below should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Prospectus:
AS OF DECEMBER 31, 1998 ------------------------------------ ACTUAL PRO FORMA PRO FORMA AS ADJUSTED (UNAUDITED) (IN THOUSANDS) Line of credit............................................ $ 5,500 $ 23,275 $ -- Redeemable securities..................................... 18,427 18,427 -- Shareholders' equity (deficit): Preferred Stock, voting, $.01 par value, authorized 500,800 shares, 250,400 shares issued and outstanding, 250,400 shares issued and outstanding -- -- pro forma and no shares outstanding pro forma as adjusted........................................... -- Preferred Stock, non-voting no par value, authorized 5,000,000 shares, none issued...................... -- -- -- Preferred Stock, voting, no par value, authorized 5,000,000 shares, none issued...................... -- -- -- Common Stock, no par value, authorized 45,000,000 shares, 6,822,950 shares issued and outstanding, 7,122,950 shares issued and outstanding pro forma 8 8 and 13,626,950 shares issued and outstanding pro forma as adjusted (1).............................. 15 Additional paid-in capital........................... 359 3,164 42,580 Retained earnings (accumulated deficit).............. (11,372) (11,372) (9,010) Less: note receivable from shareholder............... (359) (359) (359) -------- -------- ------- Total shareholders' equity (deficit)............... (11,364) (8,559) 33,226 -------- -------- ------- Total capitalization............................ $ 12,563 $ 33,143 $33,226 ======== ======== =======
- --------------- (1) Excludes (i) 64,734 shares of Common Stock subject to the KLA Options, (ii) 195,266 shares subject to the KLA Warrants, (iii) 360,600 shares of Common Stock subject to options outstanding under the 1997 Equity and Performance Plan; (iv) 2,062,450 additional shares of Common Stock reserved for issuance pursuant to the 1997 Equity and Performance Plan; and (v) 500,000 additional shares of Common Stock reserved for issuance pursuant to the Purchase Plan. See "Management -- Employee Benefits Plans" and Notes 11 and 12 of Notes to Financial Statements. 17 20 DILUTION As of December 31, 1998, the pro forma net tangible deficit of the Company was ($18.0 million) or ($1.87) per share of Common Stock. Pro forma net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding after giving effect for the BVD acquisition as if it had been completed on December 31, 1998 and after the conversion of all outstanding shares of Convertible Preferred Stock into 2,504,000 shares of Common Stock. After giving effect to the sale by the Company of the 4,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share, after deducting the underwriting discounts and commissions and estimated Offering expenses payable by the Company, after the conversion of all outstanding shares of Convertible Preferred Stock into 2,504,000 shares of Common Stock and the redemption of the Redeemable Preferred Stock and after giving effect for the BVD acquisition, the pro forma as adjusted net tangible book value of the Company as of December 31, 1998 would have been $5.4 million, or $0.39 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.26 per share of Common Stock to existing shareholders and an immediate dilution of $10.61 per share to new shareholders. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share............. $11.00 Pro forma net tangible deficit per share before the Offering............................................... ($1.87) Increase per share attributable to new investors.......... 2.26 ------ Pro forma as adjusted net tangible book value per share after the Offering........................................ 0.39 ------ Dilution per share to new investors......................... $10.61 ======
The following table summarizes, on a pro forma basis as of December 31, 1998, the difference between the existing shareholders (including shares issued in the BVD transaction and the conversion of the Convertible Preferred Stock) and new shareholders with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by existing shareholders and by new shareholders:
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing shareholders.................. 9,626,950 70.6% $19,049,235 30.2% $ 1.98 New shareholders....................... 4,000,000 29.4 44,000,000 69.8 11.00 ---------- ----- ----------- ----- Total........................ 13,626,950 100.0% $63,049,235 100.0% ========== ===== =========== =====
The foregoing tables and calculations assume no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants. As of December 31, 1998, there were 64,734 shares of Common Stock subject to the KLA Options; 195,266 shares of Common Stock subject to the KLA Warrants; 360,600 shares of Common Stock subject to options outstanding under the 1997 Equity and Performance Plan; 2,062,450 additional shares of Common Stock reserved for issuance pursuant to such plan; and 500,000 additional shares of Common Stock reserved for issuance pursuant to the Purchase Plan. See "Management -- Employee Benefit Plans," and "Shares Eligible for Future Sale." 18 21 SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the Company's financial statements and Notes thereto included elsewhere in this Prospectus. The Statements of Income Data presented below for each of the years in the three year period ended December 31, 1998 and the Balance Sheet Data, as of December 31, 1996, 1997 and 1998, have been derived from the Company's financial statements included elsewhere in this Prospectus, which have been audited by PricewaterhouseCoopers LLP, whose report with respect thereto is included elsewhere in this Prospectus. The Balance Sheet Data as of December 31, 1995 and 1994 has been derived from audited financial statements not included herein. The Statements of Income Data for the year ended December 31, 1994 have been derived from the unaudited financial statements of the Company. In the opinion of management, the unaudited financial statements include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of its financial position and operating results for such periods. See the financial statements and the related Notes thereto included elsewhere in the Prospectus.
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1994 1995 1996 1997 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF INCOME DATA: Revenues................................. $6,149 $11,107 $17,994 $32,218 $50,505 Cost of revenues......................... 3,977 6,985 10,978 19,222 30,462 ------ ------- ------- ------- ------- Gross profit............................. 2,172 4,122 7,016 12,996 20,043 Selling, general and administrative expenses.............................. 2,066 3,038 4,204 6,555 10,423 Incentive compensation................... 216 678 1,647 2,700 3,430 Acquisition compensation................. -- -- -- -- 1,179 Depreciation and amortization............ 22 26 30 35 520 ------ ------- ------- ------- ------- (Loss) income from operations............ (132) 380 1,135 3,706 4,491 Net interest expense..................... 40 35 83 87 316 ------ ------- ------- ------- ------- (Loss) income before provision for income taxes................................. (172) 345 1,052 3,619 4,175 (Benefit from) provision for income taxes................................. (80) 180 461 1,495 1,789 ------ ------- ------- ------- ------- Net (loss) income........................ $ (92) $ 165 $ 591 $ 2,124 $ 2,386 ====== ======= ======= ======= ======= Accretion to redemption value of redeemable securities................. -- -- -- (92) (457) ------ ------- ------- ------- ------- Net (loss) income available to common shareholders.......................... $ (92) $ 165 $ 591 $ 2,032 $ 1,929 ====== ======= ======= ======= ======= Net (loss) income per share: Basic................................. $(0.01) $ 0.01 $ 0.04 $ 0.15 $ 0.14 Diluted............................... $(0.01) $ 0.01 $ 0.04 $ 0.15 $ 0.14 Weighted average shares outstanding: Basic................................. 13,836,080 13,836,080 13,836,080 13,579,423 13,326,950 Diluted............................... 14,098,649 14,098,649 14,098,649 13,841,992 13,589,519
AS OF DECEMBER 31, -------------------------------------------------- 1994 1995 1996 1997 1998 (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.............. $ 109 $ 100 $ 362 $ 2,174 $ 863 Working capital (deficit).............. (142) (170) 429 2,119 2,859 Total assets........................... 1,164 2,054 3,697 7,712 19,572 Line of credit......................... -- -- 704 698 5,500 Redeemable securities.................. -- -- -- 15,970 18,427 Total shareholders' equity (deficit)... (33) (25) 723 (13,264) (11,364)
19 22 UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA The following Unaudited Pro Forma Statements of Operations Data gives pro forma effect to the acquisitions of KLA on April 8, 1998 and BVD on January 12, 1999. The Unaudited Pro Forma Statements of Operations Data for the year ended December 31, 1998 combine the historical statements of income of CCAi and the historical statements of operations of KLA and BVD as if the acquisitions had been completed on January 1, 1998. The Unaudited Pro Forma Statement of Operations Data for the year ended December 31, 1998 reflects the last full quarter of KLA operations prior to being acquired by CCAi on April 8, 1998 and the historical statements of operations of BVD for the year ended December 31, 1998. This pro forma data should be read in conjunction with the respective historical financial statements (including Notes thereto) of CCAi, KLA and BVD, Management's Discussion and Analysis of Financial Condition and Results of Operations, the Notes to Unaudited Pro Forma Statements of Operations Data presented below and other financial information of CCAi, KLA and BVD appearing elsewhere herein. The pro forma adjustments reflecting the consummation of the acquisitions are based on the purchase method of accounting, available financial information and certain estimates and assumptions set forth in the Notes to the Unaudited Pro Forma Statements of Operations Data. The Unaudited Pro Forma Statements of Operations Data reflects CCAi's best estimates; however, the actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to various factors, including, without limitation, access to additional information and changes in value. The pro forma adjustments do not reflect any operating efficiencies or cost savings that may be achievable with respect to the combined businesses of CCAi, KLA and BVD. The following data is not necessarily indicative of the future financial position or operating results of the combined businesses or the financial position or operating results of the combined businesses had the acquisition occurred at the beginning of 1998.
YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------------------------------------------- KLA BVD BVD THREE MONTHS NINE MONTHS THREE MONTHS ENDED ENDED ENDED MARCH 31, PRO FORMA SEPTEMBER 30, DECEMBER 31, PRO FORMA CCAi 1998 KLA 1998 1998 BVD PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS HISTORICAL HISTORICAL ADJUSTMENTS COMBINED (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues..................... $50,505 $2,570 $(157)(1) $11,408 $3,174 -- $ 67,500 Cost of revenues............. 30,462 1,542 (157)(1) 7,550 2,151 -- 41,548 ------- ------ ----- ------- ------ ------- ---------- Gross profit................. 20,043 1,028 -- 3,858 1,023 -- 25,952 Selling, general and administrative expenses.... 10,423 925 (250)(2) 2,814 608 $ (319)(9) 14,201 Incentive compensation....... 3,430 -- -- -- -- -- 3,430 Acquisition compensation..... 1,179 -- 646(3,4) -- -- -- 1,825 Depreciation and amortization............... 520 19 93(5) 36 19 1,030(10) 1,717 ------- ------ ----- ------- ------ ------- ---------- Income (loss) from operations................. 4,491 84 (489) 1,008 396 (711) 4,779 Transaction costs............ -- 302 (302)(6) -- 344 (344)(6) -- Net interest expense (income)................... 316 4 120(7) (2) -- 1,777(11) 2,215 ------- ------ ----- ------- ------ ------- ---------- Income (loss) before provision for (benefit from) income taxes......... 4,175 (222) (307) 1,010 52 (2,144) 2,564 Provision for (benefit from) income taxes............... 1,789 (83) (89)(8) 454 28 (460)(12) 1,639 ------- ------ ----- ------- ------ ------- ---------- Net income (loss)............ $ 2,386 $ (139) $(218) $ 556 $ 24 $(1,684) $ 925 ======= ====== ===== ======= ====== ======= ========== Accretion to redemption value of redeemable securities... (457) -- -- -- -- -- (457) ------- ------ ----- ------- ------ ------- ---------- Net income (loss) available to common shareholders..... $ 1,929 $ (139) $(218) $ 556 $ 24 $(1,684) $ 468 ======= ====== ===== ======= ====== ======= ========== Net income per share: Basic...................... $ 0.03 Diluted.................... 0.03 Weighted average shares outstanding: Basic...................... 13,626,950 Diluted.................... 13,889,519
20 23 NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA (1) Reflects the elimination of contractual sales and cost of sales that had been transacted between CCAi and KLA before the acquisition date. (2) Reflects the elimination of KLA expenses, which consist of the salary related to an officer of KLA who was not retained by CCAi and certain nonrecurring travel expenses incurred by KLA officers and employees, that will no longer be incurred as a result of the KLA acquisition. (3) Reflects pro forma adjustment to acquisition compensation in the amount of $0.1 million for the year ended December 31, 1998 for the amortization of $0.5 million of compensation expense resulting from the issuance of the KLA Options. The expense associated with the KLA Options is amortized on a straight-line basis over the 24 month vesting period for such options. In connection with the Offering, the KLA Options will fully vest and the unamortized balance will be included in acquisition compensation. See Note 12 of Notes to Financial Statements. (4) Reflects pro forma adjustment to acquisition compensation in the amount of $0.6 million for the year ended December 31, 1998 for bonus retention pool payments to an escrow account for KLA employees retained by CCAi. See Note 12 of Notes to Financial Statements. (5) Reflects the pro forma increase in amortization expenses associated with the amortization of goodwill of $7.5 million resulting from the KLA acquisition, on a straight-line basis over 20 years. (See Note (13) below). (6) Reflects transaction costs, which consist of professional services expenses, incurred by KLA or BVD resulting from the acquisitions. Transaction costs incurred by CCAi are included in goodwill. Amortization of goodwill is included in depreciation and amortization. (7) Reflects the pro forma increase in interest expense associated with the $5.9 million of borrowings by CCAi in connection with the KLA acquisition. The borrowings are assumed to have an interest rate of 8.5%, which is the Company's pro forma cost of borrowing in connection with the KLA acquisition. (8) Reflects pro forma adjustments to provision for (benefit from) income taxes after adjusting taxable income for nondeductible goodwill and assuming CCAi's effective income tax rate of 41.3%. The remaining difference between the statutory rate and the effective rate is primarily the result of state taxes. (9) Reflects pro forma adjustments attributed to royalty expenses, which will no longer be paid after the acquisition. These royalties were paid to a company which is partially owned by some of the former shareholders of BVD. (10) Reflects the pro forma increase in amortization expense associated with the estimated amortization of goodwill of approximately $20.6 million resulting from the BVD acquisition, on a straight-line basis over 20 years. (See Note (13) below). (11) Reflects the pro forma increase in interest expense associated with the $17.8 million of borrowings by CCAi in connection with the BVD acquisition. The borrowings are assumed to have an interest rate of 10.0%, which is the Company's pro forma cost of borrowing in connection with the BVD acquisition as if the KLA and BVD transactions had been completed on January 1, 1998. (12) Reflects pro forma adjustments to provision for (benefit from) income taxes after adjusting taxable income for nondeductible goodwill and assuming CCAi's effective income tax rate of 41.3%. The remaining difference between the statutory rate and the effective rate is primarily the result of state taxes. (13) The purchase price allocations for BVD and KLA are as follows:
BVD KLA ------- ------ (IN THOUSANDS) Assets acquired............................................. $ 2,620 $2,378 Liabilities assumed......................................... (2,643) (3,374) Goodwill.................................................... 20,603 7,524 Compensatory options........................................ -- 500 Earn-out liability.......................................... -- (1,123) ------- ------ 20,580 5,905 Less: equity instruments.................................... 2,805 2,000 ------- ------ Cash paid for acquisition................................... $17,775 $3,905 ======= ======
The allocation for BVD is preliminary; however, adjustments to these amounts are not expected to be material. 21 24 UNAUDITED PRO FORMA BALANCE SHEET The following Unaudited Pro Forma Balance Sheet as of December 31, 1998 gives effect to (i) the acquisition of BVD and (ii) the related pro forma adjustments described in the notes below. This pro forma balance sheet is presented as if the acquisition had been completed on December 31, 1998.
AS OF DECEMBER 31, 1998 ------------------------------------------------------------ CCAi BVD PRO FORMA HISTORICAL(1) HISTORICAL ADJUSTMENTS PRO FORMA (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................ $ 863 $ 347 $ -- $ 1,210 Accounts receivable, net................................. 7,226 1,879 (45)(4) 9,060 Deferred taxes........................................... 723 28 -- 751 Other.................................................... 246 228 -- 474 -------- ------ ------- -------- Total current assets............................... 9,058 2,482 (45) 11,495 Goodwill, net.............................................. 7,251 -- 20,603(2) 27,854 Property and equipment, net................................ 1,912 153 -- 2,065 Other...................................................... 1,351 30 -- 1,381 -------- ------ ------- -------- Total assets....................................... $ 19,572 $2,665 $20,558 $ 42,795 ======== ====== ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations................. $ 374 $ -- $ -- $ 374 Accounts payable......................................... 1,124 383 -- 1,507 Accrued payroll, taxes and benefits...................... 3,877 1,091 889(4) 5,857 Income taxes payable..................................... 434 71 100(4) 605 Other.................................................... 390 70 -- 460 -------- ------ ------- -------- Total current liabilities.......................... 6,199 1,615 989 8,803 Line of credit............................................. 5,500 -- 17,775(3) 23,275 Deferred taxes............................................. 61 39 -- 100 Long-term obligations, less current portion................ 749 -- -- 749 -------- ------ ------- -------- Total liabilities.................................. 12,509 1,654 18,764 32,927 Commitments and contingencies.............................. -- -- -- -- Redeemable securities...................................... 18,427 -- -- 18,427 Shareholders' equity (deficit): Preferred stock, voting, $.01 par value, authorized 500,800, shares, 250,400 shares issued and outstanding as of December 31, 1998................................ -- -- -- -- Preferred stock, non-voting, no par value, authorized 5,000,000 shares, none issued.......................... -- -- -- -- Preferred stock, voting, no par value, authorized 5,000,000 shares, none issued.......................... -- -- -- -- Common stock, no par value, authorized 45,000,000 shares, 6,822,950 shares issued and outstanding at December 31, 1998 and 7,122,950 shares issued and outstanding pro forma.................................................. 8 -- -- 8 Common stock, no par value, authorized and issued 1,000 shares................................................. -- 300 (300)(5) -- Additional paid-in capital............................... 359 -- 2,805(5) 3,164 Retained earnings (accumulated deficit).................. (11,372) 711 (711)(5) (11,372) -------- ------ ------- -------- (11,005) 1,011 1,794 (8,200) Less: note receivable from shareholder................... (359) -- -- (359) -------- ------ ------- -------- Total shareholders' equity (deficit)............... (11,364) 1,011 1,794 (8,559) -------- ------ ------- -------- Total liabilities and shareholders' equity (deficit)........................................ $ 19,572 $2,665 $20,558 $ 42,795 ======== ====== ======= ========
- --------------- NOTES TO UNAUDITED PRO FORMA BALANCE SHEET (1) Includes the KLA acquisition, which was consummated in April 1998. (2) Reflects the estimated goodwill resulting from the BVD acquisition. (3) Reflects the estimated bank borrowings needed to acquire BVD including certain costs associated with the acquisition in the amount of $0.3 million. (4) Reflects adjustments to reconcile accounting policies of BVD and CCAi. (5) Reflects the required adjustments to eliminate BVD's equity and to record the 300,000 shares of CCAi's Common Stock issued as part of the purchase price of BVD at their fair value of $9.35 per share. 22 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section of this Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this section, the words "anticipate," "believe," "estimate," and "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company's actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors" and elsewhere in this Prospectus. OVERVIEW CCAi is a leading provider of rapid implementations of ERP applications. CCAi also offers its clients a comprehensive range of related services, including post-implementation and platform independent services, such as network and Windows NT support, custom application development, mainframe and legacy application support, Year 2000 compliance and remote support. The Company's services are primarily targeted at middle market organizations, or divisions of larger organizations, with annual revenues between $50 million and $2.5 billion. The Company's rapid ERP implementation services enable its clients to reduce the length and risks of implementations, lower overall costs and achieve early realization of ERP-related benefits. The Company provides its services to clients across a broad spectrum of industries, including aerospace, automotive, chemical process, communications, consumer products, energy, financial and professional services, pharmaceutical and health care, publishing, retail, semiconductor and technology. From its inception through 1989, CCAi was engaged in the implementation of mainframe and minicomputer software applications, as well as the development of custom applications and software products for mainframe and minicomputer systems. In 1989, the Company participated in one of the first mainframe SAP implementations in the U.S. and thereafter continued to provide its clients with mainframe ERP implementations and related services for SAP applications throughout the early 1990s. With the advent of network-centric solutions and the availability of affordable personal computers, the Company began to develop custom applications for network-centric environments and subsequently began to participate in SAP client/server ERP implementations undertaken by larger IT service providers at Fortune 500 companies. Since 1994, when the Company became an SAP National Implementation Partner, CCAi has differentiated itself by developing expertise as a provider of rapid ERP implementation services and developing its own rapid implementation methodology. The Company was involved in the development of SAP's ASAP methodology, which has become an industry standard for rapid SAP implementations. In 1997, CCAi became one of SAP's first ASAP Partners and has since become one of the first organizations to certify 100 consultants in the ASAP methodology. Also during 1997, the Company expanded its ERP implementation capabilities by becoming an Oracle Alliance Member and has since developed its own proprietary rapid implementation methodology, known as FIRM, for Oracle ERP applications. The Company has recently been selected to become one of 26 Oracle Service Providers in the United States. Since 1997, the Company has increasingly undertaken the management of engagements for middle market clients. With the continuing growth in demand for ERP solutions among middle market organizations, the Company has focused on providing rapid ERP implementations and related services for such organizations. In 1998, the Company was one of the first organizations named by Compaq as a regional configuration support center to provide rapid implementation and related services in connection with R/3PAQ, a preconfigured ERP solution jointly developed by Compaq and SAP. In April 1998, the Company, in an arms-length transaction with parties not affiliated with the Company, purchased all of the capital stock of KLA by paying $3.9 million in cash, by issuing the KLA Warrants and by agreeing to make additional cash payments of (i) $3.4 million, subject to certain revenue targets and contribution margins during the two-year period following the acquisition and (ii) $1.1 million in three equal annual installments beginning April 1999. In addition, the Company agreed to grant the KLA Options and to pay $3.5 million in retention bonuses at certain intervals to an escrow account which benefits former KLA employees who remain employees of the Company at such intervals. Goodwill of $7.5 million from the KLA acquisition is 23 26 being amortized on a straight-line basis over 20 years. In January 1999, the Company, in an arms-length transaction with parties not affiliated with the Company, purchased all of the capital stock of BVD by paying $17.5 million in cash and issuing 300,000 shares of restricted Common Stock, which vest in two equal annual installments. Goodwill of $20.6 million from the BVD acquisition will be amortized on a straight-line basis over 20 years. In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of, the Company will continually evaluate whether later events and circumstances have occurred that indicate the acquired goodwill may warrant revision. See Note 12 of Notes to Financial Statements. The Company generates revenues by providing professional services for ERP implementations and platform independent services. Revenues are recognized as services are performed. The Company's ERP implementation services are typically billed at a higher rate than its other services. The Company undertakes engagements in a variety of roles, including: (i) as the lead consulting firm on its own engagements; (ii) as a lead consulting firm on a part of larger engagements undertaken by multinational IT consulting firms or other large service providers or (iii) as an integral member of a joint engagement team on such engagements. The Company provides services to its clients predominantly on a time and materials basis pursuant to written contracts, which can be terminated with little or no notice, typically not more than 30 days, and without penalty. The Company typically bills on a bi-weekly basis to monitor client satisfaction and manage its outstanding accounts receivable balances. Substantially all of the Company's revenues are derived from clients located in the U.S. and Canada. Revenues generated in connection with SAP implementations and related services for the years ended December 31, 1996, 1997 and 1998 accounted for approximately 69%, 75% and 80%, of revenues, respectively. Revenues derived from services provided to the Company's 10 largest clients for the years ended December 31, 1996, 1997 and 1998, were approximately 43%, 39% and 43% of revenues, respectively. During each of the years ended December 31, 1996, 1997 and 1998 none of the Company's clients individually accounted for 10% or more of the Company's revenues. See "Risk Factors -- Dependence on SAP and Other Relationships" and "-- Concentration of Revenues." Gross profit is derived from revenues less the cost of revenues, which includes salaries, bonuses and benefits paid to consultants. The Company's financial performance is primarily based upon billing margin (billable hourly rate less the consultant's hourly cost) and personnel utilization rates (billable hours divided by paid hours). Generally, clients are billed for expenses incurred by the Company on the clients' behalf. To date, the Company has been able to maintain its billing margins by offsetting increases in salaries with increases in its hourly rates. Because most of the Company's engagements are billed on a time and materials basis, increases in its cost of revenues are generally passed along to the Company's clients. In addition, the Company closely monitors and attempts to control expenses that are not passed through to its clients. The Company continuously monitors its engagements in order to effectively manage billing and utilization rates. Actual billing rates are established on an engagement-by-engagement basis. Over the last three years, the Company's average hourly billing rate has steadily increased. The growth in average hourly billing rates reflects both an increase in billing rates and a shift towards a higher percentage of billable hours related to ERP implementations, which command higher billing rates. The Company assigns consultants to engagements according to the size, duration, status and degree of complexity of each engagement. Selling, general and administrative expenses consists of salaries, benefits, training and travel expenses and other promotional costs. These expenses are associated with the Company's development of new business and with the Company's management, finance, marketing and administrative activities. Incentive compensation consists of amounts paid for non-consultant discretionary bonuses, sales commissions and company-wide profit sharing to employees who provide exceptional service to clients or the Company. Incentive compensation expenses have a large variable component relating to revenue and profit and, therefore vary based upon the Company's ability to achieve its operating objectives. Acquisition compensation consists of bonus retention pool payments to be made by the Company in connection with the KLA acquisition. In addition, amortization of the $0.5 million of compensation attributed to the KLA Options is included in acquisition compensation and is being amortized over the 24 month vesting period of the options. As a result of the Offering, the KLA Options will fully vest and, accordingly, the 24 27 unamortized balance of the compensation will be charged to acquisition compensation in the quarter in which the Offering is consummated. RESULTS OF OPERATIONS The following table sets forth the Statements of Income Data of the Company, expressed as a percentage of revenues for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1997 1998 STATEMENTS OF INCOME DATA: Revenues.................................................. 100.0% 100.0% 100.0% Cost of revenues.......................................... 61.0 59.7 60.3 ----- ----- ----- Gross profit......................................... 39.0 40.3 39.7 Selling, general and administrative expenses.............. 23.4 20.3 20.6 Incentive compensation.................................... 9.2 8.4 6.8 Acquisition compensation.................................. -- -- 2.4 Depreciation and amortization............................. 0.1 0.1 1.0 ----- ----- ----- Income from operations............................... 6.3 11.5 8.9 Net interest expense...................................... 0.5 0.3 0.6 ----- ----- ----- Income before provision for income taxes............. 5.8 11.2 8.3 Provision for income taxes................................ 2.6 4.6 3.6 ----- ----- ----- Net income........................................... 3.2% 6.6% 4.7% ===== ===== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenues. Revenues increased 56.8% to $50.5 million for the year ended December 31, 1998 from $32.2 million for the year ended December 31, 1997. This increase was predominantly due to the increase in ERP implementation services provided to clients. The increase in services was made possible through the increase in the number of consultants to 279 at December 31, 1998 from 191 at December 31, 1997. Gross Profit. Gross profit increased 54.2% to $20.0 million for the year ended December 31, 1998 from $13.0 million for the year ended December 31, 1997. Gross margin decreased to 39.7% for the year ended December 31, 1998 from 40.3% for the year ended December 31, 1997. The dollar increase was the result of increased revenues, partially offset by increased cost of revenues. The decrease in gross margin was primarily due to lower consultant utilization in the year ended December 31, 1998 resulting from the time devoted to the KLA acquisition. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 59.0% to $10.4 million for the year ended December 31, 1998 from $6.6 million for the year ended December 31, 1997. As a percentage of revenues, such expenses increased to 20.6% for the year ended December 31, 1998 from 20.3% for the year ended December 31, 1997. The dollar increase was predominantly due to the increased personnel costs needed to support the increase in revenues. The increase in selling, general and administrative expenses as a percentage of revenues was primarily due to increased recruiting and training costs associated with the increase in personnel during the year ended December 31, 1998. Incentive Compensation. Incentive compensation increased 27.0% to $3.4 million for the year ended December 31, 1998 from $2.7 million for the year ended December 31, 1997. As a percentage of revenues, such expenses decreased to 6.8% for the year ended December 31, 1998 from 8.4% for the year ended December 31, 1997. The dollar increase in incentive compensation was due to the increase in revenues. The decrease in incentive compensation as a percent of revenues was primarily related to reduced incentive compensation payable to the Founders since October 1997. 25 28 Acquisition Compensation. Acquisition compensation in the year ended December 31, 1998 includes $1.0 million related to the KLA retention pool and $0.2 million for compensation amortization related to the KLA Options. The KLA acquisition was completed in April 1998. Depreciation and Amortization. Depreciation and amortization increased to $0.5 million for the year ended December 31, 1998 from $35,000 for the year ended December 31, 1997. The increase was primarily due to goodwill amortization related to the KLA acquisition. The remaining increase was the result of depreciation associated with furniture, equipment and leasehold improvements acquired in conjunction with the Company's relocation to new corporate facilities in January 1998. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 Revenues. Revenues increased 79.1% to $32.2 million for the year ended December 31, 1997 from $18.0 million for the year ended December 31, 1996. This increase was predominantly due to the increase in ERP implementation services provided to clients. The increase in services was made possible through the increase of consultants to 191 at December 31, 1997 from 122 at December 31, 1996. Gross Profit. Gross profit increased 85.3% to $13.0 million for the year ended December 31, 1997 from $7.0 million for the year ended December 31, 1996. Gross margin increased to 40.3% for the year ended December 31, 1997 from 39.0% for the year ended December 31, 1996. Both the dollar and percentage increases were the result of increased revenues, partially offset by increased cost of revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 55.9% to $6.6 million for the year ended December 31, 1997 from $4.2 million for the year ended December 31, 1996. As a percentage of revenues, such expenses decreased to 20.3% for the year ended December 31, 1997 from 23.4% for the year ended December 31, 1996. The dollar increase was predominantly due to the increased personnel costs needed to support the increase in revenues. The decrease in selling, general and administrative expenses as a percentage of revenues was primarily due to an increase in revenues. Incentive Compensation. Incentive compensation increased 63.9% to $2.7 million for the year ended December 31, 1997 from $1.6 million for the year ended December 31, 1996. As a percentage of revenues, such expenses decreased to 8.4% for the year ended December 31, 1997 from 9.2% for the year ended December 31, 1996. The dollar increase in incentive compensation was due to the increase in revenues. The decrease in incentive compensation as a percentage of revenues was primarily due to the increase in revenues. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly operating results for each of the quarters for the years ended December 31, 1996, 1997 and 1998. In management's opinion, this unaudited information has been prepared on the same basis as the audited financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented when read in conjunction with the financial statements and Notes thereto included elsewhere in this Prospectus. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. 26 29
QUARTERS ENDED -------------------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1996 1996 1996 1996 1997 1997 1997 1997 1998 -------- -------- --------- -------- -------- -------- --------- -------- -------- (IN THOUSANDS) (UNAUDITED) Revenues............. $3,926 $3,943 $4,822 $5,302 $6,535 $7,799 $8,871 $9,013 $9,902 Cost of revenues..... 2,255 2,550 2,826 3,347 3,548 4,643 5,181 5,850 5,762 ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross profit......... 1,671 1,393 1,996 1,955 2,987 3,156 3,690 3,163 4,140 Selling, general and administrative expenses........... 838 936 1,194 1,236 1,380 1,600 1,949 1,626 2,017 Incentive compensation....... 433 286 337 591 601 658 932 509 984 Acquisition compensation....... -- -- -- -- -- -- -- -- -- Depreciation and amortization....... 7 7 7 9 8 8 9 10 24 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income from operations......... 393 164 458 119 998 890 800 1,018 1,115 Net interest expense............ 17 25 21 19 31 17 26 13 5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before provisions for income taxes....... 376 139 437 100 967 873 774 1,005 1,110 Provision for income taxes.............. 165 61 192 43 399 361 320 415 471 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income........... $ 211 $ 78 $ 245 $ 57 $ 568 $ 512 $ 454 $ 590 $ 639 ====== ====== ====== ====== ====== ====== ====== ====== ====== QUARTERS ENDED ------------------------------- JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 -------- --------- -------- (IN THOUSANDS) (UNAUDITED) Revenues............. $12,122 $13,964 $14,517 Cost of revenues..... 7,565 8,166 8,969 ------- ------- ------- Gross profit......... 4,557 5,798 5,548 Selling, general and administrative expenses........... 2,340 3,097 2,969 Incentive compensation....... 607 995 844 Acquisition compensation....... 362 363 454 Depreciation and amortization....... 151 153 192 ------- ------- ------- Income from operations......... 1,097 1,190 1,089 Net interest expense............ 112 92 107 ------- ------- ------- Income before provisions for income taxes....... 985 1,098 982 Provision for income taxes.............. 434 488 396 ------- ------- ------- Net income........... $ 551 $ 610 $ 586 ======= ======= =======
The following table sets forth certain unaudited quarterly operating results as a percentage of revenues, as applicable, for each of the quarters for the years ended December 31, 1996, 1997 and 1998:
QUARTERS ENDED -------------------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1996 1996 1996 1996 1997 1997 1997 1997 1998 -------- -------- --------- -------- -------- -------- --------- -------- -------- (UNAUDITED) Revenues............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues..... 57.4 64.7 58.6 63.1 54.3 59.5 58.4 64.9 58.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Gross profit......... 42.6 35.3 41.4 36.9 45.7 40.5 41.6 35.1 41.8 Selling, general and administrative expenses........... 21.4 23.7 24.8 23.3 21.1 20.5 22.0 18.0 20.4 Incentive compensation....... 11.0 7.3 7.0 11.1 9.2 8.4 10.5 5.7 9.9 Acquisition compensation....... -- -- -- -- -- -- -- -- -- Depreciation and amortization....... 0.2 0.1 0.1 0.2 0.1 0.2 0.1 0.1 0.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income from operations......... 10.0 4.2 9.5 2.3 15.3 11.4 9.0 11.3 11.3 Net interest expense............ 0.4 0.7 0.4 0.4 0.5 0.2 0.2 0.2 0.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before provisions for income taxes....... 9.6 3.5 9.1 1.9 14.8 11.2 8.8 11.1 11.2 Provision for income taxes.............. 4.2 1.5 4.0 0.8 6.1 4.6 3.7 4.6 4.8 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net income........... 5.4% 2.0% 5.1% 1.1% 8.7% 6.6% 5.1% 6.5% 6.4% ===== ===== ===== ===== ===== ===== ===== ===== ===== QUARTERS ENDED ------------------------------- JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 -------- --------- -------- (UNAUDITED) Revenues............. 100.0% 100.0% 100.0% Cost of revenues..... 62.4 58.5 61.8 ----- ----- ----- Gross profit......... 37.6 41.5 38.2 Selling, general and administrative expenses........... 19.3 22.2 20.5 Incentive compensation....... 5.0 7.1 5.8 Acquisition compensation....... 3.0 2.6 3.1 Depreciation and amortization....... 1.3 1.1 1.3 ----- ----- ----- Income from operations......... 9.0 8.5 7.5 Net interest expense............ 0.9 0.6 0.7 ----- ----- ----- Income before provisions for income taxes....... 8.1 7.9 6.8 Provision for income taxes.............. 3.6 3.5 2.8 ----- ----- ----- Net income........... 4.5% 4.4% 4.0% ===== ===== =====
27 30 The Company's quarter-to-quarter increase in revenues was primarily due to increased business activity. This increase was predominantly due to the increase in ERP implementation services provided to clients. Cost of revenues increased due to the growing number of consultants needed to support the growing demand for the Company's services. Variable utilization rates and average billing rates cause quarterly fluctuations in cost of revenues as a percent of revenues. For the quarters ended June 30, 1996, December 31, 1996, June 30, 1997, December 31, 1997, June 30, 1998 and December 31, 1998, gross margins were adversely affected by lower utilization rates. Lower utilization rates during the second and fourth quarters are primarily due to a lower number of billable days resulting from training schedules and the number of vacations and holidays in those quarters. Utilization rates may continue to cause gross margins to vary in the future based on factors such as training schedules, vacations, sick days, holiday schedules, recruiting requirements, start-up of new engagements and administrative requirements of the Company's employees. Selling, general and administrative expenses have increased in absolute dollars over the quarters presented due to increased salaries, benefits, training and travel expenses and other promotional costs. Selling, general and administrative expenses have varied from quarter-to-quarter as a percent of revenues primarily due to the timing of training or promotional conferences attended by Company personnel. CCAi's revenues and operating results are subject to significant variation from quarter-to-quarter as a result of a number of factors, including employee hiring, consultant billing and utilization rates, the mix, size and timing of engagements commenced and completed during a quarter, the number of billable days in a quarter, the timing of office and service expansion, training schedules and the timing of expenditures. Because a high percentage of CCAi's expenses are relatively fixed, a variation in the number of engagements or the timing of the initiation or the completion of engagements, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter-to-quarter and could result in losses to the Company. In addition, CCAi's engagements are generally terminable by the client without penalty. Unanticipated termination of an engagement, a client's decision not to proceed to the next phase of an engagement as anticipated by the Company, completion during a quarter of several client engagements without the deployment of consultants to new engagements or expansion of existing engagements could result in the Company's underutilization of employees and could, therefore, materially adversely affect the Company's business, operating results and financial condition. To the extent that increases in the number of consultants do not result in corresponding increases in revenues, the Company's business, operating results and financial condition could be materially adversely affected. Further, it is difficult for the Company to forecast the timing of revenues because engagement cycles depend on factors such as the size and scope of assignments and circumstances specific to particular clients. Because the Company derives revenues only when its consultants are billing on engagements, its business, operating results and financial condition are materially adversely affected due to vacations, training schedules, holidays, inclement weather or other similar events. For example, the Company has generated lower operating margins during the second and fourth quarters of the year due to a lower number of billable days resulting from training schedules and the number of vacations and holidays in those quarters. Given all of the foregoing, the Company believes that quarter-to-quarter comparisons of its operating results of preceding quarters are not necessarily meaningful, and that such results for one quarter should not be relied upon as an indication of future performance. Demand for IT consulting services is also significantly affected by the general level of economic activity. When economic activity slows, clients may delay or cancel plans that involve the hiring of IT consultants. The Company is unable to predict the level of economic activity at any particular time, and fluctuations in the general economy could materially adversely affect the Company's business, operating results and financial condition. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has funded its operations primarily through internally generated funds. Working capital needs have been periodically supplemented by borrowings under the Company's revolving credit facilities. Working capital was $0.4 million, $2.1 million and $2.9 million at December 31, 1996, 1997 and 1998, respectively. 28 31 Net cash provided by operating activities was $0.2 million, $2.1 million and $1.4 million for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in cash provided by operating activities in the years ended December 31, 1997 and 1998 compared to the year ended December 31, 1996 was primarily the result of the increased net income and due to increases in accruals and other current liabilities, partially offset by increases in accounts receivable. Accounts receivable increased from December 31, 1997 to December 31, 1998 primarily as a result of increased revenue and the timing of billings. Net cash used in investing activities was $51,700, $0.4 million and $5.2 million for the years ended December 31, 1996, 1997 and 1998, respectively. During 1998, the KLA acquisition required a net cash outlay of $3.9 million. See Note 12 of Notes to Financial Statements. During the years ended December 31, 1997 and 1998, net cash used in investing activities reflected the Company's use of $0.4 million and $1.3 million, respectively, of funds for furniture, equipment and leasehold improvements primarily in a new corporate facility. In January 1999, in order to finance the BVD acquisition, the Company refinanced its then existing revolving credit facility with Fleet Bank. The Fleet Bank line of credit permits the Company to borrow up to $27.5 million and is collateralized by substantially all of CCAi's assets. Borrowings under the line of credit are limited to 80% of qualified receivables plus $20.0 million and to multiples of the Company's latest aggregated four quarters' earnings before interest, taxes, depreciation, amortization and other non-cash expenses. The interest rate is LIBOR (5.544% at December 31, 1998) plus up to 3.25% to the extent the Company borrows funds for a certain period of time, and the bank's prime rate (7.75% at December 31, 1998) plus up to 1.50%, on the remaining outstanding balance. The line of credit contains various financial and operating covenants and restricts, among other things, the Company's ability to incur additional indebtedness, sell or transfer assets or make investments and pay dividends. At December 31, 1998, $5.5 million was outstanding under the Fleet Bank line of credit. In January 1999, the Company borrowed $17.8 million for the BVD acquisition. The Company intends to use a portion of the net proceeds of the Offering to repay amounts outstanding under the line of credit. See "Use of Proceeds" and Note 4 of Notes to Financial Statements. Net cash provided by financing activities totaled $0.1 million, $0.1 million and $2.5 million for the years ended December 31, 1996, 1997 and 1998, respectively. In October 1997, the Company sold certain shares of Common Stock and Convertible Preferred Stock for an aggregate purchase price of $17.5 million ($15.9 million, net of $1.6 million of transaction expenses). Contemporaneously with such sale, the Company paid $15.9 million to purchase shares of Common Stock from affiliates of the Founders. See "Certain Transactions" and Note 9 of Notes to Financial Statements. The Company believes that the proceeds from the sale of the Shares offered hereby together with the cash provided from the operations will be sufficient, based on the Company's current operating plans, to meet the Company's working capital and capital expenditure requirements for the next 24 months. At December 31, 1998, the Company had no material commitments for capital expenditures. To the extent the Company is unable to fund its operations from cash flows, the Company may need to obtain financing from external sources in the form of either additional equity or indebtedness. There can be no assurance that additional financing will be available at all, or that, if available, such financing will be obtainable on terms favorable to the Company. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128 ("SFAS 128") Earnings per Share, which changes the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share on the face of the income statement. Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average shares of outstanding common stock. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common stock equivalents such as stock options and warrants. The statement is effective for financial statements for periods ending after December 15, 1997 and has been adopted by the Company in the quarter ended December 31, 1997. The Company adopted SFAS No. 128 for all periods reported herein. In June 1997, the FASB issued Statement No. 130 ("SFAS 130"), Reporting Comprehensive Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information. SFAS 130 29 32 establishes standards for reporting comprehensive income and SFAS 131 establishes standards for reporting information about operating segments. In February 1998, the FASB issued Statement No. 132 ("SFAS 132"), Employers' Disclosures about Pension and Other Postretirement Benefits. SFAS 132 establishes standards for reporting information regarding disclosures about pensions and other postretirement benefits. The Company is required to adopt these statements in 1998. In June 1998, the FASB issued Statement No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes standards for reporting derivative instruments and hedging activities. The Company does not believe the adoption of the above SFAS statements will have a significant impact on the Company's financial statements or related disclosures. YEAR 2000 COMPLIANCE Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date code field, and were not designed to account for the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process dates in the Year 2000 and beyond. The Company and its clients rely on their systems, applications and devices in operating and monitoring all major aspects of their businesses, including financial systems (such as general ledger, accounts payable and accounts receivable modules), customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company and its clients also rely directly and indirectly, on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governmental entities, both domestic and international, for accurate exchange of data. The Company's Year 2000 assessment is conducted by the Company's IT department and executive management. The Company's assessment of the Year 2000 issue has been broadly divided among hardware systems, software systems, telecommunications, data communications, facilities, internal business applications, external business applications and services offered by CCAi. All hardware systems are being inventoried, audited and tested for Year 2000 compliance. All personal computer systems are in material compliance or will be replaced in 1999. Software systems include operating systems, applications and utilities. All business critical software systems have been assessed and are in material compliance. The telecommunications systems in use at CCAi are comprised of voice, facsimile, voice mail and video teleconferencing. All telecommunications systems have been assessed and are in material compliance. The data communications systems employed by CCAi include local area as well as wide area networking. The Company's data communications systems are in material compliance. CCAi employs two major internal business applications, which are significant in its business operations. These applications are its financial and payroll systems, which are commercial off-the-shelf items and include ongoing support. Both the systems have been assessed for Year 2000 compliance and are in material compliance. CCAI has implemented a training program and has created an environment in which issues and solutions relating to Year 2000 problems are exchanged and implemented. The Year 2000 issues with regard to CCAi's facilities have also been assessed and found to be in material compliance. There is a combination of hardware, software and communications elements involved with CCAi's headquarters and other offices. These are broadly grouped into physical security systems, fire alarm and fire control systems, heating and cooling systems, elevator systems, irrigation systems, lighting and emergency services. Based on the information currently available, the Company does not anticipate any significant investments and therefore, believes that the costs associated with the Year 2000 issue, and the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse effect on its business, operating results and financial condition. However, there can be no assurance that the Company, or its clients, will not encounter unexpected costs or disruption in their businesses as a result of the Year 2000 issue. In addition, even if the internal system of the Company are not materially affected by the Year 2000 issue, the Company's business, operating results and financial condition could be materially adversely affected through disruption in the operation of the enterprises with which the Company interacts. 30 33 BUSINESS CCAi is a leading provider of rapid implementations of ERP applications. CCAi also offers its clients a comprehensive range of related services, including post-implementation and platform independent services, such as network and Windows NT support, custom application development, mainframe and legacy application support, Year 2000 compliance and remote support. The Company's services are primarily targeted at middle market organizations, or divisions of larger organizations, with annual revenues between $50 million and $2.5 billion. The Company's rapid ERP implementation services enable its clients to reduce the length and risks of implementations, lower overall costs and achieve early realization of ERP-related benefits. CCAi has established numerous strategic relationships with leading software application vendors, hardware vendors and other IT service providers, including multinational consulting firms. The Company has a relationship with SAP dating from 1989 and has been an SAP National Implementation Partner since 1994. In addition, the Company is a member of SAP's National Advisory Board and was involved in the development of ASAP, which has become an industry standard for rapid SAP implementations. In 1997, the Company became one of SAP's first ASAP Partners and has since become one of the first organizations to certify 100 consultants in SAP's ASAP methodology. CCAi recently received the 1998 Partner Award of Excellence from SAP. Also, CCAi has been an Oracle Alliance Member since 1997 and utilizes its own rapid implementation methodology, known as FIRM, for Oracle ERP applications. The Company has recently been selected to become one of 26 Oracle Service Providers in the United States. In addition, the Company has been an integral member of implementation teams managed by Andersen Consulting, Ernst & Young and SAP. In 1998, the Company was one of the first organizations named by Compaq as a regional configuration support center to provide rapid implementation and related services in connection with R/3PAQ, a preconfigured ERP solution jointly developed by Compaq and SAP. CCAi is a "company of employees" and has adopted a business model focused on establishing and maintaining long-term relationships with its employees. The Company believes, in a resource constrained industry, it distinguishes itself from its competitors by recruiting and retaining consultants with practical business and relevant IT experience, which enhance the Company's ability to identify industry-specific business issues and develop practical IT solutions to address such issues. CCAi's consultants who perform ERP implementations generally have 10 to 15 years of business or IT experience, including three to five years of ERP implementation experience. INDUSTRY BACKGROUND Today's global business environment is rapidly changing due to increased competition, deregulation and technological advances. In this environment, organizations are constantly assessing the need for fundamental improvements in such core business functions as product development, service delivery, manufacturing, human resources, finance and accounting. To meet this need and succeed in the marketplace, organizations are increasingly turning to IT solutions that can be easily adapted to changing business requirements in order to improve the quality of products and services, shorten time to market and reduce costs. As a result, IT-related decisions have become mission critical within an organization's overall strategy. Recent technological advancements have caused many organizations to migrate from legacy mainframe systems running proprietary software to open systems and scalable client/server architectures based on personal computers using local and wide area networks, running shared databases and packaged software applications. For many organizations, an integral part of this migration is the implementation of complementary, fully-integrated, enterprise-wide applications developed and marketed by leading vendors such as SAP and Oracle. ERP applications address enterprise-wide management needs, including product development, distribution and logistics, finance and accounting, human resources and electronic data interchange. ERP applications greatly enhance operational efficiencies by enabling an organization to access and utilize information across the enterprise. Moreover, when implemented successfully, ERP applications enable the cost-effective redesign of critical business processes. According to International Data Corp., a market research company, the worldwide market for IT services is estimated to be $250 billion in 1997 and is projected to increase to over $370 billion by 2000. According to industry sources, the demand for ERP applications and services represent two of the fastest growing segments of 31 34 this market. According to AMR Research, Inc., a market research company, the worldwide market for ERP applications and services totaled approximately $15 billion in 1998 and is projected to grow to approximately $52 billion by 2002, representing a compound annual growth rate of approximately 37%. In addition, according to industry sources, for every dollar spent on ERP applications, four to six dollars are spent on ERP implementation and related services. The Company believes that a large portion of this growth is represented by middle market companies. The successful implementation of ERP applications requires extensive resources, specific software expertise, end-user training and significant ongoing modifications to support an organization's evolving business processes. In addition, ERP implementations and related services typically require a large number of highly specialized consultants with industry and ERP application knowledge necessary to successfully configure the application to the organization's needs. Implementations also require ongoing modifications to continuously support an organization's evolving business processes. Generally, internal IT departments do not have the resources required to successfully manage the complex task of implementing and supporting such industry specific IT solutions. Moreover, external competitive pressures are driving many organizations to focus on their critical business processes and to control expenses, including those associated with IT. As a result, organizations are increasingly using third-party service providers to implement ERP applications in order to reduce the length and risks of implementations, lower overall costs and achieve early realization of ERP-related benefits. The Company believes the need for third-party ERP implementation and related services is particularly acute among middle market organizations. Such organizations are directing substantial resources to their ERP implementations and are particularly sensitive to the risk of cost overruns and delays associated with poorly managed ERP implementations. Such organizations expect timely and substantial economic returns from their ERP investments in the form of lower costs and early realization of ERP-related benefits. In addition, these organizations are under growing pressure from their Fortune 500 customers to rapidly implement compatible ERP solutions. As a result, middle market organizations are selective in identifying third-party ERP implementation partners. Large IT service providers, such as multinational consulting firms, however, typically do not target middle market organizations, but instead focus on system implementations and related consulting engagements with Fortune 500 companies and other large organizations. Conversely, most small IT service providers lack sufficient breadth of services, ERP implementation expertise, financial resources or industry knowledge to adequately address the needs of middle market organizations. THE CCAi SOLUTION CCAi provides its clients with a broad range of highly specialized IT solutions that enable the rapid and cost-effective implementation of ERP applications and facilitate the early realization of ERP-related benefits. Key elements of the CCAi solution include the following: Rapid, Cost-Effective Implementations. The Company uses rapid SAP implementation methodologies and experienced consultants to deliver on-time and on-budget implementations. The Company's consultants combine both ERP implementation expertise and industry knowledge to deliver rapid configurations and implementations that address each client's particular needs. The Company has focused on providing ERP implementation services since 1994 when it developed its own rapid implementation methodology. More recently, CCAi was involved in the development of SAP's ASAP methodology, which has become an industry standard for rapid SAP implementations. CCAi utilizes the ASAP methodology for predominantly all of the SAP implementations it manages, and the Company believes, among SAP's National Implementation Partners, it has one of the largest groups of certified ASAP implementation consultants. In addition, in 1997, the Company became an Oracle Alliance Member and now utilizes its own rapid implementation methodology, known as FIRM, for Oracle ERP implementations. Highly Skilled Functional and Technical Consultants. The Company provides value-added ERP implementation and related services through a combination of highly skilled functional and technical consultants. CCAi's functional consultants typically have 10 to 15 years of business experience in areas such as finance, accounting, logistics, manufacturing, operations and engineering, including three to five years of ERP implementation experience. CCAi's technical consultants typically have 10 to 15 years of IT experience, including IT 32 35 management, programming, systems analysis, application development and ERP implementation. The Company assigns its consultants to engagements that leverage their industry, implementation and technical experience to reduce ERP implementation times, lower overall engagement costs and increase returns on ERP investments. Strong Strategic Relationships. CCAi has strong strategic relationships with some of the world's leading developers of software applications, hardware vendors, and other IT service providers, such as multinational consulting firms. The Company's relationships with organizations such as SAP, Oracle, Microsoft Corporation ("Microsoft"), Compaq, Data General Corp. ("Data General") and Sterling Software, Inc. provide it with early exposure to new products, services and enhancements in implementation methodologies and enable the Company to offer its clients a greater variety of services. For example, the Company was named by Compaq as one of its first regional configuration support centers to provide rapid implementation services in connection with R/3PAQ, a preconfigured ERP solution jointly developed by Compaq and SAP. In addition, the Company's relationships with other IT service providers offer the Company early exposure to evolving business processes as tested and adopted in the Fortune 500 marketplace, which in turn allows the Company to offer such services on a more cost-effective basis to its middle market clients. Employee Focused, Scalable Business Model. CCAi is a "company of employees" and has adopted a scalable business model focused on supporting long-term relationships with its employees. The Company has developed a flat, flexible and scalable management organization designed to provide each CCAi consultant with access to substantial administrative and practice support resources and training and career development guidance. The Company believes it has a lower consultant turnover rate than the industry average and accordingly is able to offer its clients a stable team of consultants that provide superior services and greatly enhance client satisfaction. As a result, the Company rarely utilizes independent contractors. Broad Range of Complementary Services. CCAi provides a broad range of complementary services. The Company's consultants have expertise in IT services ranging from the implementations of SAP and Oracle applications, including interface design and development and process re-engineering, to an array of post-implementation and platform independent services, such as network and Windows NT support, custom application development, mainframe and legacy application support, Year 2000 compliance, on-site knowledge transfer, systems level technical support, network level technical and installation support and remote support. GROWTH STRATEGY CCAi's objective is to be a leading provider of IT solutions to the middle market by continuing to deliver rapid ERP implementations and related services. CCAi's growth strategy emphasizes the following key elements: Expand Base of Highly Skilled Employees. The Company believes significant demand exists for its ERP implementation and related services. In order to meet such demand, CCAi intends to continue to invest significant financial and management resources to expand its base of highly skilled employees. By continuing to promote and enhance a corporate culture that rewards creativity and an entrepreneurial spirit, the Company believes it can recruit and retain the employees required to meet its clients' growing demands. Key elements of the Company's recruiting and retention package include competitive base salary and incentive compensation. In addition, the Company's flexible and scalable management organization is designed to provide consultants with administrative and practice support resources as well as training and career development guidance. Leverage Strategic Relationships. The Company intends to leverage its strategic relationships with its clients and leading software and hardware vendors to maximize marketing and sales opportunities, refine rapid implementation and pre-configured ERP methodologies and enhance its consultants' relevant technical knowledge. For example, CCAi often participates with software vendors such as SAP and Oracle in pre-sale activities and in the design of appropriate ERP solutions. The Company intends to form similar relationships with other software developers of complementary enterprise-wide applications, including supply chain management, sales force automation and process control automation. In addition, the Company intends to continue to leverage its relationships with other IT service providers to pursue opportunities within market segments that may not otherwise be available to the Company on its own. 33 36 Broaden Geographic Presence. The Company intends to establish offices in targeted geographic regions where CCAi has established a significant local presence in terms of consultants, clients, or both. The Company has recently opened offices in Cincinnati, Dallas and San Francisco and plans to open additional offices over the next 12 months. As a result of the acquisition of BVD, the Company now has an office in Atlanta and has also established a presence in San Diego. CCAi believes that establishing and maintaining local offices will help the Company recruit and retain consultants with strong ties to local markets, as well as attracting clients who prefer to engage a services firm with a local presence. The Company also believes a local presence in these markets will enable it to strengthen relationships with local representatives of SAP, Oracle and other software application vendors, as well as hardware vendors. The Company's new offices will be organized to provide sales, marketing and recruiting support services for its consultants in the targeted regions. Expand Service Offerings. The Company believes it can increase revenues from existing clients and attract new clients by selectively expanding its service offerings. In order to capitalize on the full advantages of enterprise-wide capabilities, organizations are seeking complementary applications such as supply chain management, sales force automation, customer resource management, process control automation and e-commerce. The Company intends to offer additional value-added services to assist its clients in adopting such applications. The Company also believes it can leverage its relationships with industry-leading companies in the automotive, aerospace and financial services industries to provide implementation and related services to such companies' supply chain. For example, CCAi believes that its experience in assisting in the implementation of SAP at GM provides CCAi with a competitive advantage in obtaining implementations for GM's direct and indirect vendors. The Company intends to offer prospective clients in such industries, particularly suppliers of its clients, the latest in pre-configured ERP applications and standardized implementation services for such industries. Pursue Strategic Acquisitions. The Company intends to continue to pursue strategic acquisitions that will provide additional well-trained, high-quality professionals, new service offerings, additional industry expertise, a broader client base and an expanded geographic presence. The Company recently completed the acquisitions of KLA and BVD, which enabled the Company to acquire highly skilled ERP consultants, obtain additional recruiting and sales and marketing opportunities, gain SAP implementation expertise in the automotive, semiconductor and financial services industries, and enhance its presence in the Atlanta, Cincinnati and San Diego markets. 34 37 SERVICES CCAi's services are focused on reducing the time and cost associated with implementing and integrating IT solutions. CCAi undertakes engagements in a variety of roles including: (i) as the lead consulting firm on its own engagements, (ii) as the lead consulting firm on a part of larger engagements undertaken by multinational IT consulting firms or other large service providers or (iii) as an integral member of a joint engagement team on such engagements. In almost all cases, the Company provides its services on a time and materials basis. The Company's services include:
CCAi SERVICES DESCRIPTION Engagement Management - Develop engagement scope and budget - Manage implementation engagements and budgets Process Re-engineering - Analyze and prioritize current business processes - Focus clients on processes yielding greatest business benefits - Map to proven solutions and best business practices - Provide functional consulting expertise Interface Design and Development - Analyze existing legacy applications - Design database conversion interfaces On-site Knowledge Transfer and Training - Create knowledge transfer programs for clients' employees - Develop customized training programs - Provide product training Systems Level Technical Support - Coordinate hardware and operating system installations - Provide system upgrades and configurations - Integrate back-office products with ERP solutions Network Level Technical Support - Install and configure networks - Manage installed networks Programming Services - Provide services for full range of programming languages, including Visual Basic, C, C++ and COBOL - Provide experts in use of various tools and database products, including Access, PowerBuilder, Developer 2000 and COOL:Gen - Develop Internet-based applications utilizing HTML, ActiveX and Java - Support legacy applications Outsourced/Remote Support - Offer support center based implementation teams - Offer help-desk and upgrade support - Provide platform outsourcing
CCAi offers its clients ERP implementation and platform independent services. The following is a description of such services: ERP Implementation Services. The Company provides a full range of ERP implementation services in both rapid and traditional ERP engagements. The Company has a relationship with SAP dating from 1989 and has been an SAP National Implementation Partner since 1994. In addition, the Company is a member of SAP's National Advisory Board and was involved in the development of SAP's ASAP methodology, which has become an industry standard for rapid SAP implementations. In 1997, the Company became one of SAP's first ASAP Partners and has since become one of the first organizations to certify 100 consultants in the ASAP methodology. 35 38 In addition to rapid implementations, the Company also performs traditional ERP implementation engagements, which typically are conducted over a more extended period of time, with larger teams of consultants and greater customization. Rapid ERP implementation has become a central focus of CCAi's service offerings and has been a growing part of its business since 1994. Because of the importance of rapid ERP implementations to the Company's middle market clients, CCAi has consultants with expertise in Oracle's FastForward methodology and SAP's ASAP methodology. The Company utilizes its own rapid implementation methodology, known as FIRM, for Oracle ERP applications. CCAi utilizes the ASAP methodology for predominantly all the SAP implementations it manages and believes that, among SAP's National Implementation Partners, it has one of the largest groups of certified ASAP consultants. CCAi's ASAP implementations utilize SAP's five-phased ASAP approach. The first phase, Project Preparation, provides initial planning and preparation for SAP's R/3 implementation. The second phase, Business Blueprint, involves the detailed documentation of the business process requirements of the client. In the third phase, Realization, all of the business and process requirements are implemented in two work packages. The fourth phase, Final Preparation, entails complete testing, end-user training, system management and cut over activities and resolution of all critical open issues. In phase five, Go Live and Support, the project is transitioned to a live, productive operation. Platform Independent Services. The Company provides platform independent services both on a stand-alone basis and in conjunction with ERP implementations. These services are designed to assist organizations in software application design, development and maintenance across a broad spectrum of computing environments. These services span client/server, midrange, mainframe and Internet-based solutions. The Company's consultants and software developers typically are engaged for part or all of the lifecycle of application development, from requirements analysis and systems planning through coding, testing, deployment and maintenance. The Company uses rapid prototyping and application development tools, commercially available database software and other standard development tools. The following chart details the Company's platform independent services:
CCAi SERVICES DESCRIPTION IT Consulting - Assist organizations in reengineering business processes - Plan migration of clients' legacy systems to networked, distributed, client/server architectures - Model core systems, including architecture, design, gap analysis, testing and engagement management functions Application Development - Develop software applications in a full range of programming languages including Visual Basic, C, C++ and COBOL - Design systems using rapid prototyping and application development tools (Developer 2000 and COOL:Gen), database software (Access and SQL Server) and standard development tools (PowerBuilder) - Upgrade and maintain software applications Outsourcing, Training and Remote Support - Augment clients' internal resources with skilled IT professionals - Provide outsourced IT support - Provide consulting services for Year 2000 compliance - Support databases and operating systems - Train clients' personnel in packaged and custom software applications
36 39 CLIENTS AND REPRESENTATIVE ENGAGEMENTS CCAi provides its services to a diverse group of organizations across a broad spectrum of industries. These clients generally have substantial recurring requirements for IT services and products and have typically maintained ongoing, long-term relationships with the Company. The Company had no client that represented more than 10% of its annual revenues in each of the three years ended December 31, 1996, 1997 and 1998. The following table presents a representative list of clients that have directly engaged CCAi to perform a variety of IT services:
AEROSPACE AND AUTOMOTIVE CHEMICAL PROCESS COMMUNICATIONS ------------------------ ---------------- -------------- Aircraft Braking Systems Corp. Akzo Nobel N.V. GTE Corp. Aluminum Company of America Dow Chemical Co. Reltec Corp. General Motors Corporation Henkel Corp. Voice-Tel Enterprises, Inc. Lockheed Martin Energy Research Corp.
FINANCIAL AND PROFESSIONAL CONSUMER PRODUCTS ENERGY SERVICES ----------------- ------ -------------------------- American Greetings Corp. BP America Inc. Andersen Consulting LLP ChemRex, Inc. Lockheed Martin Energy Ernst & Young LLP Master Builders, Inc. Systems, Inc. KeyCorp
PHARMACEUTICAL AND HEALTH CARE INDUSTRIAL PUBLISHING ------------------ ---------- ---------- Medical Mutual of Ohio Alcan Aluminum Company Antioch Publishing Co. University Hospitals of Cleveland Brush Wellman Inc. Simon & Schuster Inc. UCB Pharma, Inc. Continental General Tire Bantam Doubleday Dell Publishing Pyxis Corporation Inc. Group Inc. Eaton Corporation Goodyear Tire & Rubber Co. OwensCorning Tremco, Inc. USS/Kobe Steel Co.
RETAIL TECHNOLOGY SEMICONDUCTOR ------ ---------- ------------- Cole National Corp. Compaq Computer Burr Brown Corporation OfficeMax, Inc. Corporation Rockwell Semiconductor Systems, Hewlett-Packard Inc. Company Triquint Semiconductor Inc. SAP America, Inc.
Three examples of the Company's engagements include the following: SAP Implementation and Platform Independent Services. A manufacturer of specialty metals and alloys, with approximately $400 million in annual revenues, engaged CCAi to revitalize its implementation initiative. The SAP implementation was complex because of the involvement of four service centers, two large manufacturing plants, four specialty division sites, a mining operation and the corporate headquarters. CCAi was engaged because of its implementation plan using SAP's ASAP methodology and its stable team of highly-skilled consultants. The initial implementation phase included traditional financials and logistics modules along with more complex modules such as variant configuration, product costing and process industry production. The client currently has five of its facilities live on SAP and is on-time and on-budget to complete the implementation for the entire organization during the first quarter of 1999. CCAi also provided the client with Year 2000 compliance services with respect to the client's AS400 legacy system. ASAP Implementation. CCAi successfully implemented SAP in one of the first ASAP implementations in the Midwest. The client is a manufacturer of concrete add mixtures and specialty sealants with approximately 37 40 $250 million in annual revenues. To support its growth strategy, the client needed to replace a customized legacy system. CCAi was engaged to help implement SAP's R/3 on a new HP-Unix platform. Besides the standard suite of applications, this implementation included the new environmental, health and safety module as well as plant maintenance, quality management and process industry production modules. Over an eight month period, eight to 10 CCAi consultants implemented the applications on-time and on-budget, earning a performance bonus. ASAP Implementation. CCAi successfully implemented SAP utilizing the ASAP implementation methodology at a Midwest publisher of non-literary products. With revenues of over $150 million, the client installed SAP's R/3 to be better positioned for its anticipated growth and the complexities that its legacy systems were unable to handle. Phase one of the project was installed by a global SAP implementation partner. The project was running past schedule and over budget by 150%. As a result, in February 1998, CCAi was engaged to implement the second phase of the project as the lead implementor, including an additional plant and corporate wide financials. CCAi completed the blueprinting phase of the project on-time and SAP R/3 was implemented on-time and on-budget. HUMAN RESOURCES CCAi's success depends in large part upon its ability to recruit, motivate and retain highly skilled IT professionals. These professionals are in great demand and are likely to remain a limited resource for the foreseeable future. As of December 31, 1998, the Company had 339 employees, 279 of whom were consultants. Upon completion of the BVD acquisition on January 12, 1999, the Company had 397 employees, 331 of whom were consultants. The Company believes that its employee-focused culture and organization, including its recruiting, training, compensation, support and mentoring programs, are directly related to its ability to recruit, train, motivate and retain its consultants. Recruiting. CCAi dedicates significant resources to recruiting highly motivated and skilled consultants with functional, consulting and technology business experience. The Company recruits and employs consultants with a range of diverse business backgrounds, including accounting, finance, engineering, logistics, manufacturing and operations. The technical experience of the Company's consultants is equally wide ranging, covering areas such as IT management, programming, systems analysis and application development. CCAi maintains a rigorous hiring program administered by its in-house recruiters. Before employment determinations are made, applicants are screened in a highly selective process by several levels of management for technical skills, functional business expertise and cultural fit. Compensation. The Company offers competitive base salary and incentive compensation packages. As part of their compensation package, the Company's consultants are eligible for monthly and quarterly cash bonuses and participate in the 1997 Equity and Performance Plan. The cash bonuses earned by the Company's consultants are based on a percentage of the revenue the individual consultant contributes to the Company. See "Management -- Employee Benefit Plans." Career Development, Support and Training. The Company focuses significant resources on the career development of its consultants. The Company has developed a flat, flexible and scalable management organization designed to provide each CCAi consultant with access to substantial administrative and practice support resources and training and career development guidance. The Company is organized so that each consultant is mentored and supervised by two senior consultants: a Managing Associate, who focuses on the consultant's performance and administrative needs, and an Advisory Associate, who provides technical expertise and guidance and focuses on the consultant's training and career development needs. Each CCAi consultant is also assigned an Advocate responsible for assisting the consultant with travel arrangements, time and expense reports and other administrative matters. The Company provides an extensive training program for its consultants focused on "best of breed" technologies and practices. The program includes in-house instruction and external training often offered in conjunction with one of the software application vendors with whom the Company maintains a strategic relationship. 38 41 Quality Assurance. CCAi has developed a formal quality assurance program led by a full-time quality program manager. The program, which is fully automated, measures both client and employee satisfaction and is a tool used for employee and manager performance reviews. The quality assurance process commences at the beginning of an engagement. The Account Executives and project managers assigned to a particular engagement work closely with the client to document the clients' expectations for the engagement. Subsequently, performance audits of each consultant assigned to such engagement are conducted every 90 days. These audits are then used in each consultant's annual performance review. CCAi recently received the 1998 Partner Award of Excellence from SAP. SALES AND MARKETING CCAi markets and sells its ERP implementation and related services predominantly in the U.S. and Canada through its network of strategic relationships and its direct sales force. The Company's sales organization leverages CCAi's referenceable client portfolio to acquire new clients. Multiple engagements from current or prior clients, and the reputation of CCAi's consultants and management, are also meaningful sources of new business for the Company. Strategic Relationships. The Company has established a number of formal and informal marketing relationships with leading software and hardware vendors. CCAi derives a substantial number of leads for new engagements from such relationships. In addition, its strategic relationships with SAP and Oracle involve coordinated sales and marketing efforts, as well as trade show activities specifically targeted to the ERP implementation industry. The Company's other strategic relationships with Compaq, Data General, Microsoft and Sterling Software, Inc. also offer opportunities for joint marketing activities. The Company also has strategic relationships with multinational consulting firms and other IT service providers. These relationships give CCAi access to engagement opportunities in geographic locations and within certain market segments that might otherwise be unavailable to the Company. Direct Sales. The Company's direct sales force includes account executives who are responsible for developing, maintaining and managing long-term client and strategic relationships. The account executives are also responsible for identifying new engagement opportunities directly with clients or through strategic relationships. Account executives rely on continual communications with clients, prospective clients and the organizations with which the Company maintains strategic relationships to build CCAi's relationships and also work with CCAi's consultants to analyze prospective client needs and demonstrate the Company's services. Marketing. The Company supports its sales efforts with a comprehensive marketing program that features its alliances with SAP, Oracle and Microsoft and includes trade shows, contributing articles to industry publications, public relations, ERP industry meetings and conferences, the creation of collateral marketing materials and the Company's Internet site. The program is designed to strengthen the CCAi brand name and generate new client and strategic relationships. COMPETITION The market for CCAi's services is highly competitive. CCAi believes that its principal competitors include the internal information systems groups of its prospective clients, IT consulting companies, systems integration firms and the consulting divisions of software applications vendors, some of which are also clients of the Company. Many of CCAi's competitors have longer operating histories, possess greater industry and name recognition and have significantly greater financial, technical and marketing resources than the Company. In addition, there are relatively low barriers to entry into CCAi's market, and the Company has faced, and expects to continue to face, additional competition from new entrants into its market, including new entrants offshore who may have lower fixed operating costs than the Company and new entrants who may develop new or innovative means of delivering IT services. CCAi believes that the principal competitive factors in its market include quality of service, speed of development and implementation, price, engagement management capability, technical and business expertise and reputation. The Company believes it competes favorably with respect to such factors. The Company believes 39 42 its ability to compete also depends in part on a number of competitive factors outside its control. These include the ability of its competitors to recruit, motivate and retain project managers and other senior professionals, develop services competitive with the Company's services and respond to customer needs. There can be no assurance that the Company will be able to compete successfully with its competitors. See "Business -- The CCAi Solution" and "Risk Factors -- Highly Competitive Information Technology Services Industry." INTELLECTUAL PROPERTY RIGHTS CCAi's success is dependent upon certain methodologies and other proprietary intellectual property rights. Software developed by the Company for a client is typically assigned to the client. CCAi also independently develops certain foundation and application software products, or software "tools," that remain the property of the Company. CCAi relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. CCAi enters into confidentiality agreements with its employees and limits distribution of proprietary information. There can be no assurance that the steps taken by CCAi in this regard will be adequate to deter misappropriation of the Company's proprietary information, that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights or that such steps will prevent the Company's employees from using intellectual property belonging to others. Although CCAi believes that its services do not infringe on the intellectual property rights of others and it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of claims alleging infringement of third-party intellectual property rights, including the rights of its clients. Any such claims could require CCAi to expend significant resources in litigation, pay damages, cease using infringing intellectual property, develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of asserted infringement. See "Risk Factors -- Dependence on Intellectual Property Rights." PROPERTY The Company's corporate headquarters is located in Mayfield Heights, Ohio. Currently, the Company's lease on these premises covers approximately 27,000 square feet and expires in June 2003, with three renewal options for five years each. The lease provides for payments of approximately $607,000 annually. The Founders have a 30% ownership interest in the entity that owns the Company's corporate headquarters. The Company also leases additional facilities in Atlanta, Cincinnati, Cleveland, Dallas and San Francisco. The Company believes that its properties are adequate for its needs and suitable additional or replacement space will be available when required on terms acceptable to the Company. See "Certain Transactions -- Corporate Headquarters Lease." LEGAL PROCEEDINGS The Company is not involved in any legal proceeding that the Company's management believes is likely to have a material adverse effect on the Company. 40 43 MANAGEMENT The directors, executive officers and other senior managers of the Company and their respective ages as of December 31, 1998, and positions are as follows:
NAME AGE POSITION Directors and Executive Officers: Nicholas A. Canitano...................... 50 Chairman of the Board and Chief Executive Officer Kenneth L. Conley......................... 54 President, Chief Operating Officer and Director Karen M. Conley........................... 43 Executive Vice President, Treasurer and Director Annette M. Canitano....................... 48 Executive Vice President, Secretary and Director Paul A. Farmer............................ 40 Chief Financial Officer and Vice President A. Bruce Johnston (1)(2).................. 38 Director Kenneth T. Schiciano (1)(2)............... 36 Director Ivan J. Winfield (1)(2)................... 64 Director Other Senior Managers: Jack L. Rhyne............................. 51 Vice President of Enterprise Systems Ronnie K. Crumpler........................ 50 Vice President of Vertical Market Development Luc P. De Groof........................... 51 Regional Vice President Timothy S. Flowers........................ 43 Vice President of Sales and Marketing Susan V. Lebas............................ 38 Vice President of Recruiting Timothy M. May............................ 39 Vice President of Sales and Marketing
- --------------- (1) Member of the Audit Committee of the Board of Directors. (2) Member of the Compensation Committee of the Board of Directors. DIRECTORS AND EXECUTIVE OFFICERS Nicholas A. Canitano is currently serving in the capacity of Chairman and Chief Executive Officer of the Company and has held various management positions with the Company since its inception in 1983. Prior to founding CCAi, he was employed in a variety of information systems managerial positions. Kenneth L. Conley is currently serving in the capacity of President and Chief Operating Officer of the Company and has held various management positions with the Company since its inception. Prior to founding CCAi, he was employed by International Business Machines Corporation ("IBM") in a variety of sales and marketing positions. Karen M. Conley is currently serving in the capacity of Executive Vice President and Treasurer and has held various management positions with the Company since its inception. Prior to founding CCAi, she was employed by IBM as a Marketing Representative. Annette M. Canitano is currently serving in the capacity of Executive Vice President and Secretary and has held various management positions with the Company since its inception. Prior to founding CCAi, she was employed by a financial services company. Paul A. Farmer joined the Company in April 1998 as the Chief Financial Officer and also currently serves as Vice President, Assistant Secretary and Assistant Treasurer. Mr. Farmer is a certified public accountant and, prior to joining CCAi, held various positions, including Chief Financial Officer, Chief Administrative Officer, Treasurer and Secretary with TCSI Corporation, a telecommunications software service provider, from 1993 to 1997; Vice President, Secretary, Treasurer and Corporate Controller with Technology Solutions Company, an IT consulting firm, from 1990 to 1993; and Senior Audit Manager with Price Waterhouse from 1982 to 1990. A. Bruce Johnston has served as a Director of the Company since October 1997 and has been a principal of TA Associates since January 1996. Mr. Johnston was a Vice President of TA Associates, a venture capital firm, 41 44 from June 1992 to December 1995. Mr. Johnston serves as Director of Expert Software Inc., a software company, Restrac Inc., a software company, and several privately-held companies. Kenneth T. Schiciano has served as a Director of the Company since October 1997 and has been a principal of TA Associates since January 1995. Mr. Schiciano was a Vice President of TA Associates from August 1989 to December 1994. Mr. Schiciano serves as a Director of Galaxy Telecom LP, a cable television multi-systems operator, and several privately held companies. Ivan J. Winfield has served as a Director of the Company since August 1998 and is currently Associate Professor and Executive in Residence at Baldwin Wallace College in Berea, Ohio. Mr. Winfield retired as a partner from Coopers & Lybrand, L.L.P. in 1994 where he practiced since 1970. He is also a Director of OfficeMax, Inc., a discount office product merchandiser, Rainbow Rentals, Inc., a consumer product merchandiser, Boykin Lodging Company, a real estate investment trust, HMI Industries, Inc., primarily a manufacturer of consumer products, and International Total Service, Inc., a provider of aviation contract support services. Jack L. Rhyne joined CCAi in 1994 as the Manager of SAP Enterprise Systems and is currently Vice President of Enterprise Systems. Prior to joining CCAi, Mr. Rhyne was employed by ICI Explosives Environmental Co., a chemical and explosives company, from 1990 to 1994 in a variety of positions including as a Technical Project Manager implementing SAP solutions at various sites in the U.S. and Canada. Prior to 1990, Mr. Rhyne held a variety of executive positions in IT-related companies, OEM distributors and software development organizations. Ronnie K. Crumpler joined CCAi in April 1998 as part of the acquisition of KLA and is currently the Company's Vice President of Vertical Market Development. Prior to joining CCAi, Mr. Crumpler was Chairman of the Board and Chief Operating Officer of KLA from November 1996 to April 1998. Prior to his employment with KLA, Mr. Crumpler held a variety of positions with several management consulting firms, including A.T. Kearney from January 1996 to November 1996, Enterprise Solutions Management Consulting from June 1995 to January 1996 and Ernst & Young from June 1993 to June 1995. Prior to this, Mr. Crumpler served as president of a private consulting firm and held a variety of positions with Dow Chemical Co. for 19 years. Luc P. De Groof joined CCAi in January 1999 as part of the acquisition of BVD and is currently the Company's Regional Vice President of the Southeast. Mr. De Groof was serving in the capacity of President and Chief Executive Officer of BVD. Prior to founding BVD in the US, he was a Services Manager with SAP Belgium from 1992 to 1993 and held various management positions with major Belgian IT consulting firms, including Bureau van Dijk Computer Services, S.A. (Europe) from January 1989 to December 1991 and SEMA Group from September 1977 to December 1988. Timothy S. Flowers joined CCAi in 1990 and is currently a Vice President of Sales and Marketing. Prior to joining CCAi, Mr. Flowers was employed by Automated Data Processing, Inc., a payroll services provider, from 1982 to 1989 in a variety of management and marketing positions, including Technical Support and Implementation Manager for a variety of accounting software products. Susan V. Lebas joined CCAi in 1987 and is currently the Vice President of Recruiting. Prior to joining CCAi, Ms. Lebas served in a variety of industries in an administrative capacity. Timothy M. May joined CCAi in 1995 and is currently a Vice President of Sales and Marketing for the Company. From 1994 to 1995, Mr. May was the Vice President of Marketing for Enterprise Network Services, Inc., a network management provider. From 1992 to 1994, Mr. May was employed as an Area Sales Manager by Global Software, Inc., a software company. Prior to 1992, Mr. May was employed by IBM for 10 years in a variety of marketing positions. BOARD OF DIRECTORS The Company's Articles of Incorporation and Code of Regulations provide that the Company's Board of Directors be comprised of not less than six and not more than 16 directors. The Board is currently comprised of 42 45 seven members. The Company's Board of Directors is divided into two classes and the Company intends to designate the terms of each of the Directors prior to the consummation of the Offering. Each director holds office until his or her successor is duly elected and qualified, or until such Director's earlier death, resignation or removal. Two of the Company's current directors, Messrs. Johnston and Schiciano, were nominated and elected to the Company's Board of Directors as designees of TA Associates in accordance with a voting agreement contained in the Stock Purchase and Shareholders Agreement dated October 15, 1997. The voting provisions of this agreement terminate upon consummation of the Offering. Executive officers of the Company are appointed by, and serve at the discretion of, the Board of Directors. Nicholas A. Canitano and Annette M. Canitano are husband and wife, and Kenneth L. Conley and Karen M. Conley are husband and wife. See "Certain Transactions." BOARD COMMITTEES The Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee, consisting of Messrs. Johnston, Schiciano and Winfield, makes recommendations concerning the engagement of independent public accountants, reviews the scope and results of the audit with the independent public accountants, reviews the Company's annual operating results with management and the independent accountants, considers the adequacy of the internal accounting procedures and considers the effect of such procedures on the accountants' independence. The Compensation Committee, consisting of Messrs. Johnston, Schiciano and Winfield, reviews and recommends the compensation arrangements for officers and other employees, determines the options or stock to be granted to eligible persons under the 1997 Equity and Performance Plan and takes such other actions as may be required in connection with the Company's compensation and incentive plans. DIRECTOR COMPENSATION The Code of Regulations provide that the non-employee directors may receive compensation and expense reimbursement for serving on the Company's Board of Directors, including committees thereof, and for other services related to a director's membership. EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the annual and long-term compensation earned for the years ended December 31, 1997 and December 31, 1998 for the Company's Chief Executive Officer and the Company's three other executive officers during 1997 and the Company's four other executive officers during 1998 (the "Named Executive Officers"): 43 46 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------- ---------------------------------------- RESTRICTED ALL OTHER SALARY BONUS STOCK AWARD COMPENSATION(2) ------------------- ------------------ ------------- --------------- NAME AND POSITION 1997 1998 1997 1998(1) 1997 1998 1997 1998 Nicholas A. Canitano............. $224,200 $250,562 $466,194 -- -- -- $4,750 $5,000 Chairman of the Board and Chief Executive Officer Kenneth L. Conley................ 197,579 247,117 476,486 -- -- -- 4,750 5,000 President and Chief Operating Officer Karen M. Conley.................. 211,352 155,303 93,959 -- -- -- 4,750 3,510 Executive Vice President and Treasurer Annette M. Canitano.............. 185,620 151,923 103,362 -- -- -- 4,750 4,510 Executive Vice President and Secretary Paul A. Farmer (3)............... -- 103,844 -- -- -- -- -- -- Chief Financial Officer and Vice President
- --------------- (1) In 1998, the Company accrued bonuses to each of the Named Executive Officers, which will be paid in January 1999, as follows: Nicholas A. Canitano -- $125,000; Kenneth L. Conley -- $125,000; Karen M. Conley -- $75,000; Annette M. Canitano -- $75,000; and Paul A. Farmer -- $82,500. (2) Represents matching payments under the Company's 401(k) Plan. (3) Mr. Farmer joined the Company in April 1998. In May 1998, Mr. Farmer was issued 76,950 shares of restricted Common Stock under the 1997 Equity and Performance Plan. On each anniversary of the grant date, one third of Mr. Farmer's restricted stock will vest. Mr. Farmer paid the purchase price for the restricted stock by executing and delivering to the Company a promissory note in the principal amount of $359,356. No dividends will be paid on these shares of restricted Common Stock. EMPLOYEE BENEFIT PLANS 1997 Equity and Performance Incentive Plan. Upon the consummation of the Offering, the Company will have an aggregate of 2,072,750 shares of Common Stock reserved for issuance under the 1997 Equity and Performance Plan, which may be granted to directors, consultants, key employees and officers of the Company. The 1997 Equity and Performance Plan is administered by the Compensation Committee and provides for awards, including restricted shares of Common Stock, deferred shares of Common Stock and options to purchase shares of Common Stock, including Incentive Stock Options ("ISOs") (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")). The exercise price for options may be paid as follows: (i) in cash or check payable to the Company; (ii) by actual or constructive transfer to the Company of Common Stock owned by the optionee having a value at the time of exercise equal to the option price and which have been held by the optionee for at least six months; or (iii) by a combination of such methods of payment. In the case of a stock option that is not an ISO, the exercise price per share of Common Stock may be less than the fair market value per share of Common Stock on the date of the grant. Any grant may provide for payment of the option price in installments, upon terms determined by the Board of Directors, including, without limitation, pursuant to a promissory note. ISOs to be granted under the 1997 Equity and Performance Plan must be exercised within 10 years from the date of grant. Each option will become exercisable over a period of time as the optionee provides services to the Company; provided, however, that each option will accelerate in the event of a sale of a majority of the outstanding Common Stock of the Company, a sale of substantially all of the Company's assets or other similar transactions and events as determined by the Board of Directors of the Company (a "Change in Control"). Each grant or sale of restricted stock will vest over a period of not less than two years to be determined by the Board of Directors at the date of the grant or issuance; provided, however, that the Board of Directors of the Company may accelerate vesting upon a Change in Control or public offering. Each grant or sale of deferred shares of Common Stock entitles the 44 47 recipient to receive Common Stock (or equivalent in other property, including cash) upon the fulfillment of specified objectives over a period of not less than one year, except, if the Board of Directors so determines, each payment may be accelerated in the event of a Change in Control or public offering. The Board of Directors can amend or terminate the 1997 Equity and Performance Plan at any time. In the event of any change in the capital structure of the Company, such as a stock dividend or stock split, the Board of Directors may make equitable adjustments to outstanding unexercised awards and to the provisions of the 1997 Equity and Performance Plan so that the net value of the award is not changed. If the Company becomes a party to a merger, reorganization, liquidation or similar transaction, the Board of Directors may make such arrangements it deems advisable regarding outstanding awards, such as substituting new awards for outstanding awards, assuming outstanding awards or terminating or paying for outstanding awards. No awards were made under the 1997 Equity and Performance Plan in 1997, and none were outstanding at December 31, 1997. At December 31, 1998, options for 360,600 shares were outstanding under the 1997 Equity and Performance Plan. Currently, no grants or issuances under the 1997 Equity and Performance Plan have been made to executive officers other than Paul A. Farmer. On May 11, 1998, Mr. Farmer was issued 76,950 shares of restricted Common Stock under the 1997 Equity and Performance Plan for a purchase price of $4.67 per share. See "Certain Transactions." 401(k) Plan. The Company maintains a 401(k) profit sharing and defined contribution plan (the "401(k) Plan"). All employees of the Company who have reached 21 years of age and have completed six months of service are eligible to participate in the 401(k) Plan, pursuant to which each participant may contribute up to 15% of eligible compensation (up to a statutorily prescribed annual limit of $10,000 in 1998). The Company currently matches contributions made by employees to the 401(k) Plan. The amount of the match is determined at the discretion of the Company. A profit sharing contribution may also be made each year at the discretion of the Company. All amounts contributed by employee participants and earnings on these contributions are fully vested at all times. Employee participants may elect to invest their account balances in various established funds. During 1997, each of the Named Executive Officers participated in the 401(k) Plan as indicated in the Summary Compensation Table. 1998 Employee Stock Purchase Plan. In December 1998, the Company established the Purchase Plan and reserved an aggregate of 500,000 shares of Common Stock for issuance under the Purchase Plan. Currently, no shares of Common Stock have been issued under the Purchase Plan. The Purchase Plan will be intended to qualify under Section 423 of the Code and will permit eligible employees of the Company whose customary employment is a minimum of 20 hours per week to purchase shares of Common Stock through payroll deductions of up to 10% of the employee's gross regular earnings on an annualized basis, provided that no employee may purchase more than 5,000 shares of Common Stock on any Purchase Date (as defined in the Purchase Plan), with the first offering period commencing on the first day of the first quarter following the Offering. The price of shares of Common Stock purchased under the Purchase Plan will be 85% of the fair market value of the Common Stock (as calculated in the Purchase Plan). The Purchase Plan will be administered by the Compensation Committee. The Board of Directors will be able to amend or terminate the Purchase Plan at any time. Other. The Company maintains customary health and benefit plans for its employees. The Company does not maintain any defined benefit pension plans. BONUSES The Company grants annual bonuses to its executive officers. These bonuses are determined by the Compensation Committee of the Board of Directors of the Company and are based on the attainment of individual performance targets and the financial performance of the Company. 45 48 CERTAIN TRANSACTIONS The 1997 Transactions. In July 1997, the Company repurchased 509,130 shares of Common Stock owned by Joseph Minadeo for an aggregate amount of $171,429. Mr. Minadeo is the brother of Annette M. Canitano, the Company's Executive Vice President, Secretary and a Director, and was an original investor in the Company. In October 1997, the Company entered into a series of transactions (collectively, the "1997 Transactions") wherein TA Associates, including the following affiliated groups: TA/Advent VIII L.P., Advent Atlantic and Pacific III L.P. and TA Investors LLC (f.k.a. TA Venture Investors Limited Partnership) (collectively, the "TA Investors"), and McDonald & Company Securities, Inc., including the following affiliated groups: McD Venture Capital Fund, L.P. and GHK Investments, L.L.C. (collectively, the "McDonald Investors") purchased a total of 250,400 shares of Convertible Preferred Stock and 1,350,000 shares of Common Stock from the Company for an aggregate purchase price of $17.5 million ($15.9 million, net of $1.6 million of transaction expenses). Immediately prior to the consummation of the Offering, the Convertible Preferred Stock sold by the Company in the 1997 Transactions will be converted into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock. Upon consummation of the Offering, the Redeemable Preferred Stock will be redeemed for $15.8 million, using a portion of the net proceeds from the Offering. See "Use of Proceeds." As part of the 1997 Transactions and under the terms of the Stock Purchase and Shareholders Agreement, dated October 15, 1997 (the "1997 Agreement"), among TA Investors, McDonald Investors, the Founders, NAC Enterprises, Inc., CKCK Enterprises, Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M. Conley Charitable Remainder Trust and the Company, each of TA Investors and McDonald Investors was granted certain demand and "piggyback" registration rights and certain other preferential rights, including: (i) rights to participate in sales of additional shares; and (ii) rights of first refusal and co-sale involving the Company's securities. In addition, TA Investors, McDonald Investors, the Company and the Founders entered into a voting agreement whereby the parties agreed to vote all shares of the Company's capital stock held by them (and any other securities over which the Founders exercise voting control) as to cause the Board of Directors of the Company to include Messrs. Johnston and Schiciano (so long as each remains in the employ of TA Associates) and one independent director nominated by TA Associates. Except for the registration rights granted to each of TA Investors and McDonald Investors, the preferential rights contained in the 1997 Agreement terminate upon consummation of the Offering. Also as part of the 1997 Transactions, the Company repurchased an aggregate of 1,350,000 shares of Common Stock for $15.9 million from the Founders, including: (i) 675,000 shares of Common Stock from NAC Enterprises, Inc., of which the Annette M. Canitano Trust and the Nicholas A. Canitano Trust, affiliates of Mr. and Mrs. Canitano, directors of the Company, are the sole shareholders; (ii) 610,000 shares of Common Stock from CKCK Enterprises, Inc., of which the Karen M. Conley Trust and the Kenneth L. Conley Trust, affiliates of Mr. and Mrs. Conley, directors of the Company, are the sole shareholders; (iii) 32,500 shares of Common Stock from the Kenneth L. Conley Charitable Remainder Trust, a charitable remainder trust established by Kenneth L. Conley, a director of the Company; and (iv) 32,500 shares of Common Stock from the Karen M. Conley Charitable Remainder Trust, a charitable remainder trust established by Karen M. Conley, a director of the Company. Upon the consummation of the 1997 Transactions, the Company paid Mr. Minadeo an additional $205,000 in accordance with the terms of certain change of control provisions contained in the documentation of the July 1997 repurchase of shares of Common Stock from Mr. Minadeo. Employment Agreement. The Company is party to an employment agreement with Paul A. Farmer, pursuant to which Mr. Farmer serves as Chief Financial Officer and Vice President of the Company. The agreement provides for an annual base salary of $165,000, an annual bonus up to a maximum of 50% of base salary to be determined by the Compensation Committee, benefits under the Company's benefit plans and payment of all reasonable relocation costs incurred by Mr. Farmer. Although Mr. Farmer's employment may be terminated at any time, the agreement also provides that upon the termination of Mr. Farmer's employment with the Company, other than for cause or retirement, the Company shall pay Mr. Farmer an amount equal to the greater of six months' salary, or the value of his unvested restricted stock at the time of the termination. Mr. Farmer is also subject to noncompetition, nondisclosure and nonsolicitation covenants. 46 49 In May 1998, Mr. Farmer was issued 76,950 shares of restricted Common Stock under the 1997 Equity and Performance Plan. On each anniversary of the grant date, one third of Mr. Farmer's restricted stock will vest. Mr. Farmer paid the purchase price for the restricted stock by executing and delivering to the Company a promissory note (the "Note") in the principal amount of $359,356. The Note is due and payable on May 11, 2004, and accrues interest on the unpaid principal amount at 6% per annum until the Note is paid in full. Accrued interest is payable in June and December of each year during the term of the Note, including May 11, 2004. The Note also becomes due and payable six months after any date on which Mr. Farmer ceases to be employed for any reason by the Company. See "Management -- Employee Benefit Plans." Employment of Related Individuals. Brian Conley, Kenneth L. Conley's son, who is an employee working as an ERP implementation consultant to the Company's clients, received cash compensation of $125,400 in 1997 and $133,000 in 1998 as well as options to purchase 1,500 shares of Common Stock under the 1997 Equity and Performance Plan. Linda Neumann, Karen M. Conley's sister, who serves as the Company's Controller, received cash compensation of $88,200 in 1997 and $102,500 in 1998 as well as options to purchase 2,000 shares of Common Stock under the 1997 Equity and Performance Plan. Donald Neumann, Linda Neumann's husband, who is an employee working as an ERP implementation consultant with the Company to the Company's clients, received cash compensation of $36,500 in 1997 and $42,300 in 1998 as well as options to purchase 1,500 shares of Common Stock under the 1997 Equity and Performance Plan. Loans. Various other loans have periodically been made by the Company to the Founders. In April 1997, the Company made loans to Nicholas A. and Annette M. Canitano and Kenneth L. and Karen M. Conley each in an amount of $44,500. In March 1998, the Company made loans to Mmes. Canitano and Conley, each in an amount of $64,092. Each such loan bore interest at 10% and such loans have been repaid in full. Corporate Headquarters Lease. The Company leases its corporate headquarters in Mayfield Heights, Ohio, from an entity that is 30% owned by the Founders with rental payments of approximately $607,000 annually. The term of the lease, which commenced in January 1998, expires in June 2003 and includes three five-year renewal options. The Company believes that the terms of the lease are no less favorable to the Company than those that could have been obtained from an independent third party lessor at the time the lease was executed. See "Business -- Property." 47 50 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information known to the Company regarding beneficial ownership of the Company's Common Stock as of February 1, 1999, after giving effect to the conversion of Convertible Preferred Stock into shares of Common Stock, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's executive officers; (iii) each director of the Company; and (iv) all directors and executive officers of the Company as a group. The address of each of the officers and directors of the Company is c/o Conley, Canitano & Associates, Inc., CCAi Renaissance Centre, 5800 Landerbrook Drive, Mayfield Heights, Ohio 44124.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING (1) NUMBER AFTER OFFERING --------------------- OF SHARES --------------------- NUMBER BEING NUMBER NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT OFFERED OF SHARES PERCENT Nicholas A. Canitano (2)............... 1,739,000 18.1% -- 1,739,000 12.8% Kenneth L. Conley (3).................. 1,697,750 17.6 -- 1,697,750 12.5 Karen M. Conley (4).................... 1,397,750 14.5 -- 1,397,750 10.3 Annette M. Canitano (5)................ 1,349,000 14.0 -- 1,349,000 9.9 Paul A. Farmer (6)..................... 76,950 * -- 76,950 * A. Bruce Johnston (7).................. 8,960 * -- 8,960 * Kenneth T. Schiciano (8)............... 10,560 * -- 10,560 * TA Associates, Inc. (9)................ 3,743,890 38.9 951,991 2,791,607 20.5 High Street Tower, Suite 2500 125 High Street Boston, MA 02110 McDonald Investments Inc.(10).......... 110,110 1.1 27,999 82,103 * Other Selling Shareholders as a group (7 persons)(11)...................... -- -- 20,010 -- -- All executive officers and directors as a group (7 persons).................. 5,454,970 56.7% -- 5,454,970 40.0%
- --------------- * Indicates beneficial ownership of less than 1.0% of the outstanding Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to securities. Shares of Common Stock issuable upon the exercise of stock options or exercisable within 60 days hereof are deemed outstanding and to be beneficially owned by the person holding such option for purposes of computing such person's percentage ownership, but are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except for shares held jointly with a person's spouse or subject to applicable community property laws, or as indicated in the footnotes to this table, each shareholder identified in the table possesses the sole voting and disposition power with respect to all shares of Common Stock shown as beneficially owned by such shareholder. (2) Nicholas A. Canitano has beneficial ownership of 400,000 shares of Common Stock held in trusts for which he is trustee and has sole power of voting and for which Annette M. Canitano, his wife, has sole power of disposition and 400,000 shares held in trusts for which he is trustee and has sole power of disposition. Nicholas A. Canitano also has beneficial ownership of 939,000 shares of Common Stock held in trust for which he is trustee and has sole power of voting and disposition. Except as noted, the shares shown do not include shares owned by Annette M. Canitano. (3) Kenneth L. Conley has beneficial ownership of 300,000 shares of Common Stock held in trust for which he is trustee and has sole power of voting and for which Karen M. Conley, his wife, has sole power of disposition, 400,000 shares held in trusts for which he has sole power of disposition and 125,000 shares held in trust for which he has shared power of disposition with Karen M. Conley. Kenneth L. Conley has beneficial ownership of 872,750 shares of Common Stock held in trust for which he is trustee and has sole power of voting and disposition. Except as noted, the shares shown do not include shares owned by Karen M. Conley. (4) Karen M. Conley has beneficial ownership of 300,000 shares of Common Stock held in trust for which she is trustee and has sole power of disposition and 125,000 shares held in trusts for which she has shared power of disposition with Kenneth L. Conley. Karen M. Conley has beneficial ownership of 972,750 shares of 48 51 Common Stock held in trust for which she is trustee and has sole power of voting and disposition. Except as noted, the shares shown do not include shares owned by Kenneth L. Conley. (5) Annette M. Canitano has beneficial ownership of 400,000 shares of Common Stock held in trusts for which she is trustee and has sole power of disposition and for which Nicholas A. Canitano, her husband, has sole power of voting. Annette M. Canitano has beneficial ownership of 949,000 shares of Common Stock for which she is trustee and has sole power of voting and disposition. Except as noted, the shares shown do not include shares owned by Nicholas A. Canitano. (6) All shares owned by Mr. Farmer are restricted Common Stock issued pursuant to the Company's 1997 Equity and Performance Plan. See "Certain Transactions." (7) Includes 8,960 shares of Common Stock beneficially owned by Mr. Johnston through TA Investments L.L.C., all of which shares are included in the 3,743,890 shares described in footnote (9) below and does not include any shares beneficially owned by TA Associates, TA/Advent VIII L.P. or Advent Atlantic and Pacific III, L.P., of which Mr. Johnston disclaims beneficial ownership. (8) Includes 10,560 shares of Common Stock beneficially owned by Mr. Schiciano through TA Venture Investors Limited Partnership, all of which shares are included in the 3,743,890 shares described in footnote (9) below and does not include any shares beneficially owned by TA Associates, TA/Advent VIII L.P. or Advent Atlantic and Pacific III, L.P., of which Mr. Schiciano disclaims beneficial ownership. (9) Includes (i) 3,100,070 shares owned by TA/Advent VIII L.P., (ii) 581,840 shares owned by Advent Atlantic and Pacific III L.P. and (iii) 61,980 shares owned by TA Investors LLC. The foregoing partnerships and limited liability company are part of an affiliated group of investment partnerships and other entities referred to, collectively, as the TA Investors. The general partner of TA/Advent VIII L.P. is TA Associates VIII LLC. The general partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP III Partners L.P. The manager of each of TA Associates VIII LLC and TA Investors LLC is TA Associates, Inc. TA Associates, Inc. is also the general partner of TA Associates AAP III Partners L.P. In such capacity, TA Associates, Inc. exercises sole voting and investment power with respect to all the shares of Common Stock held of record by the named partnerships or limited liability companies; individually no stockholder, director or officer of TA Associates, Inc. is deemed to have or share such voting or investment power. (10) Includes (i) 77,090 shares of Common Stock held by McDonald Investments Inc.; (ii) 22,020 shares held by McD Venture Capital Fund, L.P., an affiliate of McDonald Investments Inc.; and (iii) 11,000 shares held by GHK Investments, L.L.C., an affiliate of McDonald Investments Inc. (11) Each other Selling Shareholder beneficially owns less than 1% of the outstanding shares of Common Stock. All of such other Selling Shareholders hold KLA Options which will be exercised for shares of Common Stock immediately prior to the Offering. SHAREHOLDERS AGREEMENT The Founders anticipate that they will enter into a shareholders agreement prior to the consummation of the Offering. Under the proposed shareholders agreement, all of the Founders would agree to vote all of their shares of Common Stock as determined by any three of the Founders. In addition, the Founders would agree to restrictions on the transfer of their shares. See "Risk Factors -- Significant Influence of Principal Shareholders." DESCRIPTION OF CAPITAL STOCK GENERAL Upon the consummation of the Offering, the Articles of Incorporation will provide that the Company may issue up to 45,000,000 shares of Common Stock, and (i) 500,800 shares of preferred stock, par value $.01 per share, (ii) 5,000,000 shares of non-voting "preferred stock", no par value, and (iii) 5,000,000 shares of voting preferred stock, no par value (collectively, the "Preferred Stock"). As of February 1, 1999, there were 7,122,950 shares of Common Stock issued and outstanding which were held by 53 shareholders of record, and there were 250,400 shares of Convertible Preferred Stock issued and outstanding which were held by six shareholders of record. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters to be submitted to a vote of the shareholders and do not have preemptive rights. The Articles of Incorporation do not 49 52 provide for cumulative voting for the election of directors. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors of the Company out of funds legally available therefor. All outstanding shares of Common Stock are, and the Common Stock to be sold in the Offering, when issued and paid for, will be, fully paid and nonassessable. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock are entitled to share ratably in the assets of the Company remaining after payment or provision for payment of all of the Company's debts and obligations and liquidation payments to holders of outstanding shares of Preferred Stock. See "Dividend Policy" and "Description of Capital Stock -- Certain Articles of Incorporation and Code of Regulations Provisions and Ohio Law; Anti-Takeover Effects." PREFERRED STOCK Shares of Preferred Stock may be issued by the Company in series with such preferences and designations as the Board of Directors of the Company may from time to time determine. The Board of Directors of the Company can, without shareholder approval, issue Preferred Stock with voting, dividend, liquidation and conversion rights, which could dilute the voting strength of the holders of the Common Stock and may assist management in impeding a takeover or attempted change in control. In connection with the 1997 Transactions, the Board of Directors of the Company created the Convertible Preferred Stock. Immediately prior to consummation of the Offering, the 250,400 issued and outstanding shares of Convertible Preferred Stock will automatically convert into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock. Upon consummation of the Offering, all 250,400 then issued and outstanding shares of Redeemable Preferred Stock will immediately be redeemed by the Company for approximately $15.8 million using a portion of the net proceeds of the Offering. As a result, subsequent to the Offering, there will be no shares of Preferred Stock outstanding. See "Use of Proceeds." CERTAIN ARTICLES OF INCORPORATION AND CODE OF REGULATIONS PROVISIONS AND OHIO LAW; ANTI-TAKEOVER EFFECTS Certain Articles of Incorporation and Code of Regulations Provisions. The Articles of Incorporation provide for a classified Board of Directors. Other than those who may be expressly elected by virtue of the terms of any preferred stock designation, the directors are divided into two classes. The directors are elected for terms that are staggered so that the terms of one-half of the directors expire each year. Except as may be provided in any preferred stock designation, the Code of Regulations do not permit the shareholders to remove a director. The Articles of Incorporation also provide that a 70% majority of the voting power of the Company is required to approve, among other things, certain strategic transactions including mergers, consolidations, the sale, lease or exchange of substantialy all the Company's assets, control share acquisitions, or any other transaction requiring shareholder approval under Ohio law. The above-described provisions of the Articles of Incorporation and Code of Regulations may have certain anti-takeover effects. Such provisions, in addition to the provisions described below and the possible issuance of Preferred Stock discussed above, may make it more difficult for other persons, without the approval of the Company's Board of Directors, to make a tender offer or acquisitions of substantial amounts of the Common Stock or to launch other takeover attempts that a shareholder might consider to be in such shareholder's best interests. Ohio Law. The Company is subject to several anti-takeover provisions under Ohio law that apply to Ohio public corporations. These provisions make it more difficult for other persons, without the approval of the Company's Board of Directors, to make a tender offer or acquisitions of substantial amounts of the Common Stock or to launch other takeover attempts that a shareholder might consider in such shareholder's best interests. Ohio Control Share Acquisition Act. Under Ohio's Control Share Acquisition Act (the "Acquisition Act"), any "control share acquisition" of an Ohio public corporation may be made only with the prior authorization of the shareholders of the corporation in accordance with the provisions of the Acquisition Act. A "control share acquisition" is defined under the Acquisition Act to mean the acquisition, directly or indirectly, by any person of 50 53 shares of a public corporation that, when added to all other shares of the corporation such person owns, would entitle such person, directly or indirectly, to exercise voting power in the election of directors within the following ranges: more than 20%, more than 33% and a majority. The Acquisition Act further specifies that the shareholders of the corporation must approve the proposed control share acquisition by certain percentages at a special meeting of shareholders at which a quorum is present. In order to comply with the Acquisition Act, the acquiring person may only acquire the stock of the Ohio public corporation upon the affirmative vote of: (i) a majority of the voting power of the corporation that is represented in person or by proxy at the special meeting (increased to a majority of 70% of such voting power, in the case of the Company, by the Articles of Incorporation); and (ii) a majority of the voting power of the corporation that is represented in person or by proxy at the special meeting, excluding those shares of the corporation deemed to be "interested shares" for purposes of the Acquisition Act. "Interested shares" are defined under the Acquisition Act to mean shares in respect of which the voting power is controlled by any of the following persons: (i) an acquiring person; (ii) any officer of the Ohio public corporation; and (iii) any employee who is also a director of the corporation. "Interested shares" also include shares of the corporation that are acquired by any person after the date of the first public disclosure of the proposed acquisition and prior to the record date for the applicable special meeting, if either (i) the aggregate consideration paid by such person, and any person acting in concert with him or her, for such shares of the Ohio public corporation exceeds $250,000 or (ii) the number of shares acquired by such person, and any person acting in concert with him or her, exceeds 1.5% of the outstanding shares of the corporation, or if shares are acquired after the record date for the applicable special meeting accompanied by the voting power for such special meeting. Ohio Merger Moratorium Act. The Company is also subject to Ohio's Merger Moratorium Act. The Merger Moratorium Act generally prohibits a wide range of business combinations and other transactions (including mergers, consolidations, asset sales, loans, disproportionate distributions of property and disproportionate issuances or transfers of shares or rights to acquire shares) between an Ohio corporation and a person that owns beneficially (within the meaning of the Securities Act), alone or with other related parties, shares representing at least 10% of the voting power of the corporation (an "Interested Shareholder") for a period of three years after such person becomes an Interested Shareholder, unless, prior to the date that the Interested Shareholder became such, the directors approve either the transaction or the acquisition of the corporation's shares that resulted in the person becoming an Interested Shareholder. Following the three-year moratorium period, the corporation may engage in covered transactions with an Interested Shareholder only if, among other things, (i) the transaction receives the approval of the holders of two-thirds of all the voting shares and the approval of the holders of a majority of the voting shares held by persons other than an Interested Shareholder or (ii) the remaining shareholders receive an amount for their shares equal to the higher of the highest amount paid in the past by the Interested Shareholder for the corporation's shares or the amount that would be due the shareholders if the corporation were to dissolve. Ohio Control Bid Statute. The Company is also subject to Ohio's Control Bid Statute. Ohio's Control Bid Statute provides that no offeror may make a "control bid" pursuant to a tender offer or a request or invitation for tenders unless, on the day the offeror commences a control bid, it files with the Ohio Division of Securities (the "Securities Division") and the target company certain information in respect of the offeror, his or her ownership of the corporation's shares and his or her plans for the corporation (including, among other things, plans to terminate employee benefits plans, close any plant or facility or reduce the work force). If the Securities Division determines that the offeror's disclosures are inadequate, it must act within five calendar days from the date of the offeror's filing to issue a suspension order. If a bid is suspended, a hearing must be held within 10 calendar days from the date of the Securities Division's suspension order. The hearing procedure must be completed no later than 14 calendar days after the date on which the suspension was imposed. A "control bid" under Ohio's Control Bid Statute is defined as the purchase of or an offer to purchase an equity security of an issuer with certain connections to Ohio from a resident of Ohio if (i) after the purchase of such security, the offeror would directly or indirectly be the beneficial owner of more than 10% of any class of the issued and outstanding equity securities of the issuer or (ii) the offeror as the issuer, there is a pending control 51 54 bid by a person other than the issuer and the number of issued and outstanding shares of the corporation will be reduced by more than 10%. Fiduciary Duty Statute. Ohio law also provides for the right of the Board of Directors to consider the interests of various constituencies, including employees, customers, suppliers and creditors of the Company, as well as the communities in which the Company is located, in addition to the interest of the Company and its shareholders, in discharging their duties in determining what is in the Company's best interests. LIMITATION OF LIABILITY AND INDEMNIFICATION Generally, a director of an Ohio corporation will not be found to have violated his fiduciary duties unless there is proof by clear and convincing evidence that the director has not acted in good faith, in a manner such director reasonably believes to be in or not opposed to the best interests of the corporation, or with the care that an ordinarily prudent person in a like position would use under similar circumstances. In general, a director is liable for monetary damages for any action or omission as a director only if it is approved by clear and convincing evidence that such act or omission was undertaken either with deliberate intent to cause injury to the corporation or with reckless disregard for the best interests of the corporation. Under Ohio law, a corporation must indemnify its directors, as well as its offices, employees and agents, against expenses where any such person is successful on the merits or otherwise in defense of an action, suit or proceeding. A corporation may indemnify such persons in actions, suits and proceedings (including derivative suits) if the individual has acted in good faith and in a manner that such director believes to be in or not opposed to the best interests of the corporation. In the case of a criminal proceeding, the individual must also have no reasonable cause to believe that his or her conduct was unlawful. Indemnification may be made only if ordered by a court or if authorized in a specific case upon a determination that the applicable standard of conduct has been met. Such a determination may be made by a majority of the disinterested directors, by independent legal counsel or by the shareholders. In order to obtain reimbursement for expenses in advance of the final disposition of any action, the individual must provide an undertaking to repay the amount if it is ultimately determined that such director is not entitled to be indemnified. In general, Ohio law requires that all expenses, including attorneys fees, incurred by a director in defending any action, suit or proceeding to be paid by the corporation as they are incurred in advance of final disposition if the director agrees to repay such amounts if it is proved by clear and convincing evidence that his action or omission was undertaken with deliberate intent to cause injury to the corporation or with reckless disregard for the best interests of the corporation and if the director reasonably cooperates with the corporation concerning the action, suit or proceeding. The Code of Regulations provides for indemnification, which is coextensive with that permitted under Ohio law. These provisions do not alter a director's liability under federal securities laws. The Code of Regulations authorizes the Company to enter into indemnification agreements with each present and future director and such officers, employees or agents as specified in the Code of Regulations. The Code of Regulations also authorizes the Company to enter into agreements to indemnify such persons to the maximum extent permitted by applicable law. REGISTRATION RIGHTS Under the terms of the 1997 Agreement, at any time after the earlier of December 31, 1998 or the effective date of an initial public offering by the Company, the holders of at least 50% of registrable securities (as defined in the 1997 Agreement), including any shares of Common Stock or any securities convertible into shares of Common Stock, have the right to require the Company to register under the Securities Act any or all of such registrable securities, subject to the conditions and limitations contained in the 1997 Agreement. In addition, under the terms of the 1997 Agreement, each of TA Investors and McDonald Investors was granted demand registration rights once the Company becomes eligible to register securities on Form S-3 under the Securities Act, subject to conditions and limitations contained in the 1997 Agreement. Also, each of TA Investors and McDonald 52 55 Investors was granted certain "piggyback" registration rights, subject to the conditions and limitations contained in the 1997 Agreement, at any time that the Company undertakes a public offering. In connection with the KLA acquisition, the Company entered into Warrant Agreements, dated April 3, 1998 (the "1998 Warrant Agreements") with each of Ronnie Crumpler, Gary Levey and Anthony Kelly (individually, a "Warrant Holder" and collectively, the "Warrant Holders") granting the Warrant Holders the right to purchase an aggregate of 195,266 shares of Common Stock at $0.001 per share. Upon consummation of the Offering, the Warrants will be exercisable until April 2008. In addition, under the 1998 Warrant Agreements, each Warrant Holder was granted certain "piggyback" registration rights, subject to the conditions and limitations contained in the 1998 Warrant Agreements, at any time the Company undertakes a public offering. Subsequent to the KLA acquisition, the Company granted the KLA Options to certain employees of the Company formerly employed by KLA (individually, an "Option Holder" and collectively, the "Option Holders"). Pursuant to the Option Agreements (the "Option Agreements" and together with the 1997 Agreement and the 1998 Warrant Agreements, the "Registration Agreements"), the Option Holders were granted options to purchase an aggregate of 64,734 shares of Common Stock at a price of $0.001 per share. Upon the consummation of the Offering, the options will be exercisable. In addition, each Option Holder was granted certain "piggyback" registration rights, subject to the conditions and limitations contained in the Option Agreements, at any time the Company undertakes a public offering. Pursuant to the Registration Agreements, but subject to the conditions and limitations set forth in such agreements, the Company is required to: (i) pay registration expenses (exclusive of underwriting discounts and commissions) in connection with certain registrations of the Company's securities; (ii) use its best efforts to effect such registrations; and (iii) indemnify TA Investors, McDonald Investors, the Warrant Holders and the Option Holders, including certain of their affiliates, against certain liabilities, including liabilities under the Securities Act, in connection with the registration of their shares of Common Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is National City Bank in Cleveland, Ohio. 53 56 SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have an aggregate of 13,626,950 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants to purchase shares of Common Stock. Of these shares of Common Stock, the 5,000,000 shares sold in the Offering are freely tradeable without restriction or further registration under the Securities Act, except that any Shares held by "affiliates" of the Company, as that term is defined in Rule 144, may generally be sold only in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining 8,626,950 shares of Common Stock are deemed "restricted securities" as defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under the Securities Act. Of the restricted securities, 10,000 shares of Common Stock will be available for sale in the public market on the date of this Prospectus. Subject to the Lock-Up Agreements described below, an additional 8,616,950 shares of Common Stock will be available for sale in the public market (subject in the case of shares held by affiliates to compliance with certain volume restrictions) as follows: (i) 8,316,950 shares will be eligible for sale upon the expiration of the Lock-up Agreements 180 days after the date of this Prospectus, (ii) 150,000 shares will be eligible for sale after January 2000; and (iii) 150,000 shares will be eligible for sale after January 2001. In general, under Rule 144, a person (or persons whose shares are aggregated) including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares of Common Stock that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 145,000 shares immediately after the Offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person, who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations described above. An employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this Prospectus. EFFECT OF SALES OF SHARES Prior to the Offering, there has been no public market for the Common Stock, and no precise prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sale of substantial amounts of Common Stock in the public market could adversely effect prevailing market prices and could impair the Company's future ability to raise capital through the sale of its equity securities. LOCK-UP AGREEMENTS Each of the Company, its executive officers and directors and certain shareholders of the Company (including the Selling Shareholders) has agreed, subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to 54 57 be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its executive officers, directors and certain shareholders of Company (including the Selling Shareholders) has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent. 55 58 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement, dated , 1999 (the "Underwriting Agreement"), the Underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), BancBoston Robertson Stephens Inc., Lehman Brothers Inc. and McDonald Investments Inc. (collectively, the "Representatives"), have severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite their names below.
NUMBER UNDERWRITERS OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation......... BancBoston Robertson Stephens Inc........................... Lehman Brothers Inc......................................... McDonald Investments Inc.................................... Total............................................. 5,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $ per share. After the initial offering of the Common Stock, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation and a member of the selling group, is facilitating the distribution of the shares sold in the offering over the Internet. The underwriters have agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its brokerage account holders. The Company and certain shareholders of the Company have granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of 750,000 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover overallotments, if any, made in connection with the Offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. McDonald Investments Inc., one of the Representatives, and one of its affiliates, are among the Selling Shareholders. Each of the Company, its executive officers and directors and certain shareholders of the Company (including the Selling Shareholders) has agreed, subject to certain exceptions, not to (i) offer, pledge, sell, 56 59 contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its executive officers, directors and certain shareholders of Company (including the Selling Shareholders) has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without DLJ's prior written consent. Prior to the Offering, there has been no established trading market for the Common Stock. The initial public offering price for the shares of Common Stock offered hereby will be determined by negotiation among the Company and the Representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which the Company competes, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the Offering. Other than in the United States, no action has been taken by the Company, the Selling Shareholders or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the Offering and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the Offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. LEGAL MATTERS The legality of the issuance of the Shares offered hereby will be passed upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York. EXPERTS The Financial Statements of the Company as of December 31, 1997 and December 31, 1998 and for each of the years in the three year period ended December 31, 1998 included herein and elsewhere in the Registration Statement and the Financial Statements of KLA as of December 31, 1996 and December 31, 1997 and for each of the years in the two year period ended December 31, 1997 included herein and elsewhere in the Registration Statement, have been included herein in reliance upon the reports of PricewaterhouseCoopers LLP, independent 57 60 certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. The Financial Statements of BVD as of December 31, 1996, December 31, 1997 and September 30, 1998 and for each of the years in the two year period ended December 31, 1997 and for the nine months ended September 30, 1998 included herein and elsewhere in the Registration Statement have been included herein in reliance upon the reports of Langford de Kock & Co., independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission Registration Statements on Form S-1 under the Securities Act, with respect to the Shares. This Prospectus does not contain all of the information set forth in the Registration Statements, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statements, including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract, agreement or any other document referred to herein are not necessarily complete; with respect to each such contract, agreement or document filed as an exhibit to the Registration Statements, reference is made to such exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statements, including the exhibits and schedules thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of either of them or any part thereof may be obtained from such office, upon payment of the fees prescribed by the Commission. The Registration Statements, including the exhibits and schedules thereto, are also available on the Commission's Web site at http://www.sec.gov. The Company is subject to the information requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy materials and other information concerning the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or at its regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company's Common Stock is listed in the Nasdaq National Market, and such reports, proxy materials and other information can also be inspected at the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20549. Copies of reports, proxy and information statements and other information regarding registrants that file electronically are available on the Commission's Web site. 58 61 CONLEY, CANITANO & ASSOCIATES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE REGISTRANT Conley, Canitano & Associates, Inc. Report of Independent Certified Public Accountants........ F-2 Balance Sheets -- December 31, 1997 and 1998 and pro forma December 31, 1998 (unaudited).......................... F-3 Statements of Income -- For the years ended December 31, 1996, 1997 and 1998.................................... F-4 Statements of Shareholders' Equity (Deficit) -- For the years ended December 31, 1996, 1997 and 1998........... F-5 Statements of Cash Flows -- For the years ended December 31, 1996, 1997 and 1998................................ F-6 Notes to Financial Statements............................. F-7 BUSINESS ACQUIRED IN 1998 Kelly-Levey & Associates, Inc. Report of Independent Certified Public Accountants........ F-16 Balance Sheets -- December 31, 1996 and 1997 and March 31, 1998 (unaudited)....................................... F-17 Statements of Operations -- For the years ended December 31, 1996 and 1997 and for the three months ended March 31, 1997 (unaudited) and 1998 (unaudited).............. F-18 Statements of Shareholders' Equity (Deficit) -- For the years ended December 31, 1996 and 1997 and for the three months ended March 31, 1998 (unaudited).......... F-19 Statements of Cash Flows -- For the years ended December 31, 1996 and 1997 and for the three months ended March 31, 1997 (unaudited) and 1998 (unaudited).............. F-20 Notes to Financial Statements............................. F-21 BUSINESS ACQUIRED IN 1999 Bureau van Dijk Computer Services, Inc. Independent Auditors' Report.............................. F-24 Balance Sheets -- December 31, 1996 and 1997 and September 30, 1998............................................... F-25 Statements of Income and Retained Earnings -- For the years ended December 31, 1996 and 1997 and for the nine months ended September 30, 1997 (unaudited) and 1998... F-26 Statements of Cash Flows -- For the years ended December 31, 1996 and 1997 and for the nine months ended September 30, 1997 (unaudited) and 1998................ F-27 Notes to Financial Statements............................. F-28 UNAUDITED FINANCIAL STATEMENTS: Balance Sheet -- December 31, 1998........................ F-32 Statement of Income and Retained Earnings -- For the year ended December 31, 1998................................ F-33 Statement of Cash Flows -- For the year ended December 31, 1998................................................... F-34
F-1 62 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS CONLEY, CANITANO & ASSOCIATES, INC. We have audited the accompanying balance sheets of Conley, Canitano & Associates, Inc. as of December 31, 1997 and 1998, and the related statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. 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 Conley, Canitano & Associates, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP Cleveland, Ohio January 29, 1999 F-2 63 CONLEY, CANITANO & ASSOCIATES, INC. BALANCE SHEETS
AS OF DECEMBER 31, ---------------------------------- 1998 PRO FORMA 1998 (UNAUDITED) 1997 ACTUAL (NOTE 1) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 2,174 $ 863 $ 863 Accounts receivable, less allowance for doubtful accounts of $175 in 1997 and $327 in 1998....................... 4,281 7,226 7,226 Deferred taxes............................................ 384 723 723 Other..................................................... 88 246 246 -------- ------- ------- Total current assets................................... 6,927 9,058 9,058 Goodwill, net............................................... -- 7,251 7,251 Property and equipment, net................................. 549 1,912 1,912 Other....................................................... 236 1,351 1,039 -------- ------- ------- Total assets........................................... $ 7,712 $19,572 $19,260 ======== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Line of credit............................................ $ 698 $ -- $ -- Current portion of long-term obligations.................. 100 374 374 Accounts payable.......................................... 457 1,124 1,124 Accrued payroll, taxes and benefits....................... 2,773 3,877 3,877 Income taxes payable...................................... 468 434 434 Other..................................................... 312 390 390 -------- ------- ------- Total current liabilities.............................. 4,808 6,199 6,199 Line of Credit.............................................. -- 5,500 5,500 Deferred taxes.............................................. 32 61 61 Long-term obligations, less current portion................. 196 749 749 -------- ------- ------- Total liabilities...................................... 5,036 12,509 12,509 -------- ------- ------- Commitments and contingencies............................... -- -- -- Redeemable securities (Note 9).............................. 15,970 18,427 15,750 -------- ------- ------- Shareholders' equity (deficit): Preferred Stock, voting, $.01 par value, authorized 500,800 shares, 250,400 issued and outstanding as of December 31, 1998...................................... -- -- -- Preferred Stock, non-voting no par value, authorized 5,000,000 shares, none issued.......................... -- -- -- Preferred Stock, voting, no par value, authorized 5,000,000 shares, none issued.......................... -- -- -- Common stock, no par value, authorized 45,000,000 shares, issued and outstanding 6,746,000 shares at December 31, 1997, 6,822,950 shares at December 31, 1998 and 9,326,950 shares pro forma............................. 7 8 11 Additional paid-in capital................................ -- 359 359 Retained earnings (accumulated deficit)................... (13,301) (11,372) (9,010) -------- ------- ------- (13,294) (11,005) (8,640) Less: note receivable from shareholder.................... -- (359) (359) -------- ------- ------- Total shareholders' equity (deficit)................... (13,294) (11,364) (8,999) -------- ------- ------- Total liabilities and shareholders' equity (deficit)... $ 7,712 $19,572 $19,260 ======== ======= =======
The accompanying notes are an integral part of these financial statements. F-3 64 CONLEY, CANITANO & ASSOCIATES, INC. STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues................................................. $ 17,994 $ 32,218 $ 50,505 Cost of revenues......................................... 10,978 19,222 30,462 ---------- ---------- ---------- Gross profit........................................ 7,016 12,996 20,043 Selling, general and administrative expenses............. 4,204 6,555 10,423 Incentive compensation................................... 1,647 2,700 3,430 Acquisition compensation................................. -- -- 1,179 Depreciation and amortization............................ 30 35 520 ---------- ---------- ---------- Income from operations.............................. 1,135 3,706 4,491 Net interest expenses.................................... 83 87 316 ---------- ---------- ---------- Income before provision for income taxes............ 1,052 3,619 4,175 Provision for income taxes............................... 461 1,495 1,789 ---------- ---------- ---------- Net income.......................................... $ 591 $ 2,124 $ 2,386 ========== ========== ========== Accretion to redemption value of redeemable securities... -- (92) (457) ---------- ---------- ---------- Net income available to common shareholders......... $ 591 $ 2,032 $ 1,929 ========== ========== ========== Net income per share: Basic.................................................. $ 0.04 $ 0.15 $ 0.14 Diluted................................................ $ 0.04 $ 0.15 $ 0.14 Weighted average shares outstanding: Basic.................................................. 13,836,080 13,579,423 13,326,950 Diluted................................................ 14,098,649 13,841,992 13,589,519
The accompanying notes are an integral part of these financial statements. F-4 65 CONLEY, CANITANO & ASSOCIATES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK NOTE (AT STATED VALUE) ADDITIONAL RETAINED RECEIVABLE ------------------ PAID-IN EARNINGS FROM SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDER (IN THOUSANDS) Balance, December 31, 1995.................... 7,255,130 $ 8 $ -- $ 124 $ -- Net income................ 591 --------- --- ---- -------- ----- Balance, December 31, 1996.................... 7,255,130 8 -- 715 -- Purchase and retirement of common stock............ (509,130) (1) (171) Treasury shares purchased............... Redeemable securities issued.................. (15,877) Accretion to redemption value of redeemable securities.............. (92) Net income................ 2,124 --------- --- ---- -------- ----- Balance, December 31, 1997.................... 6,746,000 7 -- (13,301) -- Sale of shares to officer................. 76,950 1 359 Note receivable from shareholder............. (359) Accretion to redemption value of redeemable securities.............. (457) Net income................ 2,386 --------- --- ---- -------- ----- Balance, December 31, 1998.................... 6,822,950 $ 8 $359 $(11,372) $(359) ========= === ==== ======== ===== Pro forma balance, December 31, 1998 (Note 1) (unaudited).......... 9,326,950 $11 $359 $ (9,010) $(359) ========= === ==== ======== ===== TOTAL TREASURY STOCK SHAREHOLDERS' ---------------------- EQUITY SHARES AMOUNT (DEFICIT) (IN THOUSANDS) Balance, December 31, 1995.................... -- $ -- $ 132 Net income................ 591 ---------- -------- -------- Balance, December 31, 1996.................... -- -- 723 Purchase and retirement of common stock............ (172) Treasury shares purchased............... (1,350,000) (15,877) (15,877) Redeemable securities issued.................. 1,350,000 15,877 -- Accretion to redemption value of redeemable securities.............. (92) Net income................ 2,124 ---------- -------- -------- Balance, December 31, 1997.................... -- -- (13,294) Sale of shares to officer................. 360 Note receivable from shareholder............. (359) Accretion to redemption value of redeemable securities.............. (457) Net income................ 2,386 ---------- -------- -------- Balance, December 31, 1998.................... -- $ -- $(11,364) ========== ======== ======== Pro forma balance, December 31, 1998 (Note 1) (unaudited).......... -- $ -- $ (8,999) ========== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 66 CONLEY, CANITANO & ASSOCIATES, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 (IN THOUSANDS) Cash flows from operating activities: Net income.............................................. $ 591 $ 2,124 $ 2,386 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 30 35 520 Deferred taxes....................................... (83) (223) (260) Incentive option amortization........................ -- -- 188 Change in assets and liabilities: Accounts receivable................................ (1,147) (1,488) (783) Other assets....................................... (58) (87) 13 Accounts payable................................... (66) 220 (320) Accrued payroll, taxes and benefits................ 790 1,027 (370) Income taxes payable............................... 139 232 15 Other liabilities.................................. 4 289 3 -------- -------- -------- Net cash provided by operating activities....... 200 2,129 1,392 -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment...................... (52) (434) (1,335) Acquisition of KLA...................................... -- -- (3,905) -------- -------- -------- Net cash used in investing activities........... (52) (434) (5,240) -------- -------- -------- Cash flows from financing activities: Proceeds from line of credit............................ 18,681 28,785 39,199 Payments on line of credit.............................. (18,463) (28,792) (35,397) (Payments on) proceeds from long-term obligations....... -- 296 (296) Net proceeds from sale of redeemable securities......... -- 15,877 -- Purchase of common stock................................ -- (16,049) -- Public offering expenses................................ -- -- (969) Other................................................... (104) -- -- -------- -------- -------- Net cash provided by financing activities....... 114 117 2,537 -------- -------- -------- Net (decrease) increase in cash and cash equivalents...... 262 1,812 (1,311) Cash and cash equivalents, at beginning of period......... 100 362 2,174 -------- -------- -------- Cash and cash equivalents, at end of period............... $ 362 $ 2,174 $ 863 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest............................................. $ 93 $ 109 $ 116 ======== ======== ======== Taxes................................................ $ 431 $ 1,485 $ 2,049 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-6 67 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Conley, Canitano & Associates, Inc. (the "Company") is a provider of rapid implementations of Enterprise Resource Planning applications. The Company also offers its clients a comprehensive range of related services. The Company provides its services predominately in the United States and Canada. For the years ended December 31, 1996, 1997 and 1998, approximately 69%, 75% and 80%, respectively, of the Company's revenues were derived from engagements in which the Company implemented SAP applications. The Company's results of operations include those of Kelly-Levey & Associates, Inc. ("KLA") since April 8, 1998 (See Note 12). Revenue Recognition Revenues are recognized as services are performed. Accounts receivable includes services performed but not yet billed of $418 and $1,348 as of December 31, 1997 and 1998, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Cash and Cash Equivalents The Company considers all restricted cash and money market funds with an original maturity of three months or less to be cash equivalents. The carrying amount of these instruments approximates fair value. Allowance for Doubtful Accounts Management provides an allowance for doubtful accounts based on historical experience and management's evaluation of outstanding accounts receivable. Amounts related to doubtful accounts that were charged to expense for the years ended December 31, 1996, 1997 and 1998 totaled $40, $109 and $45, respectively. Property and Equipment Property and equipment are stated at cost. Expenditures for maintenance and repair which extend the useful life of the property and equipment are capitalized. Depreciation is provided using accelerated and straight-line methods over the estimated useful lives of the assets as follows: Furniture and fixtures...................................... 10 years Computer equipment and software............................. 3 to 6 years Leasehold improvements...................................... 10 years
Goodwill Goodwill resulting from the April 1998 acquisition of KLA is amortized over 20 years which represents management's estimate of the customer relationships and industry expertise acquired, using the straight-line method. For the year ended December 31, 1998, amortization expense was $273. The Company will continually F-7 68 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) evaluate whether later events and circumstances have occurred that indicate the remaining goodwill may warrant revision. Income Taxes Deferred income tax assets and liabilities are provided for temporary differences between the financial reporting and the tax basis of the Company's assets and liabilities. These deferred taxes are measured by the provisions of currently enacted tax laws. Valuation allowances have been established when necessary to reduce tax assets to the amount expected to be realized. Earnings Per Share Computations of basic and diluted earnings per share of common stock have been made in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings Per Share. Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period are weighted for the portion of the period that they are outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Earnings per common share ("EPS") were computed as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 Net income.................................................. $ 591 $ 2,124 $ 2,386 Accretion to redemption value............................... -- (92) (457) ---------- ---------- ---------- Net income available to common shareholders................. $ 591 $ 2,032 $ 1,929 ========== ========== ========== Basic EPS: Weighted average common shares outstanding................ 13,836,080 13,579,423 13,326,950 ========== ========== ========== Earnings per share........................................ $ 0.04 $ 0.15 $ 0.14 ========== ========== ========== Diluted EPS: Weighted average common shares outstanding................ 13,836,080 13,579,423 13,326,950 Shares applicable to dilutive options and warrants........ 262,569 262,569 262,569 ---------- ---------- ---------- Shares applicable to diluted earnings..................... 14,098,649 13,841,992 13,589,519 ========== ========== ========== Earnings per share........................................ $ 0.04 $ 0.15 $ 0.14 ========== ========== ==========
Fair Value of Financial Instruments The Company's financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities, a line of credit and long-term debt. The fair value of these financial instruments approximates their carrying value. Accretion to Redemption Value of the Redeemable Securities As more fully discussed in Note 9, redeemable securities includes 250,400 shares of Convertible Preferred Stock and 1,350,000 shares of Common Stock with put rights. The 250,400 shares of Convertible Preferred Stock are convertible into 250,400 shares of Redeemable Preferred Stock and 2,504,000 shares of Common Stock with put rights, which can be exercised at various times after 2001, 2002 and 2003. All such rights terminate upon the consummation of the proposed initial public offering of the Company's Common Stock (the "Offering"). F-8 69 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Accretion to redemption value represents accretion to the redemption dates utilizing the interest method from October 1997 (See Note 9). Redeemable securities also includes warrants exercisable into 195,265.98 shares of Common Stock and compensatory options exercisable into 64,734.02 shares of Common Stock issued by the Company in connection with the KLA acquisition (See Note 12). These warrants and compensatory options may be put to the Company for an aggregate of $2,000. All such put rights terminate upon the consummation of the Offering. The warrants are exercisable 24 months after the closing of the KLA acquisition or upon the consummation of the Offering. The acquisition compensation expense related to the compensatory options is being amortized over a 24 month vesting period. The compensatory options vest upon the consummation of the Offering. Total accretion for the years ended December 31, 1997 and 1998 was $92 and $457, respectively. Unaudited Pro Forma Balance Sheet In conjunction with the Offering, all of the 250,400 shares of Convertible Preferred Stock will convert into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock (See Note 9). The unaudited pro forma balance sheet as of December 31, 1998 reflects the reclassification of the 1,350,000 shares of Common Stock included in the redeemable securities to shareholders equity as a result of the termination of the put rights and as a result of the conversion of the Convertible Preferred Stock into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock. The unaudited pro forma balance sheet assumes the redemption of the 250,400 shares of the Redeemable Preferred Stock to be redeemed upon the consummation of the Offering for $62.90 per share. Also upon the Offering, the remaining compensatory options (See Note 12) fully vest and therefore the related unamortized acquisition compensation recorded in other assets in the amount of $312 has been expensed for purposes of the December 31, 1998 pro forma balance sheet presentation. 2. NOTES RECEIVABLE The Company has a $359 promissory note receivable due from an officer of the Company. The note was issued in exchange for Restricted Stock (See Note 11) and is treated as a non-cash item for purposes of the statements of cash flow. Interest at 6% per annum and principal are due and payable on June 30, 2004. The note provides for accelerated payment if the officer ceases to be employed by the Company. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
AS OF DECEMBER 31, ----------------------- 1997 1998 Furniture and fixtures...................................... $ 382 $ 995 Computer equipment.......................................... 492 941 Leasehold improvements and other............................ 223 333 ------ ------ 1,097 2,269 Less: accumulated depreciation.............................. 548 357 ------ ------ Property and equipment, net................................. $ 549 $1,912 ====== ======
Depreciation expense for the years ended December 31, 1996, 1997 and 1998 was $30, $35 and $247. F-9 70 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LINE OF CREDIT Prior to April 8, 1998, the Company had a $2,500 bank line of credit expiring May 31, 1998. Interest was payable monthly at the bank's prime rate (8.25% and 8.5% at December 31, 1996 and 1997, respectively) plus 1.75% through December 31, 1996 and 1.5% thereafter. On April 8, 1998, the Company refinanced the line of credit with a line of credit/term note from another bank simultaneously with the acquisition of KLA (See Note 12). In January 1999, the Company refinanced the line of credit/term note to finance the acquisition of Bureau van Dijk Computer Services, Inc. ("BVD") (See Note 14). The January 1999 line of credit/term note is collateralized by substantially all the Company's assets. The borrowings are limited to the lesser of $27,500 or 80% of eligible receivables plus $20,000 or a multiple of the latest aggregated four quarters' EBITDA as defined in the agreement. The interest rate is LIBOR (5.544% at December 31, 1998) plus up to 3.25% or the bank's prime rate (7.75% at December 31, 1998) plus up to 1.50%. The line of credit/term note contains various covenants that restrict, among other things, the Company's ability to incur additional indebtedness, sell or transfer assets, make investments and pay dividends and requires the Company to meet various financial covenants. The term portion matures as follows: $500,000 quarterly on September 30, 1999 through June 30, 2000; $750,000 quarterly on September 30, 2000 through June 30, 2001; $1,000,000 on September 30, 2001 and December 31, 2001; $1,250,000 on March 31, 2002 and June 30, 2002; $1,500,000 quarterly on September 30, 2002 through June 30, 2003; $2,250,000 on September 30, 2003 and the remainder on December 31, 2003. The balance of the revolving line of credit is due by June 30, 2001. 5. LONG-TERM OBLIGATIONS On June 25, 1997, the Company entered into a variable rate note agreement with a bank for up to $700 at the bank's prime rate (8.5% at December 31, 1997). Interest only was paid on this note through March 31, 1998 in accordance with the terms of the note. The Company repaid the note in April 1998. As part of the KLA acquisition, the Company agreed to pay $1,123 to one of the KLA majority shareholders in three equal annual installments beginning on April 3, 1999. 6. INCOME TAXES The provision for income taxes is as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 Current: Federal............................................. $426 $1,332 $1,597 State and local..................................... 118 386 452 ---- ------ ------ 544 1,718 2,049 Deferred.............................................. (83) (223) (260) ---- ------ ------ $461 $1,495 $1,789 ==== ====== ======
F-10 71 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company estimates the effective income tax rate quarterly using annualized estimated financial data. A reconciliation of the provision for income taxes at the federal statutory rate to that included in the statements of income is as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1996 1997 1998 Tax at federal statutory rate............................. 34.0% 34.0% 34.0% Increases in taxes resulting from: State income taxes, net of federal benefit.............. 6.2 6.1 6.2 Goodwill amortization................................... -- -- 2.2 Meals and entertainment................................. 3.6 1.1 1.3 Other................................................... 0.0 0.1 (0.9) ---- ---- ---- 43.8% 41.3% 42.8 ==== ==== ====
The components of the net deferred tax asset are comprised of the following:
AS OF DECEMBER 31, -------------- 1997 1998 Gross deferred tax assets: Allowance for doubtful accounts........................... $ 71 $124 Accrued compensation and benefits......................... 232 449 Other..................................................... 81 150 ---- ---- Deferred tax assets............................... 384 723 ---- ---- Gross deferred tax liability: Depreciation.............................................. (32) (61) ---- ---- Deferred tax liability............................ (32) (61) ---- ---- Deferred tax asset, net..................................... $352 $662 ==== ====
7. PROFIT SHARING AND 401(k) SAVINGS PLAN The Company maintains a qualified cash or deferred compensation plan under section 401(k) of the Internal Revenue Code (the "401(k) Plan") that covers substantially all the employees of the Company. Under the 401(k) Plan, the Company may make a matching contribution as well as a discretionary contribution. The Company's contributions totaled $303, $596 and $564 for the years ended December 31, 1996, 1997 and 1998, respectively. 8. COMMITMENTS AND CONTINGENCIES As of December 31, 1998, the Company leased office space and certain equipment under various noncancelable operating leases. Lease payments for the years ended December 31, 1996, 1997 and 1998, were $253, $358 and $688, respectively. On January 3, 1997, the Company entered into an additional office lease, with a leasing company partially owned by affiliates of the Company's management and principal shareholders. This lease extends through December 31, 2002. The lease provides for three successive renewal periods of 60 months each at the Company's option. The monthly lease payment will be adjusted prior to each annual anniversary date F-11 72 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of the lease based on increases in the consumer price index. The maximum annual increase is 2%. Future minimum lease payments as of December 31, 1998 required under all operating leases are as follows: 1999.............................................. $ 876 2000.............................................. 653 2001.............................................. 619 2002.............................................. 613 2003.............................................. 305 ------ $3,066 ======
9. REDEEMABLE SECURITIES On October 15, 1997, the Company's Amended and Restated Articles of Incorporation ("Articles") were amended to authorize 500,800 shares of $0.01 par value Preferred Stock. On October 15, 1997, the Company purchased 1,350,000 shares of its Common Stock from certain shareholders for $15,877. The Company then issued 250,400 shares of Convertible Preferred Stock for $17,500 and 1,350,000 shares of Common Stock for $1, for an aggregate consideration of $17,501 ($15,877, net of $1,624 of related expenses). The 1,350,000 shares of Common Stock may be put back to the Company on or after October 15, 2003, if the Company has not completed an offering, for the greater of $0.4541 per share or fair market value. The Company accounted for these transactions using the cost method. The 250,400 shares of Convertible Preferred Stock have certain voting and other rights and privileges set forth in the Company's Articles. On or after October 15, 2001 and October 15, 2002, 50% and 100% of the shares, respectively, can be redeemed by the Company at the option of the holders for the greater of $69.89 per share or their fair market value as provided for in the Articles. Holders of Convertible Preferred Stock are entitled to receive dividends, if declared by the Board of Directors, on an equal basis with the holders of Common Stock. In connection with the Offering, the 250,400 shares of Convertible Preferred Stock automatically convert into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred Stock, and the Redeemable Preferred Stock will be redeemed for $62.90 per share. The authorized Preferred Stock also includes 250,400 shares of Redeemable Preferred Stock that contain similar voting and liquidation preferences as the Convertible Preferred Stock. The Redeemable Preferred Stock will pay cumulative dividends at the per share rate per annum of 7% of $62.90. None of the Redeemable Preferred Stock has been issued. Redeemable securities also includes warrants exercisable into 195,265.98 shares of Common Stock and compensatory options exercisable into 64,734.02 shares of Common Stock issued by the Company in connection with the KLA acquisition (See Note 12). These warrants and compensatory options may be put to the Company for an aggregate of $2,000 and accordingly have been included in redeemable securities at their fair value of $2,000. All such put rights terminate upon the consummation of the Offering at which time the $2,000 will be included in equity. The warrants are exercisable 24 months after the closing of the KLA acquisition or upon the consummation of the Offering. The acquisition compensation expense related to the compensatory options is being amortized over a 24 month vesting period. The compensatory options vest upon the consummation of the Offering. 10. COMMON STOCK In July 1997, the Company purchased 509,130 shares of its Common Stock from a shareholder for $171. The Company subsequently retired these shares. In October 1997, the Company effected a 6,364.151-for-1 common stock split. In addition, in July 1998, the Company effected a 10-for-1 common stock split. All share and per share amounts herein have been restated to reflect such stock splits. F-12 73 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In July 1998, the Company's shareholders granted approval to increase authorized shares of stock to the following: Common Stock, no par value..................... 45,000,000
11. STOCK OPTIONS AND WARRANTS During October 1997, the Company and its shareholders adopted the 1997 Equity and Performance Incentive Plan (the "Plan") to attract and retain directors, officers, employees and consultants. Under the terms of the Plan, 2,072,750 shares of the Company's Common Stock are available for grant. Future grants, and the provisions thereof, are at the discretion of the Company's Board of Directors (See Note 14). On May 11, 1998, options were granted under the Plan to purchase 321,400 shares of Common Stock at $4.67 per share. At various dates from August 15, 1998 through December 31, 1998, options were granted under the Plan to purchase 58,300 shares of Common Stock at $9.35 per share. Options vest evenly over three to five-year periods. In May 1998, an officer of the Company was granted 76,950 shares of Restricted Stock under the Plan at a purchase price of $4.67 per share. The officer paid for the shares with a promissory note (See Note 2). In December 1998, the Company's Board of Directors authorized an increase in Company common shares available for grant under the Company's 1997 Equity and Performance Incentive Plan to 2,500,000 shares. In December 1998, the Company established the 1998 Employee Stock Purchase Plan, which reserves an aggregate of 500,000 shares of Common Stock for issuance under the plan. No shares have been issued under this plan. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its stock option plan and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock- Based Compensation. Had compensation cost been determined based on the estimated fair value at the grant date consistently with the provisions of SFAS No. 123, net income and net income per share would have been reduced to the pro forma amounts indicated below:
FOR THE YEAR ENDED DECEMBER 31, 1998 ----------------- Net income available to common shareholders -- as reported.................................................. $1,929 Net income available to common shareholders -- pro forma.... $1,801 Net income per share -- as reported: Basic..................................................... $ 0.14 Diluted................................................... $ 0.14 Net income per share -- pro forma: Basic..................................................... $ 0.14 Diluted................................................... $ 0.13
The fair value of each option grant and restricted share is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for the grant: dividend yield of 0%; expected volatility of 47%; risk-free interest rate of 5%; and expected lives of the options of five years from the date of vesting. F-13 74 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of stock options is presented below:
FOR THE YEAR ENDED DECEMBER 31, 1998 ----------------------------- WEIGHTED-AVERAGE SHARES EXERCISE PRICE Outstanding, beginning of period...................... -- $ -- Granted............................................... 379,700 5.39 Exercised and converted............................... -- -- Forfeited............................................. 19,100 5.16 --------- ----- Outstanding, end of period............................ 360,600 5.40 Options available for grant, end of period............ 2,062,450 -- --------- ----- Options exercisable, end of period.................... -- -- ========= =====
Redeemable securities also includes warrants exercisable into 195,265.98 shares of Common Stock and compensatory options exercisable into 64,734.02 shares of Common Stock issued by the Company in connection with the KLA acquisition (See Note 12). The warrants and compensatory options are exercisable at $0.001 per share of Common Stock 24 months after the closing of the KLA acquisition or upon the consummation of the Offering. The acquisition compensation expense related to the compensatory options is being amortized over a 24 month vesting period. The compensatory options vest upon the consummation of the Offering. 12. KLA ACQUISITION On April 8, 1998, the Company purchased all of the outstanding capital stock of KLA for a purchase price consisting of $3,552 in cash, the issuance of warrants to purchase 195,265.98 shares of Common Stock and certain other consideration. Of the total consideration, $3,377 is subject to certain revenue targets and contribution margins during the two-year period following April 8, 1998 and $1,123 is payable in three equal annual installments beginning April 3, 1999. In addition, the Company agreed to grant the KLA compensatory options and to pay $3,500 in retention bonuses at certain intervals to an escrow account which benefits former KLA employees who remain employees of the Company at such intervals. The purchase price has been allocated as follows: Assets acquired............................................. $2,378 Liabilities assumed......................................... (3,374) Goodwill.................................................... 7,524 Compensatory options........................................ 500 Earn-out liability.......................................... (1,123) ------ 5,905 Less: non-cash warrants and options......................... 2,000 ------ Cash paid for acquisition................................... $3,905 ======
Compensatory options are amortized on a straight-line basis over their 24 month vesting period. Amortization expense for the year ended December 31, 1998 was $188 and is included in acquisition compensation. In connection with the Offering, the compensatory options will fully vest, and the unamortized balance will be included in acquisition compensation. The warrants and options are included in redeemable securities at their fair value of $2,000 (see Note 9). F-14 75 CONLEY, CANITANO & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1998, the Company was obligated to make retention bonus payments to the escrow account as follows: April 3, 1999............................................... $ 875 April 3, 2000............................................... 875 October 3, 2000............................................. 1,050 ------ $2,800 ======
Compensation expense is recorded as the bonuses are earned. Compensation expense for these retention bonuses for the year ended December 31, 1998 was $991 and is included in acquisition compensation. 13. RELATED PARTY TRANSACTIONS The Company has a $359 promissory note receivable due from an officer of the Company (See Note 2). In July 1997, the Company purchased 509,130 shares of its Common Stock from a related party (See Note 10). On October 15, 1997, the Company purchased 1,350,000 shares of its Common Stock from certain majority shareholders. Simultaneously, the Company issued 1,350,000 shares of its Common Stock and 250,400 shares of Convertible Preferred Stock (See Note 9). The Company leases office space from a company owned partially by the Company's management and principal shareholders (See Note 8). 14. SUBSEQUENT EVENTS The Company's Board of Directors has authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission to sell up to 4,000,000 shares of the Company's Common Stock in the Offering. CCAi expects to use the net proceeds from the Offering to repay in full existing indebtedness (See Note 4), to redeem all outstanding shares of Redeemable Preferred Stock (See Note 9) and for general corporate purposes, including working capital. The Company may also use a portion of the net proceeds to fund acquisitions of complementary businesses and service offerings. Although the Company may periodically review potential acquisition opportunities, there are no current agreements with respect to any such transactions. Pending their application as described above, the proceeds will be invested in short-term, investment grade, interest-bearing securities. In January 1999, the Company completed the acquisition of BVD for $17,500 in cash and 300,000 shares of Common Stock, which will vest in two equal annual installments. The acquisition will be accounted for as a purchase. Goodwill from the acquisition will be amortized over 20 years. The purchase price will be allocated as follows: Assets acquired............................................. $ 2,620 Liabilities assumed......................................... (2,643) Goodwill.................................................... 20,603 ------- 20,580 Less: restricted common stock............................... 2,805 ------- Cash paid for acquisition................................... $17,775 =======
F-15 76 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE OWNERS KELLY-LEVEY & ASSOCIATES, INC. We have audited the accompanying balance sheets of Kelly-Levey & Associates, Inc. as of December 31, 1996 and 1997, and the related statements of operations, shareholders' 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 Kelly-Levey & Associates, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. On April 8, 1998, all of the Kelly-Levey & Associates, Inc. common stock was acquired by Conley, Canitano & Associates, Inc. (See Note 7). PricewaterhouseCoopers LLP Cleveland, Ohio June 8, 1998 F-16 77 KELLY-LEVEY & ASSOCIATES, INC. BALANCE SHEETS
AS OF DECEMBER 31, AS OF ------------------ MARCH 31, 1996 1997 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 54 $ 176 $ -- Accounts receivable, less allowance for doubtful accounts of $125 in 1998........................................ 882 1,764 2,425 Deferred taxes............................................ 50 Other..................................................... -- 12 39 ---- ------ ------ Total current assets.............................. 936 1,952 2,514 Property and equipment, net................................. 33 262 266 Deferred taxes.............................................. -- 16 49 Other....................................................... 4 11 2 ---- ------ ------ Total assets...................................... $973 $2,241 $2,831 ==== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Line of credit............................................ $ -- $ 298 $1,000 Accounts payable.......................................... 41 447 1,012 Accrued payroll, taxes and benefits....................... 676 1,419 878 Income taxes payable...................................... 48 -- -- Other..................................................... -- 1 -- ---- ------ ------ Total current liabilities......................... 765 2,165 2,890 Shareholders' equity (deficit): Common stock, no par value, authorized 1,000,000 shares, issued and outstanding 321,200 shares at December 31, 1996, issued 329,550 and outstanding 322,850 shares at December 31, 1997 and issued 331,900 shares and outstanding 325,200 shares at March 31, 1998........... 2 24 28 Retained earnings (deficit)............................... 206 66 (73) Treasury stock, 6,700 shares at cost...................... -- (14) (14) ---- ------ ------ Total shareholders' equity (deficit).............. 208 76 (59) ---- ------ ------ Total liabilities and shareholders' equity (deficit)....................................... $973 $2,241 $2,831 ==== ====== ======
The accompanying notes are an integral part of these financial statements. F-17 78 KELLY-LEVEY & ASSOCIATES, INC. STATEMENTS OF OPERATIONS
FOR THE YEARS FOR THE THREE MONTHS ENDED DECEMBER 31, ENDED MARCH 31, ------------------ -------------------------- 1996 1997 1997 1998 (UNAUDITED) (UNAUDITED) (IN THOUSANDS) Revenues........................................... $3,951 $8,726 $1,819 $2,570 Cost of revenues................................... 2,727 6,589 1,434 1,542 ------ ------ ------ ------ Gross profit..................................... 1,224 2,137 385 1,028 Selling, general and administrative expenses....... 838 2,238 429 925 Depreciation....................................... 27 74 17 19 ------ ------ ------ ------ Income (loss) from operations.................... 359 (175) (61) 84 Transaction costs.................................. -- -- -- 302 Interest expense................................... -- 29 16 4 ------ ------ ------ ------ Income (loss) before provision for (benefit from) income taxes.................................. 359 (204) (77) (222) Provision for (benefit from) income taxes.......... 153 (64) (28) (83) ------ ------ ------ ------ Net income (loss)................................ $ 206 $ (140) $ (49) $ (139) ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-18 79 KELLY-LEVEY & ASSOCIATES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK (AT STATED VALUE) RETAINED TREASURY STOCK TOTAL ------------------ EARNINGS --------------- SHAREHOLDERS' SHARES AMOUNT (DEFICIT) SHARES AMOUNT EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA) Balance, December 31, 1995.......... 321,200 $ 2 $ 53 -- $ -- $ 55 Dividends........................... (53) (53) Net income.......................... 206 206 ------- --- ---- ----- ---- ---- Balance, December 31, 1996.......... 321,200 2 206 -- -- 208 Sale of common shares to employees......................... 8,350 22 22 Treasury shares purchased from employees......................... 6,700 (14) (14) Net loss............................ (140) (140) ------- --- ---- ----- ---- ---- Balance, December 31, 1997.......... 329,550 24 66 6,700 (14) 76 Sale of common shares to employees (unaudited)....................... 2,350 4 4 Net loss (unaudited)................ (139) (139) ------- --- ---- ----- ---- ---- Balance, March 31, 1998 (unaudited)....................... 331,900 $28 $(73) 6,700 $(14) $(59) ======= === ==== ===== ==== ====
The accompanying notes are an integral part of these financial statements. F-19 80 KELLY-LEVEY & ASSOCIATES, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE THREE MONTHS DECEMBER 31, ENDED MARCH 31, -------------------- -------------------------- 1996 1997 1997 1998 (UNAUDITED) (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income (loss)................................ $ 206 $ (140) $ (49) $ (139) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation.................................. 27 74 18 19 Deferred taxes................................ -- (16) (29) (83) Change in assets and liabilities: Accounts receivable......................... (763) (882) (254) (661) Other assets................................ (1) (19) 2 (18) Accounts payable............................ (4) 406 314 565 Accrued payroll, taxes and benefits......... 588 743 80 (541) Income taxes payable........................ 48 (48) (48) -- Other liabilities........................... -- 1 -- (1) ----- ------- ----- ------- Net cash provided by (used in) operating activities............................. 101 119 34 (859) ----- ------- ----- ------- Cash flows from investing activities: Purchase of property and equipment............... (59) (303) (56) (23) ----- ------- ----- ------- Net cash used in investing activities.... (59) (303) (56) (23) ----- ------- ----- ------- Cash flows from financing activities: Proceeds from line of credit..................... -- 5,079 350 1,868 Payments on line of credit....................... -- (4,781) (350) (1,166) Purchase of common stock......................... -- (14) -- -- Proceeds from sale of common stock............... -- 22 -- 4 Dividends paid................................... (53) -- -- -- ----- ------- ----- ------- Net cash (used in) provided by financing activities............................. (53) 306 -- 706 ----- ------- ----- ------- Net (decrease) increase in cash.................... (11) 122 (22) (176) Cash, at beginning of period....................... 65 54 54 176 ----- ------- ----- ------- Cash, at end of period............................. $ 54 $ 176 $ 32 $ -- ===== ======= ===== ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest...................................... $ -- $ 26 $ 16 $ 4 ===== ======= ===== ======= Taxes......................................... $ 57 $ 5 $ 48 $ -- ===== ======= ===== =======
The accompanying notes are an integral part of these financial statements. F-20 81 KELLY-LEVEY & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS (Amounts and Disclosures at March 31, 1998 and for the Three Months Ended March 31, 1997 and 1998 are Unaudited) (IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Kelly-Levey & Associates, Inc. ("KLA") is a Kentucky-based provider of Enterprise Resource Planning implementation services. KLA provides services to clients predominately in the United States. Substantially all of KLA's revenues are derived from services provided as a contractor or a subcontractor to Electronic Data Systems Corporation ("EDS") and its affiliates for the years ended December 31, 1996 and 1997 and for the three months ended March 31, 1997 and 1998. Interim Unaudited Financial Information The interim statements of operations, shareholders' equity (deficit) and cash flows of KLA for the three month periods ended March 31, 1997 and 1998 have been prepared without audit. These interim financial statements reflect all normal and recurring adjustments, which in the opinion of KLA management, are necessary for a fair presentation of the financial position of KLA and its results of operations for the interim periods set forth herein. The results for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. Revenue Recognition Revenues are recognized as services are performed. Accounts receivable includes services performed but not yet billed of $354 and $43 as of December 31, 1996 and 1997, respectively, and $332 as of March 31, 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Allowance for Doubtful Accounts Management provides an allowance for doubtful accounts based on historical experience and management's evaluation of outstanding receivables. Property and Equipment Property and equipment are stated at cost. Expenditures for maintenance and repair which extend the useful life of the property and equipment are capitalized. Depreciation is provided using accelerated and straight-line methods over the estimated useful lives of the assets as follows: Furniture and fixtures............................ 5 years Equipment......................................... 3 years
F-21 82 KELLY-LEVEY & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes Deferred income tax assets and liabilities are provided for temporary differences between the financial reporting and the tax basis of KLA's assets and liabilities. These deferred taxes are measured by the provisions of currently enacted tax laws. Valuation allowances have been established when necessary to reduce tax assets to the amount expected to be realized. Fair Value of Financial Instruments KLA's financial instruments consist principally of cash, accounts receivable, accounts payable, accrued expenses and other liabilities, a line of credit and long-term debt. The fair value of these financial instruments approximates their carrying value. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
AS OF DECEMBER 31, AS OF ------------ MARCH 31, 1996 1997 1998 Furniture and fixtures..................................... $11 $ 32 $ 32 Equipment.................................................. 53 334 357 --- ---- ---- 64 366 389 Less: accumulated depreciation............................. 31 104 123 --- ---- ---- Property and equipment, net................................ $33 $262 $266 === ==== ====
3. LINE OF CREDIT As of March 31, 1998, KLA had a $1,000 bank line of credit. Interest was payable monthly at the lending bank's prime rate (8.5% at December 31, 1997 and March 31, 1998), plus 0.75%. Borrowings under the line of credit were due on demand, were personally guaranteed by the shareholders and were collateralized by substantially all assets of KLA. The line of credit contained restrictive terms and covenants which imposed certain maintenance of asset requirements. This line of credit was repaid and cancelled (See Note 8). 4. INCOME TAXES The provision for (benefit from) income taxes is as follows:
FOR THE YEARS FOR THE THREE ENDED MONTHS ENDED DECEMBER 31, MARCH 31, -------------- -------------- 1996 1997 1997 1998 Current: Federal.............................................. $126 $(39) $ -- $ -- State and Local...................................... 27 (9) -- -- ---- ---- ---- ---- 153 (48) -- -- Deferred............................................... -- (16) (28) (83) ---- ---- ---- ---- $153 $(64) $(28) $(83) ==== ==== ==== ====
KLA estimates the effective income tax rate quarterly using annualized estimated financial data. The estimated effective income tax rate for the three months ended March 31, 1997 and 1998 was 37.3% and 32.6%, F-22 83 KELLY-LEVEY & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) respectively. A reconciliation of the provision for (benefit from) income taxes at the federal statutory rate to that included in the Statements of Operations is as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------- 1996 1997 Tax (benefit) at federal statutory rate..................... 34.0% (34.0)% Increases (reductions) in taxes resulting from: State income taxes, net of federal benefit................ 4.9 (4.5) Meals and entertainment................................... 3.6 5.6 Other..................................................... 0.2 1.4 ---- ------ 42.7% (31.5)% ==== ======
The components of deferred tax assets and liabilities are comprised of the following:
AS OF DECEMBER 31, AS OF ------------ MARCH 31, 1996 1997 1998 Deferred tax assets: Allowance for doubtful accounts........................... $-- $-- $50 Operating loss carryforwards.............................. -- 15 48 Other..................................................... -- 1 1 -- --- --- Deferred tax assets............................... $-- $16 $99 == === ===
Operating loss carryforwards are available through December 2017. 5. PROFIT SHARING AND 401(K) SAVINGS PLAN KLA maintains a qualified cash or deferred compensation plan under section 401(k) of the Internal Revenue Code that covers substantially all the employees of KLA. Under the Plan, KLA may make a matching contribution as well as a discretionary contribution. KLA's contributions totaled $46 and $344 for the years ended December 31, 1996 and 1997, respectively, and $75 for the three months ended March 31, 1997. No contributions were made during the three months ended March 31, 1998. 6. COMMITMENTS AND CONTINGENCIES As of March 31, 1998, KLA leased office space and certain equipment under various noncancelable operating leases. Lease expense for the years ended December 31, 1996 and 1997 was $8 and $38, respectively, and for the three months ended March 31, 1997 and 1998 was $6 and $14, respectively. Future minimum lease payments required under all operating leases are as follows: 1998 (9 months)................................. $ 71 1999............................................ 68 2000............................................ 55 2001............................................ 18 -------- $ 212 ========
7. SUBSEQUENT EVENT On April 8, 1998, Conley, Canitano & Associates, Inc. purchased all of the capital stock of KLA. F-23 84 INDEPENDENT AUDITORS' REPORT To the Shareholders of Bureau van Dijk Computer Services, Inc.: We have audited the accompanying balance sheets of Bureau van Dijk Computer Services, Inc. as of December 31, 1996 and 1997 and September 30, 1998, and the related statements of income and retained earnings, and cash flows for the years ended December 31, 1996 and 1997 and the nine months ending September 30, 1998. 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 Bureau van Dijk Computer Services, Inc. as of December 31, 1996 and 1997 and September 30, 1998, and the results of its operations and its cash flows for the years ended December 31, 1996 and 1997 and the nine months ending September 30, 1998, in conformity with generally accepted accounting principles. We did not audit the statement of income and retained earnings and cash flow information for the nine months ended September 30, 1997, and accordingly, we do not express an opinion on them. Langford de Kock & Co. Atlanta, Georgia January 11, 1999. F-24 85 BUREAU VAN DIJK COMPUTER SERVICES, INC. BALANCE SHEETS
AS OF DECEMBER 31, AS OF --------------------- SEPTEMBER 30, 1996 1997 1998 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 456 $ 504 $ 180 Accounts receivable: Trade, net of bad debt allowance of $23 at September 30, 1998.......................................... 2,140 1,280 1,206 Related parties...................................... 28 1,733 1,087 Investment................................................ 100 -- -- Prepaid expenses.......................................... 39 28 8 Deferred taxes............................................ 25 50 28 ------ ------ ------ Total current assets.............................. 2,788 3,595 2,509 Property and equipment, net................................. 265 345 391 Other assets................................................ 40 43 33 ------ ------ ------ Total assets...................................... $3,093 $3,983 $2,933 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 871 $ 656 $ 728 Accrued compensation and benefits......................... 1,228 885 778 Due to related parties.................................... 387 794 249 Dividends payable......................................... -- 587 -- Loans from employees...................................... -- 172 -- Income taxes.............................................. 106 423 152 ------ ------ ------ Total current liabilities......................... 2,592 3,517 1,907 Deferred taxes.............................................. 31 35 39 ------ ------ ------ Total liabilities................................. 2,623 3,552 1,946 ------ ------ ------ Commitments and contingencies Shareholders' equity: Common stock, 1,000 shares, authorized and issued with no par value.............................................. 300 300 300 Retained earnings......................................... 170 131 687 ------ ------ ------ Total shareholders' equity........................ 470 431 987 ------ ------ ------ Total liabilities and shareholders' equity........ $3,093 $3,983 $2,933 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-25 86 BUREAU VAN DIJK COMPUTER SERVICES, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE FOR THE YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- ------------------------- 1996 1997 1997 1998 (UNAUDITED) (IN THOUSANDS) Revenue.......................................... $13,806 $14,415 $10,322 $11,408 Cost of revenue.................................. 8,413 8,918 6,348 7,550 ------- ------- ------- ------- Gross profit................................... 5,393 5,497 3,974 3,858 Operating expenses............................... 5,138 4,479 3,659 2,850 ------- ------- ------- ------- Income from operations......................... 255 1,018 315 1,008 Interest income, net............................. 33 10 14 2 ------- ------- ------- ------- Income before provisions for income taxes...... 288 1,028 329 1,010 Provision for income taxes....................... 160 480 154 454 ------- ------- ------- ------- Net income..................................... 128 548 175 556 RETAINED EARNINGS -- BEGINNING................... 42 170 170 131 DIVIDENDS........................................ -- (587) -- -- ------- ------- ------- ------- RETAINED EARNINGS -- ENDING...................... $ 170 $ 131 $ 345 $ 687 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-26 87 BUREAU VAN DIJK COMPUTER SERVICES, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE NINE MONTHS DECEMBER 31, ENDED SEPTEMBER 30, ---------------------- ------------------------- 1996 1997 1997 1998 (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income..................................... $ 128 $ 548 $ 175 $ 556 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation................................... 18 33 24 36 Deferred taxes................................. 24 (21) (3) 26 Change in assets and liabilities: Trade receivables........................... (675) 860 685 74 Related party receivables................... (28) (1,705) (945) 646 Prepaid expenses and advances............... (4) 11 (3) 20 Deposits.................................... (2) (3) (3) 10 Accounts payable............................ 477 (215) (3) 72 Accrued compensation and benefits........... 1,031 (343) (626) (107) Due to related parties...................... (356) 407 480 (545) Income taxes................................ 88 317 24 (271) ------ ------- ----- ----- Net cash (used in) provided by operating activities.................................. 701 (111) (195) 517 Cash flows from investing activities: Purchases of property and equipment............ (130) (113) (97) (82) Purchases of investments....................... (100) -- -- -- Proceeds on sale of investments................ -- 100 100 -- ------ ------- ----- ----- Net cash (used in) provided by investing activities.................................. (230) (13) 3 (82) Cash flows from financing activities: Proceeds from line of credit................... 115 100 100 600 Repayments on line of credit................... (290) (100) (100) (600) Proceeds from loans from employees............. -- 242 242 -- Repayments on loans from employees............. -- (70) (29) (172) Dividends paid................................. -- -- -- (587) ------ ------- ----- ----- Net cash (used in) provided by financial activities.................................. (175) 172 213 (759) Net increase (decrease) in cash.................. 296 48 21 (324) Cash and cash equivalents, at beginning of period......................................... 160 456 456 504 ------ ------- ----- ----- Cash and cash equivalents, at end of period...... $ 456 $ 504 $ 477 $ 180 ====== ======= ===== ===== Supplemental disclosure of cash flow information: Cash paid for Interest......................... $ 4 $ 1 $ 1 $ 4 ====== ======= ===== ===== Taxes.......................................... $ 42 $ 186 $ 134 $ 719 ====== ======= ===== =====
The accompanying notes are an integral part of these financial statements. F-27 88 BUREAU VAN DIJK COMPUTER SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (Amounts and Disclosures at and for the Nine Months Ended September 30, 1997 are Unaudited) (In thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Bureau van Dijk Computer Services, Inc. (the "Company") is a service provider for implementations of Enterprise Resource Planning applications from SAP. The Company provides its services predominately in the United States. For the years ended December 31, 1996 and 1997, one customer accounted for approximately 52% and 16% of the total revenue, respectively. Amounts due from this customer included in trade accounts receivable at December 31, 1996 and 1997 is $546 and $185, respectively. For the nine months ended September 30, 1998 two customers accounted for 22% of total revenues. Amounts due from these two customers at September 30, 1998 is $506. The Company has significant transactions with related parties (see Note 7). Interim Unaudited Financial Information The interim statement of income and retained earnings of the Company for the nine month period ended September 30, 1997 has been prepared without audit. This interim financial statement reflects all normal and recurring adjustments, which in the opinion of Company management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim period set forth herein. Revenue Recognition Revenues are recognized as services are performed. Accounts receivable at December 31, 1996 and 1997 and September 30, 1998 do not include any unbilled services. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Cash and Cash Equivalents The Company considers all restricted cash and money market funds with an original maturity of three months or less to be cash equivalents. The carrying amount of these instruments approximates fair value. Allowance for Doubtful Accounts Management provides an allowance for doubtful accounts based on historical experience and management's evaluation of outstanding accounts receivable. Amounts related to doubtful accounts that were charged to expense for the years ended December 31, 1996 and 1997 totaled $125 and $0, respectively, and for the nine months ended September 30, 1998 totaled $23. Property and Equipment Property and equipment are stated at cost. Expenditures for maintenance and repair which extend the useful life of the property and equipment are capitalized. F-28 89 Depreciation is provided using straight-line methods over the estimated useful lives of the assets as follows: Furniture and fixtures...................................... 7 years Computer equipment and software............................. 5 years Leasehold improvements...................................... 10 years
Income Taxes Deferred income tax assets and liabilities are provided for temporary differences between the financial reporting and the tax basis of the Company's assets and liabilities. These deferred taxes are measured by the provisions of currently enacted tax laws. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
AS OF DECEMBER 31, AS OF -------------- SEPTEMBER 30, 1996 1997 1998 Art......................................................... $167 $182 $228 Furniture and fixtures...................................... 92 104 107 Computer equipment and software............................. 37 124 148 Leasehold improvements...................................... 2 2 2 Vehicle..................................................... -- -- 9 ---- ---- ---- 298 412 494 Less: accumulated depreciation.............................. (33) (67) (103) ---- ---- ---- Property and equipment, net................................. $265 $345 $391 ==== ==== ====
3. COMMITMENTS AND CONTINGENCIES The Company had a $600 bank line of credit expiring July 31, 1998. Interest was payable monthly at the bank's prime rate (7.5% and 8.5% at December 31, 1996 and 1997, respectively) plus 1.75%. On August 5, 1998, the Company secured a $800 line of credit, expiring July 31, 1999, for the purpose of providing short-term working capital. The line of credit is collateralized by a blanket lien on all accounts receivable of the Company. The interest rate is the bank's prime rate (8.25% at September 30, 1998) plus 0.5%. This line of credit contains various covenants that restrict, among other things; the Company's ability to sell or transfer assets; making changes in the Company's ownership (Note 10); entering into a merger or consolidation. In addition, the line of credit requires the Company to meet various financial covenants. The Company is self-insured for errors and omissions in the performance of services. No provision has been made for any losses that may arise from such actions. 4. PROFIT SHARING AND 401(K) SAVINGS PLAN The Company maintains a qualified cash or deferred compensation plan under section 401(k) of the Internal Revenue Code (the "401(k) Plan") that covers substantially all the employees of the Company. Under the 401(k) Plan, the Company may make a discretionary contribution which becomes progressively fully vested after 6 years of employee service. The Company's contributions totaled $62 and $74, for the years ended December 31, 1996 and 1997, respectively, and $88 for the nine months ended September 30, 1998. 5. LEASE COMMITMENTS As of September 30, 1998, the Company leased office space and certain equipment under various noncancelable operating leases. The lease for one of the office spaces was renewed during 1998 for an additional 5 years ending March 2004. Lease payments under this renewal increase approximately 2.5% per year. Lease payments for the years ended December 31, 1996 and 1997, were $313 and $312, respectively, and $253 for the F-29 90 nine months ended September 30, 1998. Future minimum lease payments required under all operating leases are as follows: 1998 (3 months)............................................. $ 47 1999........................................................ 266 2000........................................................ 233 2001........................................................ 160 2002........................................................ 129 Thereafter.................................................. 117 ---- $952 ====
6. INCOME TAXES The provision for income taxes is as follows:
FOR THE FOR THE NINE YEARS ENDED MONTHS DECEMBER 31, ENDED ------------ SEPTEMBER 30, 1996 1997 1998 Current: Federal................................................... $106 $418 $360 State and local........................................... 30 83 68 ---- ---- ---- 136 501 428 Deferred.................................................... 24 (21) 26 ---- ---- ---- $160 $480 $454 ==== ==== ====
During 1997, the Company's 1995 U.S. income tax return was audited by the Internal Revenue Service (IRS). The IRS disallowed certain royalty expenses and additional taxes of $31 were assessed and paid in 1997. The Company estimates the effective income tax rate quarterly using annualized estimated financial data. The estimated effective income tax rate for the nine months ended September 30, 1998 was 45%. A reconciliation of the provision for income taxes at the federal statutory rate to that included in the statements of income is as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------ 1996 1997 Tax at federal statutory rate............................... 34.0% 34.0% Increases in taxes resulting from: State income taxes, net of federal benefit................ 6.9 5.4 Meals and entertainment................................... 7.1 2.5 Club dues................................................. 2.6 1.6 Royalties................................................. 5.1 -- IRS adjustment............................................ -- 3.0 Other..................................................... (0.1) 0.2 ---- ---- 55.6% 46.7% ==== ====
F-30 91 The components of the Company's deferred tax assets and liabilities are as follows:
AS OF DECEMBER 31, AS OF ------------------ SEPTEMBER 30, 1996 1997 1998 Current deferred taxes: Current assets: Accrued expenses.............................. $25 $51 $28 Current liabilities: Prepaids and other............................ -- (1) -- --- --- --- Net current deferred assets...................... $25 $50 $28 === === === Non-current deferred taxes: Non-current liabilities: Depreciation.................................. $31 $35 $39 === === ===
7. RELATED PARTY TRANSACTIONS The dividends payable at December 31, 1997 reflects dividends declared for the year ending December 31, 1997. These dividends were paid in 1998. The Company entered into royalty agreements with two related parties at a combined rate of 10% on gross revenue plus chargeable expenses. One of these royalty agreements expired at December 31, 1996. The second royalty agreement was modified to a rate of 4% and 2% on gross revenue plus chargeable expenses for the years ending December 31, 1997 and 1998, respectively. This royalty agreement expires December 31, 1998. The Company subcontracts employees to and from various related parties. Transactions with related parties are summarized as follows:
FOR THE YEARS ENDED FOR THE NINE DECEMBER 31, MONTHS ENDED ---------------- SEPTEMBER 30, 1996 1997 1998 Royalty expenses incurred to related parties............. $1,434 $ 602 $ 249 Revenue earned from subcontracts with related parties.... -- 2,320 4,423 Cost of revenue incurred with related parties............ 39 168 -- Reimbursement to related parties for operating expenses incurred............................................... 82 193 43
8. LOANS TO EMPLOYEES During 1997 two employees advanced a total of $242 to the Company. These loans were unsecured, interest free, due and paid in April 1998. 9. INVESTMENT Short term certificate of deposit with a bank maturing in May 1997, accruing interest at 5.04%. 10. SUBSEQUENT EVENTS The Shareholders of the Company are in negotiations to sell their shares to an unrelated third party. Substantial cost including legal and other consulting costs will be incurred in connection therewith. Management is unable to estimate the amount of these costs and no provision has been made for such costs in the accompanying statements. F-31 92 BUREAU VAN DIJK COMPUTER SERVICES, INC. BALANCE SHEET
AS OF DECEMBER 31, 1998 ------------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 347 Accounts receivable, net of bad debt allowance of $23..... 1,879 Deferred taxes............................................ 28 Other..................................................... 228 ------ Total current assets.............................. 2,482 Property and equipment, net................................. 153 Other assets................................................ 30 ------ Total assets...................................... $2,665 ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 383 Accrued compensation and benefits......................... 1,091 Income taxes.............................................. 71 Other..................................................... 70 ------ Total current liabilities......................... 1,615 Deferred taxes.............................................. 39 ------ Total liabilities................................. 1,654 ------ Commitments and contingencies Shareholders' equity: Common stock, 1,000 shares, authorized and issued with no par value.............................................. 300 Retained earnings......................................... 711 ------ Total shareholders' equity........................ 1,011 ------ Total liabilities and shareholders' equity........ $2,665 ======
F-32 93 BUREAU VAN DIJK COMPUTER SERVICES, INC. STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998 ----------------- (UNAUDITED) (IN THOUSANDS) Revenue..................................................... $14,582 Cost of revenue............................................. 9,701 ------- Gross profit.............................................. 4,881 Operating expenses.......................................... 3,821 ------- Income from operations.................................... 1,060 Interest income, net........................................ 2 ------- Income before provisions for income taxes................. 1,062 Provision for income taxes.................................. 482 ------- Net income................................................ 580 RETAINED EARNINGS -- BEGINNING.............................. 131 ------- RETAINED EARNINGS -- ENDING................................. $ 711 =======
F-33 94 BUREAU VAN DIJK COMPUTER SERVICES, INC. STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 ----------------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 580 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 55 Deferred taxes............................................ 26 Change in assets and liabilities: Accounts receivables................................... 1,134 Other assets........................................... 13 Accounts payable....................................... (273) Accrued compensation and benefits...................... (416) Income taxes........................................... (352) Other liabilities...................................... (102) ------- Net cash provided by operating activities................. 665 Cash flows from investing activities: Purchases of property and equipment....................... (63) ------- Net cash used in investing activities..................... (63) Cash flows from financing activities: Proceeds from line of credit.............................. 600 Repayments on line of credit.............................. (600) Repayments on loans from employees........................ (172) Dividends paid............................................ (587) ------- Net cash used in financing activities..................... (759) Net decrease in cash........................................ (157) Cash and cash equivalents, at beginning of period........... 504 ------- Cash and cash equivalents, at end of period................. $ 347 =======
F-34 95 [INSIDE BACK COVER] [Description of graphics: In the top left corner appears the Company's logo.] [STYLIZED TEXT:] "Harnessing the Power of Information Technology" [STYLIZED TEXT:] "Extensive Experience" [Description of graphics: A configuration of five computers, each consisting of a monitor, keyboard, and hard-drive, are connected to one line that stretches across the page. The computers are labeled: "Human Resources," "Inventory," "Payroll," "General Ledger," and "Operations."] [STYLIZED TEXT:] "Rapid ERP Implementations" [STYLIZED TEXT:] "Company of Employees" 96 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 5 Risk Factors.............................. 8 Use of Proceeds........................... 16 Dividend Policy........................... 16 Capitalization............................ 17 Dilution.................................. 18 Selected Financial Data................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 23 Business.................................. 31 Management................................ 41 Certain Transactions...................... 46 Principal and Selling Shareholders........ 48 Description of Capital Stock.............. 49 Shares Eligible for Future Sale........... 54 Underwriting.............................. 56 Legal Matters............................. 57 Experts................................... 57 Additional Information.................... 58 Index to Financial Statements............. F-1
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS 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. - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 5,000,000 SHARES CCAI LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ DONALDSON, LUFKIN & JENRETTE BANCBOSTON ROBERTSON STEPHENS LEHMAN BROTHERS MCDONALD INVESTMENTS INC. ------------------------ DLJDIRECT INC. , 1999 - ------------------------------------------------------------ - ------------------------------------------------------------ 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a list of estimated expenses to be incurred by the Company in connection with the issuance and distribution of the Common Shares being registered hereby. SEC registration fee........................................ $ 18,376 NASD filing fee............................................. 6,729 NASDAQ National Market listing fee.......................... 88,000 Printing engraving, postage and mailing costs............... 300,000 Accounting fees and expenses................................ 550,000 Legal fees and expenses..................................... 500,000 Transfer agent fees and expenses............................ 5,000 Miscellaneous expenses...................................... 31,895 ---------- Total............................................. $1,500,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Code of Regulations, consistent with that permitted by the General Corporation Law of the State of Ohio, as the same may be amended from time to time, contains provisions eliminating a director's personal liability for monetary damages resulting from certain breaches of fiduciary duty. These provisions do not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief, such as an injunction or recision, in the event of a breach of a director's fiduciary duty. These provisions will not alter a director's liability under federal securities laws. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. Section 1701.13(E) of the Ohio Revised Code provides as follows: (E)(1) A corporation may indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if he had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgement, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. (2) A corporation may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor, by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise, against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he 98 acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any of the following: (a) Any claim, issue, or matter as to which such person is adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless, and only to the extent that, the court of common pleas or the court in which such action or suit was brought determines, upon application, that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper; (b) Any action or suit in which the only liability asserted against a director is pursuant to section 1701.95 of the Revised Code. (3) To the extent that a director, trustee, officer, employee, member, manager, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in division (E)(1) or (2) of this section, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the Securities Action, suit, or proceeding. (4) Any indemnification under division (E)(1) or (2) of this section, unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, member, manager, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in division (E)(1) or (2) of this section. Such determination shall be made as follows: (a) By a majority vote of a quorum consisting of directors of the indemnifying corporation who were not and are not parties to or threatened with any such action, suit, or proceeding referred to in division (E)(1) or (2) of this section; (b) If the quorum described in division (E)(4) (a) of this section is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation or any person to be indemnified within the past five years; (c) By the shareholders; (d) By the court of common pleas or the court in which the Securities Action, suit, or proceeding referred to in division (E)(1) or (2) of this section was brought. Any determination made by the disinterested directors under division (E)(4) (a) or by independent legal counsel under division (E)(4)(b) of this section shall be promptly communicated to the person who threatened or brought the Securities Action or suit by or in the right of the corporation under division (E)(2) of this section, and within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which such action or suit was brought to review the reasonableness of such determination. (5)(a) Unless at the time of a director's act or omission that is the subject of an action, suit, or proceeding refereed to in division (E)(1) or (2) of this section, the articles or the regulations of a corporation state, by specific reference to this division, that the provisions of this division do not apply to the corporation and unless the only liability asserted against a director in an action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section is pursuant to section 1701.95 of the Revised Code, expenses, including attorney's fees, incurred by a director in defending the Securities Action, suit, or proceeding shall be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding, upon receipt of an undertaking by or on behalf of the director in which be agrees to do both of the following: (i) Repay such amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation; (ii) Reasonably cooperate with the corporation concerning the Securities Action, suit, or proceeding. 99 (b) Expenses, including attorney's fees, incurred by a director, trustee, officer, employee, member, manager, or agent in defending any action, suit, or proceeding referred to in division (E)(1) or (2) of this section, may be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding, as authorized by the directors in the specific case, upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, member, manager, or agent to repay such amount, if it ultimately is determined that he is not entitled to be indemnified by the corporation. (6) The indemnification authorized by this section shall not be exclusive of, and shall be in addition to any other rights granted to those seeking indemnification under the articles or the regulations, any agreement, a vote of shareholders or disinterested directors, or otherwise, both as to action in their official capacities and as to action in another capacity while holding their offices or positions, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, member, manager or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (7) A corporation may purchase and maintain insurance or furnish similar protection, including, but not limited to, trust funds, letters of credit, or self-insurance, on behalf of or for any person who is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager or agent of another corporation, domestic or foreign, nonprofit or for profit, limited liability company, or a partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. Insurance may be purchased from or maintained with a person in which the corporation has a financial interest. (8) The authority of a corporation to indemnify persons pursuant to division (E)(1) or (2) of this section does not limit the payment of expenses as they are incurred, indemnification, insurance, or other protection that may be provided pursuant to divisions (E)(5), (6), and (7) of this section. Divisions (E) (1) and (2) of this section do not create any obligation to repay or return payments made by the corporation pursuant to division (E)(5), (6), or (7). (9) As used in division (E) of this section, "corporation" includes all constituent entities in a consolidation or merger and the new or surviving corporation, so that any person who is or was a director, officer, employee, trustee, member, manager, or agent of such a constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee, trustee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or partnership, joint venture, trust, or other enterprise, shall stand in the same position under this section with respect to the new or surviving corporation as would if he had served the new or surviving corporation in the same capacity. Prior to the consummation of the Offering, the Company anticipates it will obtain directors' and officers' liability insurance that covers certain liabilities and expenses of the Company's directors and officers. In addition, Section 30 of the Code of Regulations provides that expenses incurred in defending a civil, criminal or administrative action, suit or proceeding will be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. No securities of the Company, which were not registered under the Securities Act, have been issued or sold by the Company within the past three years, except as follows: (a) On October 15, 1997 the Company sold to TA Investors 243,246 shares of Convertible Preferred Stock for an aggregate purchase price of approximately $17 million, and 1,311,430 shares of Common Stock for an aggregate purchase price of approximately $1,311. These transactions were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Section 4(2) of the Securities Act. (b) On October 15, 1997 the Company sold to McDonald Investors 7,154 shares of Convertible Preferred Stock for an aggregate purchase price of approximately $500,000, and 38,570 shares of Common 100 Stock for an aggregate purchase price of approximately $38. These transactions were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Section 4(2) of the Securities Act. (c) Pursuant to the terms of the 1998 Warrant Agreements, on April 3, 1998 the Company granted the Warrant Holders the right to purchase an aggregate of 195,264 shares of Common Stock at an exercise price of $0.001 per share. Upon consummation of the Offering, the KLA Warrants will be exercisable. These transactions were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Section 4(2) of the Securities Act. (d) Pursuant to the terms of the Option Agreements , on April 3, 1998 the Company granted employees of the Company previously employed by KLA options to purchase an aggregate of 64,700 shares of Common Stock at an exercise price of $0.001 per share. Upon the consummation of the Offering, the KLA Options will be exercisable. These transactions were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Rule 701 promulgated under the Securities Act. (e) On May 11, 1998, the Company issued Paul A. Farmer 76,950 shares of restricted Common Stock under the 1997 Equity and Performance Plan. On each anniversary of the grant date, one third of Mr. Farmer's restricted stock will vest. Mr. Farmer paid the purchase price for the restricted stock by executing and delivering to the Company a promissory note in the principal amount of $359,356. The note is due and payable on May 11, 2004, and accrues interest on unpaid principal at 6% per annum until paid in full. These transactions were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Rule 701 promulgated under the Securities Act. (f) On May 11, 1998, the Company granted options to purchase 320,200 shares of Common Stock under the 1997 Equity and Performance Plan. These options vest 20% each year over a five-year period. These transactions were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Rule 701 promulgated under the Securities Act. (g) In connection with the purchase of BVD, on January 12, 1999, the Company issued Luc P. De Groof 300,000 shares of restricted Common Stock. On each anniversary of the date of grant, one half of Mr. De Groof's restricted stock will vest. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. The following Exhibits are filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 1 Form of Underwriting Agreement between the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BancBoston Robertson Stephens and McDonald Investments Inc. 3.1 Second Amended and Restated Articles of Incorporation of the Company. 3.2* Amended and Restated Code of Regulations of the Company. 5 Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being offered. 10.1* Employment Agreement, dated April 3, 1998, between the Company and Ronnie Crumpler. 10.2* Employment Agreement, dated April 3, 1998, between the Company and Gary Levey. 10.3* Form of Employment Agreement, among the Company and certain employees previously employed by Kelly-Levey & Assoc., Inc. 10.4* Noncompetition Agreement, dated April 3, 1998, between the Company and Anthony Kelly. 10.5* Employment Agreement, dated April 23, 1998, between the Company and Paul A. Farmer. 10.6* Restricted Stock Agreement, dated May 11, 1998, between the Company and Paul A. Farmer. 10.7* Form of Warrant Agreement, between the Company and Ronnie Crumpler. 10.8* Form of Warrant Agreement, between the Company and Gary Levey. 10.9* Form of Warrant Agreement, between the Company and Anthony Kelly.
101
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 10.10* Warrant Escrow Agreement, dated April 3, 1998, among the Company and Ronnie Crumpler, Gary Levey and Anthony Kelly. 10.11* Form of Option Agreement, among the Company and certain employees previously employed by Kelly-Levey & Assoc., Inc. 10.12* Kelly-Levey & Assoc., Inc. Retention Incentive Bonus Plan, dated April 3, 1998. 10.13* Form of Retention Incentive Bonus Plan Agreement 1998, among certain former employees, Kelly-Levey & Assoc., Inc. and the Company. 10.14* Retention Incentive Bonus Plan Escrow Agreement, dated April 3, 1998, among the Company and Kelly-Levey & Assoc., Inc, Burke & Company, P.L.L. (as representative of the shareholders), Anthony Kelly, Gary Levey, Ronnie Crumpler, Trevor Montgomery, Rob Petersen and Don Kirby. 10.15* Earnout Agreement, dated April 3, 1998, among the Company, Kelly-Levey & Assoc., Inc., Anthony Kelly, Gary Levey and Ronnie Crumpler. 10.16* Earnout Escrow Agreement as amended, dated April 3, 1998, among the Company, Kelly-Levey & Assoc., Burke & Company, P.L.L. (as representative of the shareholders), Anthony Kelly, Gary Levey and Ronnie Crumpler. 10.17* 1997 Stock Purchase and Shareholders Agreement, dated October 15, 1997, among the Company, Annette M. Canitano, Nicholas A. Canitano, Karen M. Conley, Kenneth L. Conley, NAC Enterprises, Inc., CKCK Enterprises, Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M. Conley Charitable Remainder Trust, TA/Advent VIII L.P., Advent Atlantic and Pacific III L.P., TA Venture Investors Limited Partnership, Kenneth T. Schiciano, A. Bruce Johnston, McDonald & Company Securities, Inc., McD Venture Capital Fund, L.P. and GHK Investments, L.L.C. 10.18* Form of the Company's Incentive Stock Option Agreement. 10.19* Amended and Restated Share Redemption and Purchase Agreement, dated July 1, 1997, among the Company, Karen M. Conley, Nicholas A. Canitano, Annette Canitano and Joseph Minadeo. 10.20* Agreement, dated October 15, 1997, among the Company, Annette M. Canitano, Nicholas A. Canitano, Karen M. Conley, Kenneth L. Conley, NAC Enterprises, Inc., CKCK Enterprises, Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M. Conley Charitable Remainder Trust, TA/Advent VIII, L.P., Advent Atlantic and Pacific L.P., TA Venture Investors Limited Partnership, Kenneth T. Schiciano, A. Bruce Johnston, McDonald & Company Securities, Inc., McD Venture Capital Fund, L.P., GHK Investments, L.L.C. and Joseph Minadeo. 10.21* Stock Redemption Agreement, dated October 15, 1997, between the Company and NAC Enterprises, Inc. 10.22* Stock Redemption Agreement, dated October 15, 1997, between the Company and CKCK Enterprises, Inc. 10.23* Stock Redemption Agreement, dated October 15, 1997, between the Company and Kenneth L. Conley Charitable Remainder Trust. 10.24* Stock Redemption Agreement, dated October 15, 1997, between the Company and Karen M. Conley Charitable Remainder Trust. 10.25* The Company's 1997 Equity and Performance Incentive Plan, dated October 15, 1997. 10.26* First Amendment to the Company's Equity and Performance Incentive Plan, dated July 21, 1998. 10.27* The Company's Amended and Restated 401(k) Plan and Trust, dated December 2, 1996. 10.28* First Amendment to the Company's 401(k) Plan and Trust, dated December 18, 1997. 10.29* Amendment No. 2 to the Company's 401(k) Plan and Trust, dated May 29, 1998. 10.30* The Company's Employee Stock Purchase Plan, dated December 21, 1998. 10.31 The Restated and Amended Loan Agreement, dated January 12, 1999, between the Company and Fleet National Bank. 10.32* Lease Agreement, as amended, dated January 3, 1997, between the Company and Place Renaissance, Ltd.
102
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 10.33* R-3 National Implementation Partner Agreement, as amended, dated April 2, 1996, between the Company and SAP America, Inc. 10.34* Oracle Alliance Agreement, dated March 4, 1998, between the Company and Oracle Corporation. 10.35* Form of Indemnification Agreement for directors and officers. 10.36* Amendment to Amended and Restated Share Redemption and Purchase Agreement, dated October 13, 1997, among the Company, Karen M. Conley, Nicholas A. Canitano, Annette M. Canitano and Joseph Minadeo. 10.37* Second Amendment to the Company's 1997 Equity and Performance Incentive Plan, dated December 21, 1998. 10.38* Stock Purchase Agreement, dated January 12, 1999, between the Company and Luc De Groof. 23.1 Consent of Jones, Day, Reavis & Pogue (included with Exhibit 5). 23.2 Consent of PricewaterhouseCoopers LLP. 23.3 Consent of Langford de Kock & Co. 24* Powers of Attorney.
- --------------- * Previously filed. ** To be filed by amendment. (b) Financial Statement Schedules All financial statement schedules are omitted because they are either not applicable or the required information is included in the financial statements or notes thereto appearing elsewhere in this Registration Statement. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the Closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company 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 Company 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. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as a part of this registration statement in reliance upon Rule 430A and contained in form of prospectus filed by the registrant 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. (2) 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 that time shall be deemed to be the initial bona fide offering thereof. 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment No. 5 to the Registration Statement to be signed on its behalf by the undersigned, thereunder duly authorized, in the City of Cleveland, State of Ohio, on March 1, 1999. CONLEY, CANITANO & ASSOCIATES, INC. By: /s/ PAUL A. FARMER* ------------------------------------ Paul A. Farmer Chief Financial Officer and Vice President Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 5 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President, Chief Operating Officer and March 1, 1999 - --------------------------------------------- Director Kenneth L. Conley /s/ PAUL A. FARMER Chief Financial Officer and Vice March 1, 1999 - --------------------------------------------- President (Principal Accounting and Paul A. Farmer Financial Officer) * Executive Vice President, Treasurer and March 1, 1999 - --------------------------------------------- Director Karen M. Conley * Executive Vice President, Secretary and March 1, 1999 - --------------------------------------------- Director Annette M. Canitano * Chief Executive Officer, Chairman of the March 1, 1999 - --------------------------------------------- Board and Director (Principal Executive Nicholas A. Canitano Officer) * Director March 1, 1999 - --------------------------------------------- Kenneth T. Schiciano * Director March 1, 1999 - --------------------------------------------- A. Bruce Johnston * Director March 1, 1999 - --------------------------------------------- Ivan J. Winfield
* The undersigned by signing his name hereto, does sign and execute this Amendment No. 5 to the Registration Statement pursuant to the Powers of Attorney executed by the above-named officers and directors of the Company and which have been filed with the Securities and Exchange Commission on behalf of such officers and directors. By: /s/ PAUL A. FARMER --------------------------------------------------------- Paul A. Farmer as Attorney-in-Fact 104 EXHIBIT INDEX
PAGINATION BY SEQUENTIAL EXHIBIT NUMBERING NUMBER DESCRIPTION OF DOCUMENT SYSTEM 1 Form of Underwriting Agreement between the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BancBoston Robertson Stephens and McDonald Investments Inc. 3.1 Second Amended and Restated Articles of Incorporation of the Company. 3.2* Amended and Restated Code of Regulations of the Company. 5 Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being offered. 10.1* Employment Agreement, dated April 3, 1998, between the Company and Ronnie Crumpler. 10.2* Employment Agreement, dated April 3, 1998, between the Company and Gary Levey. 10.3* Form of Employment Agreement, among the Company and certain employees previously employed by Kelly-Levey & Assoc., Inc. 10.4* Noncompetition Agreement, dated April 3, 1998, between the Company and Anthony Kelly. 10.5* Employment Agreement, dated April 23, 1998, between the Company and Paul A. Farmer. 10.6* Restricted Stock Agreement, dated May 11, 1998, between the Company and Paul A. Farmer. 10.7* Form of Warrant Agreement, between the Company and Ronnie Crumpler. 10.8* Form of Warrant Agreement, between the Company and Gary Levey. 10.9* Form of Warrant Agreement, between the Company and Anthony Kelly. 10.10* Warrant Escrow Agreement, dated April 3, 1998, among the Company and Ronnie Crumpler, Gary Levey and Anthony Kelly. 10.11* Form of Option Agreement, among the Company and certain employees previously employed by Kelly-Levey & Assoc., Inc. 10.12* Kelly-Levey & Assoc., Inc. Retention Incentive Bonus Plan, dated April 3, 1998. 10.13* Form of Retention Incentive Bonus Plan Agreement 1998, among certain former employees, Kelly-Levey & Assoc., Inc. and the Company. 10.14* Retention Incentive Bonus Plan Escrow Agreement, dated April 3, 1998, among the Company and Kelly-Levey & Assoc., Inc, Burke & Company, P.L.L. (as representative of the shareholders), Anthony Kelly, Gary Levey, Ronnie Crumpler, Trevor Montgomery, Rob Petersen and Don Kirby. 10.15* Earnout Agreement, dated April 3, 1998, among the Company, Kelly-Levey & Assoc., Inc., Anthony Kelly, Gary Levey and Ronnie Crumpler. 10.16* Earnout Escrow Agreement as amended, dated April 3, 1998, among the Company, Kelly-Levey & Assoc., Burke & Company, P.L.L. (as representative of the shareholders), Anthony Kelly, Gary Levey and Ronnie Crumpler. 10.17* 1997 Stock Purchase and Shareholders Agreement, dated October 15, 1997, among the Company, Annette M. Canitano, Nicholas A. Canitano, Karen M. Conley, Kenneth L. Conley, NAC Enterprises, Inc., CKCK Enterprises, Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M. Conley Charitable Remainder Trust, TA/Advent VIII L.P., Advent Atlantic and Pacific III L.P., TA Venture Investors Limited Partnership, Kenneth T. Schiciano, A. Bruce Johnston, McDonald & Company Securities, Inc., McD Venture Capital Fund, L.P. and GHK Investments, L.L.C. 10.18* Form of the Company's Incentive Stock Option Agreement. 10.19* Amended and Restated Share Redemption and Purchase Agreement, dated July 1, 1997, among the Company, Karen M. Conley, Nicholas A. Canitano, Annette Canitano and Joseph Minadeo.
105 EXHIBIT INDEX -- CONTINUED
PAGINATION BY SEQUENTIAL EXHIBIT NUMBERING NUMBER DESCRIPTION OF DOCUMENT SYSTEM 10.20* Agreement, dated October 15, 1997, among the Company, Annette M. Canitano, Nicholas A. Canitano, Karen M. Conley, Kenneth L. Conley, NAC Enterprises, Inc., CKCK Enterprises, Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M. Conley Charitable Remainder Trust, TA/Advent VIII, L.P., Advent Atlantic and Pacific L.P., TA Venture Investors Limited Partnership, Kenneth T. Schiciano, A. Bruce Johnston, McDonald & Company Securities, Inc., McD Venture Capital Fund, L.P., GHK Investments, L.L.C. and Joseph Minadeo. 10.21* Stock Redemption Agreement, dated October 15, 1997, between the Company and NAC Enterprises, Inc. 10.22* Stock Redemption Agreement, dated October 15, 1997, between the Company and CKCK Enterprises, Inc. 10.23* Stock Redemption Agreement, dated October 15, 1997, between the Company and Kenneth L. Conley Charitable Remainder Trust. 10.24* Stock Redemption Agreement, dated October 15, 1997, between the Company and Karen M. Conley Charitable Remainder Trust. 10.25* The Company's 1997 Equity and Performance Incentive Plan, dated October 15, 1997. 10.26* First Amendment to the Company's Equity and Performance Incentive Plan, dated July 21, 1998. 10.27* The Company's Amended and Restated 401(k) Plan and Trust, dated December 2, 1996. 10.28* First Amendment to the Company's 401(k) Plan and Trust, dated December 18, 1997. 10.29* Amendment No. 2 to the Company's 401(k) Plan and Trust, dated May 29, 1998. 10.30* The Company's Employee Stock Purchase Plan, dated December 21, 1998. 10.31 The Restated and Amended Loan Agreement, dated January 12, 1999, between the Company and Fleet National Bank. 10.32* Lease Agreement, as amended, dated January 3, 1997, between the Company and Place Renaissance, Ltd. 10.33* R-3 National Implementation Partner Agreement, as amended, dated April 2, 1996, between the Company and SAP America, Inc. 10.34* Oracle Alliance Agreement, dated March 4, 1998, between the Company and Oracle Corporation. 10.35* Form of Indemnification Agreement for directors and officers. 10.36* Amendment to Amended and Restated Share Redemption and Purchase Agreement, dated October 13, 1997, among the Company, Karen M. Conley, Nicholas A. Canitano, Annette M. Canitano and Joseph Minadeo. 10.37* Second Amendment to the Company's 1997 Equity and Performance Incentive Plan, dated December 21, 1998. 10.38* Stock Purchase Agreement, dated January 12, 1999, between the Company and Luc De Groof. 23.1 Consent of Jones, Day, Reavis & Pogue (included with Exhibit 5). 23.2 Consent of PricewaterhouseCoopers LLP. 23.3 Consent of Langford de Kock & Co. 24* Powers of Attorney.
- --------------- * Previously filed. ** To be filed by amendment. EX-1 2 EXHIBIT 1 1 Exhibit 1 __________ Shares(1) CONLEY, CANITANO & ASSOCIATES, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- February ___, 1999 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BANCBOSTON ROBERTSON STEPHENS LEHMAN BROTHERS INC. MCDONALD INVESTMENTS INC. As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: Conley, Canitano & Associates, Inc., an Ohio corporation (the "COMPANY"), proposes to issue and sell to the several underwriters named in Schedule I hereto (the "UNDERWRITERS"), and certain shareholders of the Company named in Schedule II hereto (the "SELLING SHAREHOLDERS") severally and not jointly propose to sell to the several Underwriters, an aggregate of _______________ shares of the common stock, no par value, of the Company (the "FIRM SHARES"), of which _____________ shares are to be issued and sold by the Company and _____________ shares are to be sold by the Selling Shareholders, each Selling Shareholders selling the amount set forth opposite such Selling Shareholder's name in Schedule II hereto. The Company and the Selling Shareholders set forth on Schedule III hereto (the "PARTICIPATING SELLING Shareholders") also propose to sell to the several Underwriters not more than an additional _______ shares of the Company's common stock, no par value, (the "ADDITIONAL SHARES") if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "SHARES". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". The Company, the Selling Shareholders and the Participating Selling Shareholders are hereinafter sometimes referred to collectively as the "SELLERS." - --------------- (1)Insert number of shares to be sold (not including green shoe). 2 SECTION 1. Registration Statement and Prospectus. 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 "ACT"), a registration statement on Form S-1, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS". If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) the Company agrees to issue and sell ______________ Firm Shares, (ii) each Selling Shareholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite such Selling Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase from each Seller at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Firm Shares to be sold by the Company and the Selling Shareholders, respectively, as the number of Firm Shares set forth opposite the name of such Underwriter in Schedules I hereto bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company and each Participating Selling Shareholder agrees, severally and not jointly, to sell, and the Underwriters shall have the right to purchase, severally and not jointly, up to __________ Additional Shares from the Company and the Participating Selling Shareholders at the Purchase Price. Of the total number of Additional Shares to be purchased by the Underwriters, eighty percent (80%), of the total number of such Additional Shares are to be purchased from the Participating Selling Shareholders, on a pro rata basis, and 20% of the total number of such Additional Shares are to be purchased from the Company. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. In the event that any Participating Selling Shareholder fails to sell the Additional Shares to the Underwriters as herein set forth, then the Company hereby agrees to sell such Additional Shares to the Underwriters. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company, the Attorneys and the Custodian (as 2 3 defined in Section 7(c) below) within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company and the Participating Selling Shareholders, respectively, the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise), except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such period (i) the Company may grant stock options pursuant to the Company's existing stock option plan, (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and (iii) the Company may issue shares of Common Stock to securities holders of companies acquired in exchange for securities of such companies, provided that such securities holders agree to the foregoing restrictions. The Company also agrees not to file any registration statement under the Act with respect to any shares 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 the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, other than S-8 registration statements with respect to executive or director compensation plans. In addition, each Selling Shareholder and Participating Selling Shareholder agrees that, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by (i) each Selling Shareholder and Participating Selling Shareholder, (ii) each of the directors and officers of the Company who is not a Selling Shareholder and (iii) each 3 4 stockholder listed on Annex I hereto to the effect that such person will not, during the period commencing on the date such person signs such agreement and ending 180 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in any of the transactions described in the first sentence of this paragraph or (B) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. SECTION 3. Terms of Public Offering. The Sellers are advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. SECTION 4. Delivery and Payment. The Shares shall be represented by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request no later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Shares shall be delivered by or on behalf of the Sellers, with any transfer taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Sellers of the Purchase Price therefore by wire transfer of Federal or other funds immediately available in New York City. The certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be, at the office of DTC or its designated custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time, on February ___, 1999 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery and payment for the Firm Shares are hereinafter referred to as the "CLOSING DATE". The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery and payment for any Additional Shares are hereinafter referred to as the "OPTION CLOSING DATE". The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 9 of this Agreement shall be delivered at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New York, New York 10019 and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. 4 5 SECTION 5. Agreements of the Company. The Company agrees with you: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to you five (5) signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) To furnish as soon as practicable, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. 5 6 (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the reasonable opinion of counsel for the Underwriters, it becomes 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, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may reasonably request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To mail and make generally available to its shareholders as soon as practicable an earnings statement covering the twelve-month period ending September 30, 1999 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three (3) years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the Sellers' obligations under this Agreement, including without limitation: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and, to the extent obligated to do so under existing agreements, any counsel to the Selling Shareholders and 6 7 Participating Selling Shareholders (in addition to the Company's counsel), in connection with the registration and delivery of the Shares under the Act and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) all reasonable expenses, if any, in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and fees and disbursements of counsel, if any, for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (v) the filing fees and disbursements of counsel for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to designating the Shares for quotation on the Nasdaq National Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depositary, and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder. The Selling Shareholders and the Participating Selling Shareholders shall bear all costs and expenses incident to the performance of their obligations hereunder for which provision is not otherwise made in this Section, except to the extent the Company is obligated to pay such costs and expenses under any existing shareholder agreement. The provisions of this Section shall not supersede or otherwise affect any agreement that the Company and the Selling Shareholders and the Participating Selling Shareholders may otherwise have for allocation of costs and expenses among themselves. (j) To use its best efforts to designate for quotation the Shares on the Nasdaq National Market and to maintain the designation for quotation of the Shares on the Nasdaq National Market for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in 7 8 compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. SECTION 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, 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 not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iii) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) 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 not misleading and (B) will comply in all material respects with the Act and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) 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 Act, complied when so filed in all material respects with the Act, and did 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, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this 8 9 paragraph do not apply to statements or omissions in any preliminary prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (e) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company or any of its subsidiaries relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company or any of its subsidiaries, except as otherwise disclosed in the Registration Statement. (f) All the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Shareholders and the Participating Selling Shareholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) All of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. (h) The authorized capital stock of the Company conforms, in all material requests, as to legal matters to the description thereof contained in the Prospectus. (i) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, except for such violations or defaults which, singly or in the aggregate, would not have a material adverse effect on the 9 10 business, operating results or financial condition of the Company and its subsidiaries, taken as whole. (j) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as have been obtained under the Act and the Securities Exchange Act of 1934 (the "Exchange Act") and as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, except for such breaches or defaults which, singly or in the aggregate, would not have a material adverse effect on the business, operating results or financial condition of the Company and its subsidiaries, taken as a whole, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (iv) result in the suspension, termination or revocation of any Authorization (as defined below) of the Company or any of its subsidiaries or any other impairment of the rights of the holder of any such Authorization, except for such suspensions, terminations or revocations which, singly or in the aggregate, would not have material adverse effect on the business, operating results or financial condition of the Company and its subsidiaries, taken as a whole. (k) There are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or to which any of their respective property is subject, nor are any such proceedings threatened that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (l) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. 10 11 (m) Each of the Company and its subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. Each such Authorization is valid and in full force and effect and each of the Company and its subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (n) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (o) This Agreement has been duly authorized, executed and delivered by the Company. (p) Each of Pricewaterhouse Coopers LLP and Langdorf de Kock & Co. are independent public accountants with respect to the Company and its subsidiaries as required by the Act. (q) The consolidated financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as 11 12 disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (r) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (s) Except as otherwise disclosed in the Registration Statement, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (t) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent. (u) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida). (v) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. (w) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, taken as a whole, 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 interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the 12 13 Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, taken as a whole, in each case except as described in the Prospectus. (x) The Company and its subsidiaries own, or possess valid and enforceable licenses to all patents, patent rights, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by the Company and its subsidiaries in connection with the business now operated by them , except where the failure to own or possess such Intellectual Property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. Neither the Company, nor its subsidiaries, has received any notice, nor are they aware of facts which would form a reasonable basis for any such claim, that: (i) challenges the Company's or its subsidiaries' rights in or to any Intellectual Property; (ii) challenges the validity or scope of any Intellectual Property; (iii) any third party has or will be able to establish any rights in the Intellectual Property, except for the ownership rights of the owners of the Intellectual Property which is licensed to the Company or the rights of parties to whom the Company has granted licenses of such Intellectual Property; (iv) the Intellectual Property infringes or otherwise violates any patent, copyright, trade secret, trademark or other proprietary right of any third party; or (v) there is infringement of the Intellectual Property by any third party, which, in the case of any such claim specified in clauses (i), (ii), (iii), (iv) or (v) above, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (y) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any of its subsidiaries (i) has received notice from any insurer or agent of such insurer that substantial capital improvements or other material expenditures will have to be made in order to continue such insurance or (ii) has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not have a material adverse effect on the business, prospects, financial conditions or results of operations of the Company and its subsidiaries, taken as a whole. (z) No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, shareholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, which is required by the Act to be described in the Registration Statement or the Prospectus which is not so described. 13 14 (aa) There is no (i) significant unfair labor practice complaint, grievance or arbitration proceeding pending or, to the Company's best knowledge, threatened against the Company or any of its subsidiaries before the National Labor Relations Board or any state or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending or, to the Company's best knowledge, threatened against the Company or any of its subsidiaries or (iii) union representation question existing with respect to the employees of the Company and its subsidiaries, except for such actions specified in clause (i), (ii) or (iii) above, which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. To the best of the Company's knowledge, no collective bargaining organizing activities are taking place with respect to the Company or any of its subsidiaries. (bb) The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (cc) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. SECTION 7. Representations and Warranties of the Selling Shareholders and the Participating Selling Shareholders. Each Selling Shareholder and Participating Selling Shareholder, severally and not jointly, represents and warrants to each Underwriter that: (a) Such shareholder is the lawful owner of the Shares to be sold by such shareholder pursuant to this Agreement and has, and on the Closing Date will have, good and valid title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever. (b) The Shares to be sold by such shareholder have been duly authorized and are validly issued, fully paid and non-assessable. (c) Such shareholder has, and on the Closing Date will have, full legal right, power and authority, and all authorization and approval required by law, to 14 15 enter into this Agreement, the Custody Agreement signed by such shareholder and ____________________, as Custodian, relating to the deposit of the Shares to be sold by such shareholder (the "CUSTODY AGREEMENT") and the Power of Attorney of such shareholder appointing certain individuals as such shareholder's attorneys-in-fact (the "ATTORNEYS") to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY") and to sell, assign, transfer and deliver the Shares to be sold by such shareholder in the manner provided herein and therein. (d) This Agreement has been duly authorized, executed and delivered by or on behalf of such shareholder. (e) The Custody Agreement of such shareholder has been duly authorized, executed and delivered by such shareholder and is a valid and binding agreement of such shareholder, enforceable in accordance with its terms. (f) The Power of Attorney of such shareholder has been duly authorized, executed and delivered by such shareholder and is a valid and binding instrument of such shareholder, enforceable in accordance with its terms, and, pursuant to such Power of Attorney, such shareholder has, among other things, authorized the Attorneys, or any one of them, to execute and deliver on such shareholder's behalf this Agreement and any other document that they, or any one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such shareholder pursuant to this Agreement. (g) Upon delivery of and payment for the Shares to be sold by such shareholder pursuant to this Agreement, good and valid title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever. (h) The execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney of such shareholder by or on behalf of such shareholder, the compliance by such shareholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such shareholder, if such shareholder is not an individual, or any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such shareholder is a party or by which such shareholder or any property of such shareholder is bound or (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over such shareholder or any property of such shareholder. 15 16 (i) The information in the Registration Statement under the caption "Principal and Selling Shareholders" which specifically relates to such shareholder does not, and will not on the Closing Date, 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, in the light of the circumstances under which they were made, not misleading. (j) At any time during the period described in Section 5(d), if there is any change in the information referred to in Section 7(i), such shareholder will immediately notify you of such change. (k) Each certificate signed by or on behalf of such shareholder and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by such shareholder to the Underwriters as to the matters covered thereby. SECTION 8. Indemnification. (a) The Sellers, severally and not jointly, agree to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement 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, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter who failed to deliver a Prospectus (as then amended or supplemented, provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages and liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in 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, if such material misstatement or omission or alleged material misstatement or omission was cured in such Prospectus and such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person; provided, further, however, that each Selling Shareholder and Participating Selling Shareholder shall only be liable to the extent, and only to the extent, that such untrue statement or alleged untrue 16 17 statement or omission or alleged omission was made in the Registration Statement (or any amendment thereto), the prospectus (or any amendment or supplement thereto) or any preliminary prospectus in reliance upon and in conformity with written information furnished to the Company by such Selling Shareholder or Participating Selling Shareholder, as the case may be, expressly for use therein. Notwithstanding the foregoing, the aggregate liability of any Selling Shareholder and Participating Selling Shareholder pursuant to this Section 8(a) shall be limited to an amount equal to the total proceeds (before deducting underwriting discounts and commissions and expenses) received by such Selling Shareholder or Participating Selling Shareholder, as the case may be, from the Underwriters for the sale of the Shares sold by such Selling Shareholder or Participating Selling Shareholder, as the case may be, hereunder. (b) 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, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling Shareholder and Participating Selling Shareholder and each person, if any, who controls such Selling Shareholder or Participating Selling Shareholder, as the case may be, within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Sellers to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional 17 18 to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for (i) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Underwriters, their officers and directors and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and all persons, if any, who control the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Selling Shareholders and Participating Selling Shareholders and all persons, if any, who control any Selling Shareholder or Participating Selling Shareholder, as the case may be, within the meaning of either such Section, and all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters, their officers and directors and such control persons of any Underwriters, such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such separate firm for the Company and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders or Participating Selling Shareholders, as the case may be, and such control persons of any Selling Shareholder or Participating Selling Shareholder, such firm shall be designated in writing by the Attorneys. The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. 18 19 (d) To the extent the indemnification provided for in this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each 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 judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Sellers on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 8(d)(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 8(d)(i) above but also the relative fault of the Sellers on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting expenses) received by the Sellers, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Sellers 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, the Selling Shareholders or the Participating Selling Shareholders on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Sellers and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments 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 party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Underwriter shall 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 which such Underwriter 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 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to 19 20 contribute pursuant to this Section 8(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The remedies provided for in this Section 8 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. (f) Each Selling Shareholder and Participating Selling Shareholder hereby designates Conley, Canitano & Associates, Inc., CCAi Renaissance Centre, 5800 Landerbrook Drive, Mayfield Heights, OH 44224, as its authorized agent, upon which process may be served in any action which may be instituted in any state or federal court in the State of New York by any Underwriter, any director or officer of any Underwriter or any person controlling any Underwriter asserting a claim for indemnification or contribution under or pursuant to this Section 8, and each Selling Shareholder and Participating Selling Shareholder will accept the jurisdiction of such court in such action, and waives, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any such process shall be sent or given to such Selling Shareholder or Participating Selling Shareholder, at the address for notices specified in Section 12 hereof. SECTION 9. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or known to be contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by Nicholas Canitano and Kenneth Conley, in their capacities as the Chairman and Chief Executive Officer and the President and Chief Operating Officer Company, confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and that the Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall 20 21 not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) All the representations and warranties of each Selling Shareholder and the Participating Selling Shareholder contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date and you shall have received on the Closing Date a certificate dated the Closing Date from each Selling Shareholder and the Participating Selling Shareholder to such effect and to the effect that such Selling Shareholder and the Participating Selling Shareholder has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by such Selling Shareholder and the Participating Selling Shareholder on or prior to the Closing Date. (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Jones, Day, Reavis & Pogue counsel for the Company, to the effect that: (i) the Company is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to own or lease its properties and to conduct its business as described in the Prospectus; (ii) the Company is duly qualified and is in good standing as a foreign corporation authorized to do business in each of the states of __________, __________ and __________; (iii) all the issued and outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Shareholders and the Participating Selling Shareholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; (iv) the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment of the consideration therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; 21 22 (v) all of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (vi) this Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company; (vii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (viii) the Registration Statement has become effective under the Act, and to the best of such counsel's knowledge and after due inquiry, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, pending before or threatened by the Commission; (ix) the statements under the captions "Risk Factors - Government Regulation of Immigration", "Risk Factors - Certain Anti-Takeover Effects", "Risk Factors Shares Eligible for Future Sale; Registration Rights Agreement", "Management-Employee Benefit Plans", "Certain Transactions", "Description of Capital Stock", "Shares Eligible for Future Sale" and "Underwriting" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements purport to summarize the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (x) neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge after due inquiry, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement. (xi) neither the execution and delivery of this Agreement by the Company, nor the compliance by the Company with all the provisions hereof and the performance of the transactions herein contemplated will (A) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the Company's Second Amended and Restated Articles of Incorporation or Amended and Restated Code of Regulations or the charter or by-laws of any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is required to be described in the Registration Statement or the Prospectus or 22 23 to be filed as an exhibit to the Registration Statement or (B) result in a violation of or conflict with any statute or regulation or, to such counsel's knowledge after due inquiry, any judgment, order or decree of any U.S. court or governmental authority binding upon the Company or its subsidiaries or their respective property. (xii) no consent, approval, authorization or order of any governmental agency or body is required for the issuance or sale by the Company of the Shares except such as have been obtained under the Act and such as may be required under foreign or state securities or Blue Sky laws in connection with the purchase and distribution of the Shares as contemplated hereunder; (xiii) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or could be a party or to which any of their respective property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xiv) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" or a company "controlled" by an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xv) to the best of such counsel's knowledge after due inquiry, except as disclosed in the Registration Statement, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement; and (xvi) the Registration Statement and the Prospectus and any supplement or amendment thereto (except for the financial statements, financial schedules and other financial data included therein and the information referred to under the caption "Experts" as having been included therein on the authority of the experts named therein, as to which no opinion need be expressed) comply as to form with the Act. 23 24 In addition, such counsel shall state that (A) such counsel has no reason to believe that at the time the Registration Statement became effective or on the date of this Agreement, the Registration Statement and the prospectus included therein (except for the financial statements, financial data and other financial data and the information referred to under the caption "Experts" as having been included therein on the authority of the experts named therein, as to which such counsel need not express any belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and (B) such counsel has no reason to believe that the Prospectus, as amended or supplemented, if applicable (except for the financial statements and other financial data, as aforesaid) contains any untrue statement of a material fact 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; The opinion of Jones, Day, Reavis & Pogue, described in Section 9(f) above shall be rendered to you at the request of the Company and shall state so therein. (g) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of (i) Goodwin, Proctor & Hoar, LLP, (ii) Calfee, Halter & Griswold LLP and (iii) Keating, Muethiny & Klekamp, P.L.L., counsel for the Selling Shareholders identified on Schedule II hereto to the effect that: (i) each such Selling Shareholder is the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement and has good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever; (ii) each such Selling Shareholder has full legal right, power and authority, and all authorization and approval required by law, to enter into this Agreement and the Custody Agreement and the Power of Attorney of such Selling Shareholder and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder in the manner provided herein and therein; (iii) this Agreement has been duly authorized, executed and delivered by or on behalf of each such Selling Shareholder; the Custody Agreement of each such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder; and each such agreement is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms; (iv) the Power of Attorney of each such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder, enforceable in accordance with its terms, and, pursuant to such Power of 24 25 Attorney, such Selling Shareholder has, among other things, authorized the Attorneys, or any one of them, to execute and deliver on such Selling Shareholder's behalf this Agreement and any other document they, or any one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Selling Shareholder pursuant to this Agreement; (v) upon delivery of and payment for the Shares to be sold by each Selling Shareholder pursuant to this Agreement, good and clear title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever; and (vi) the execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney of each Selling Shareholder by such Selling Shareholder, the compliance by such Selling Shareholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such Selling Shareholder, if such Selling Shareholder is not an individual, or any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Selling Shareholder is a party or by which any property of such Selling Shareholder is bound or (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over such Selling Shareholder or any property of such Selling Shareholder. The opinions described in Section 9(g) above shall be rendered to you at the request of the Selling Shareholders and shall so state therein. (h) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Goodwin, Proctor & Hoar, LLP and Calfee, Halter & Griswold LLP, counsel for the Participating Selling Shareholders identified on Schedule III hereto, to the effect that: (i) each such Participating Selling Shareholder is the lawful owner of the Shares to be sold by such Participating Selling Shareholder pursuant to this Agreement and has good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever; (ii) each such Participating Selling Shareholder has full legal right, power and authority, and all authorization and approval required by 25 26 law, to enter into this Agreement and the Custody Agreement and the Power of Attorney of such Participating Selling Shareholder and to sell, assign, transfer and deliver the Shares to be sold by such Participating Selling Shareholder in the manner provided herein and therein; (iii) this Agreement has been duly authorized, executed and delivered by or on behalf of each such Participating Selling Shareholder; the Custody Agreement of each such Participating Selling Shareholder has been duly authorized, executed and delivered by such Participating Selling Shareholder; and each such agreement is a valid and binding agreement of such Participating Selling Shareholder, enforceable in accordance with its terms; (iv) the Power of Attorney of each such Participating Selling Shareholder has been duly authorized, executed and delivered by such Participating Selling Shareholder and is a valid and binding instrument of such Participating Selling Shareholder, enforceable in accordance with its terms, and, pursuant to such Power of Attorney, such Participating Selling Shareholder has, among other things, authorized the Attorneys, or any one of them, to execute and deliver on such Participating Selling Shareholder's behalf this Agreement and any other document they, or any one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Participating Selling Shareholder pursuant to this Agreement; (v) upon delivery of and payment for the Shares to be sold by each Participating Selling Shareholder pursuant to this Agreement, good and clear title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever; and (vi) the execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney of each Participating Selling Shareholder by such Participating Selling Shareholder, the compliance by such Participating Selling Shareholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such Participating Selling Shareholder, if such Participating Selling Shareholder is not an individual, or any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Participating Selling Shareholder is a party or by which any property of such Participating Selling Shareholder is bound or (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or 26 27 agency having jurisdiction over such Participating Selling Shareholder or any property of such Participating Selling Shareholder. The opinions described in Section 9(h) above shall be rendered to you at the request of the Participating Selling Shareholders and shall so state therein. (i) You shall have received on the Closing Date an opinion, dated the Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, as to the matters referred to in Sections 9(f)(iv), 9(f)(vi), 9(f)(ix) (but only with respect to the statements under the caption "Description of Capital Stock" and "Underwriting") and the paragraph immediately subsequent to Section 9(f)(xvi). In giving such opinions with respect to the matters covered by the paragraph immediately subsequent to Section 9(f)(xvi), Jones, Day, Reavis & Pogue and Brobeck, Phleger & Harrison LLP may rely as to matters of fact on officers' certificates and representations of the Company and may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (j) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Pricewaterhouse Coopers LLP and Langford de Kock & Co., independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (k) The Company shall have delivered to you the agreements specified in Section 2 hereof which agreements shall be in full force and effect on the Closing Date. (l) The Shares shall have been duly designated for quotation on the Nasdaq National Market. (m) The Company, the Selling Shareholders and the Participating Selling Shareholder shall not have failed on or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company, the Selling Shareholders or the Participating Selling Shareholders, as the case may be, on or prior to the Closing Date. (n) You shall have received on the Closing Date, a certificate of each Selling Shareholder and each Participating Selling Shareholder, as the case may be, who is not a U.S. Person (as defined under applicable U.S. federal tax legislation) to the effect that such Selling Shareholder or Participating Selling Shareholder is not a U.S. Person, which certificate may be in the form of a 27 28 properly completed and executed United States Treasury Department Form W-8 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. SECTION 10. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Sellers if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your reasonable judgment, is material and adverse and, in your reasonable judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares 28 29 which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, 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 Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 10 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you, the Company and the Selling Shareholders for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders. In any such case which does not result in termination of this Agreement, either you or the Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. SECTION 11. Agreements of the Selling Shareholders and Participating Selling Shareholders. Each Selling Shareholder and Participating Selling Shareholder, as the case may be, agrees with you and the Company: (a) To pay or to cause to be paid all transfer taxes payable in connection with the transfer of the Shares to be sold by such Selling Shareholder and Participating Selling Shareholder to the Underwriters. (b) To do and perform all things to be done and performed by such Selling Shareholder and Participating Selling Shareholder, as the case may be, under this Agreement prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Shares to be sold by such Selling Shareholder and Participating Selling Shareholder, as the case may be, pursuant to this Agreement. SECTION 12. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to Conley, Canitano & Associates, Inc., CCAi Renaissance Centre, 5800 Landerbrook Drive, 29 30 Mayfield Heights, OH 44124, (ii) if to the Selling Shareholders or the Participating Selling Shareholders, to [NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS OF ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Selling Shareholders, the Participating Selling Shareholders and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, the Company, the officers or directors of the Company, any person controlling the Company, any Selling Shareholder or Participating Selling Shareholder or any person controlling such Selling Shareholder or Participating Selling Shareholder, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of any Seller as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also agree, jointly and severally, to reimburse the several Underwriters, their directors and officers and any persons controlling any of the Underwriters for any and all fees and expenses (including, without limitation, the fees disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 8 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Selling Shareholders, the Participating Selling Shareholders, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the Company's directors and the Company's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. 30 31 This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 31 32 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Shareholders, the Participating Selling Shareholders and the several Underwriters. Very truly yours, CONLEY, CANITANO & ASSOCIATES, INC. By: -------------------------------- Title: THE SELLING SHAREHOLDERS NAMED IN SCHEDULE II HERETO, ACTING SEVERALLY By -------------------------------- Attorney-in-fact THE PARTICIPATING SELLING SHAREHOLDERS NAMED IN SCHEDULE III HERETO, ACTING SEVERALLY By --------------------------------- Attorney-in-fact DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BANCBOSTON ROBERTSON STEPHENS LEHMAN BROTHERS INC. MCDONALD INVESTMENTS INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By ----------------------------- 32 33 SCHEDULE I ---------- - ------------- ---------------------- Underwriters Number of Firm Shares to be Purchased Donaldson, Lufkin & Jenrette Securities Corporation BancBoston Robertson Stephens Lehman Brothers Inc. McDonald Investments Inc. ----------- Total 34 SCHEDULE II ----------- Selling Shareholders -------------------- - ----------- ----------------- Name Number of Firm Shares Being Sold TA/Advent VII L.P. Advent Atlantic and Pacific III, L.P. McDonald Investments, Inc. McD Venture Capital Fund, L.P. TA/Advent VIII L.P. T/A Investors LLC Brent Bearden J.P. Gravitt Claudia Kendler Laura McDonel Bryan Pepper Rob Petersen Ted Renneker Total ------------- 1,000,000 35 SCHEDULE III ------------ Participating Selling Shareholders ---------------------------------- - ------- ----------------- Name Number of Option Shares Being Sold Advent Atlantic and Pacific III, L.P. McDonald Investments, Inc. McD Venture Capital Fund, L.P. TA/Advent VIII L.P. T/A Venture Investors Limited Partnership 32 EX-3.1 3 EXHIBIT 3.1 1 Exhibit 3.1 SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CONLEY, CANITANO & ASSOCIATES, INC. ARTICLE I --------- The name of the corporation is Conley, Canitano & Associates, Inc. (the "Corporation"). ARTICLE II ---------- The place in the State of Ohio where the Corporation's principal office is located is the City of Mayfield Heights, Cuyahoga County. ARTICLE III ----------- The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code. ARTICLE IV ---------- A. Authorized Capital Stock. ------------------------- The total number of shares of capital stock which the Corporation shall have authority to issue is 55,500,800, of which (a) 500,800 shares shall be preferred stock, par value $.01 per share, (b) 5,000,000 shares shall be non-voting preferred stock, no par value ("Nonvoting Preferred Stock"), (c) 5,000,000 shares shall be voting preferred stock, no par value ("Voting Preferred Stock") (Sections (a), (b) and (c) collectively referred to herein as "Preferred Stock"), and (d) 45,000,000 shares shall be common stock, no par value ("Common Stock"). B. Preferred Stock. ---------------- The Board of Directors shall have authority to issue Preferred Stock from time to time in one or more classes or series. The express terms of shares of a different series of any particular class shall be identical except for such variations as may be permitted by law. Unless this provision is expressly modified by a Preferred Stock Designation in accordance with then-applicable law, the holders of Voting Preferred Stock will be entitled to one vote on each matter submitted to a vote at a meeting of shareholders for each share of Preferred Stock held of record by such holder as of the record date for such meeting. - 1 - 2 C. Convertible Preferred Stock --------------------------- 1. DESIGNATION. A total of 250,400 shares of the Corporation's Preferred Stock shall be designated as a series known as Convertible Preferred Stock, par value $.01 per share (the "Convertible Stock"). 2. Election of Directors; Voting. ------------------------------ (a) ELECTION OF DIRECTORS. The holders of outstanding shares of Convertible Stock shall, voting together as a separate class, be entitled to elect three (3) Directors of the Corporation. Such Directors shall be the candidates receiving the greatest number of affirmative votes (with each holder of Convertible Stock entitled to cast one vote for or against each candidate with respect to each share of Convertible Stock held by such holder) of the outstanding shares of Convertible Stock (the "Convertible Stock Director Designees"), with votes cast against such candidates and votes withheld having no legal effect. The election of the Convertible Stock Director Designees by the holders of the Convertible Stock shall occur (i) at the annual meeting of holders of capital stock, (ii) at any special meeting of holders of capital stock, (iii) at any special meeting of holders of Convertible Stock called by holders of a majority of the outstanding shares of Convertible Stock or (iv) by the unanimous written consent of holders of the outstanding shares of Convertible Stock. If at any time when any share of Convertible Stock is outstanding any Convertible Stock Director Designee should cease to be a Director for any reason, the vacancy shall only be filled by the vote or written consent of the holders of the outstanding shares of Convertible Stock, voting together as a separate class, in the manner and on the basis specified above. The holders of outstanding shares of Convertible Stock shall also be entitled to vote for all other Directors of the Corporation together with holders of all other shares of the Corporation's outstanding capital stock entitled to vote thereon, voting as a single class, with each outstanding share entitled to the same number of votes specified in Section C.2(b). The holders of outstanding shares of Convertible Stock, may, in their sole discretion, determine to elect only one or two Convertible Stock Director Designees from time to time, and during any such period the Board of Directors nonetheless shall be deemed duly constituted. (b) VOTING GENERALLY. The holder of each share of Convertible Stock shall be entitled to the number of votes equal to the largest number of full shares of Common Stock into which each share of Convertible Stock could be converted pursuant to Section C.6 hereof (other than by means of Section C.6(b)) on the record date for the vote or for written consent of shareholders, if applicable, multiplied by the number of shares of Convertible Stock held of record on such date. The holder of each share of Convertible Stock shall be entitled to notice of any shareholders' meeting in accordance with the Code of Regulations of the Corporation and shall vote with holders of the Common Stock, voting together as single class, upon all matters submitted to a vote of shareholders, excluding those matters required to be submitted to a class or series vote pursuant to the terms hereof (including without limitation Section C.8) or by law. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares of Common Stock into which shares of Convertible Stock held by each holder could be converted) shall be - 2 - 3 rounded to the nearest whole number (with any fraction equal or greater than one-half rounded upward to one). 3. DIVIDENDS. The holders of Convertible Stock shall be entitled to receive dividends out of funds legally available therefor at such times and in such amounts as the Board of Directors may determine in its sole discretion; PROVIDED, HOWEVER, that no such dividend may be declared or paid on any shares of Convertible Stock unless at the same time a dividend is declared or paid on all outstanding shares of Common Stock and vice versa, with holders of Convertible Stock and Common Stock sharing in any such dividends as if they constituted a single class of stock and with each holder of a share of Convertible Stock entitled to receive such dividends based on the number of shares of Common Stock into which such share of Convertible Stock is then convertible hereunder. The right to dividends on shares of Convertible Stock shall not be cumulative, and no right shall accrue to holders of Convertible Stock by reason of the fact that dividends on said shares are not declared in any prior period. 4. Liquidation. ------------ (a) LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of the Corporation and its subsidiaries, whether voluntary or involuntary (a "Liquidation Event"), each holder of outstanding shares of Convertible Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, an amount in cash equal to (i) $69.89 per share of Convertible Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Convertible Stock), plus (ii) any declared but unpaid dividends to which such holder of outstanding shares of Convertible Stock is then entitled pursuant to Sections C.3 and C.5(f) hereof (the sum of clauses (i) and (ii) being referred to herein as the "Convertible Base Liquidation Amount"), plus (iii) any interest accrued pursuant to Section C.5(e) hereof to which such holder of Convertible Stock is entitled, if any (the sum of clauses (i), (ii) and (iii) being referred to herein as the "Convertible Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Convertible Liquidation Preference Amount are not paid in full, the holders of the Convertible Stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled; and PROVIDED FURTHER, HOWEVER, that if upon any Liquidation Event the holders of the outstanding shares of Convertible Stock would receive more than the Convertible Liquidation Preference Amount in the event their shares were converted into Series A Redeemable Preferred Stock (as defined in Section D.1 of this Article IV) and Common Stock immediately prior to the record date for distributions in connection with such Liquidation Event, then each holder of an outstanding share of Convertible Stock shall receive an amount equal to such holder's Series A Redeemable Liquidation Preference Amount (as defined in Section D.4) under Section D.4 before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, and thereafter shall share ratably with the holders of Common Stock in the assets available for distribution, with such distributions to be made in cash and as if each share of Convertible Stock had been converted into the number of shares of Series A Redeemable - 3 - 4 Preferred Stock and Common Stock issuable upon the conversion of such holder's shares of Convertible Stock immediately prior to any such Liquidation Event. The provisions of this Section C.4 shall not in any way limit the right of the holders of Convertible Stock to elect to convert their shares of Convertible Stock into Series A Redeemable Preferred Stock and Common Stock pursuant to Section C.6 prior to or in connection with any Liquidation Event. (b) NOTICE. Prior to the occurrence of any Liquidation Event, the Corporation will furnish each holder of Convertible Stock notice in accordance with Section C.9 hereof, together with a certificate prepared by the chief financial officer of the Corporation describing in detail the facts of such Liquidation Event, stating in detail the amount(s) per share of Convertible Stock each holder of Convertible Stock would receive pursuant to the provisions of Section C.4(a) hereof (both with respect to the amount a holder would receive pursuant to clauses (i) and (ii) of Section C.4(a) and the amount a holder would receive pursuant to the second proviso of Section C.4(a)) and stating in detail the facts upon which such amounts were determined. 5. Redemption. ----------- (a) Redemption Events. ------------------ (i) On or After October 15, 2001. ----------------------------- (A) At any time after October 15, 2001, on any one occasion any holder of Convertible Stock may require the Corporation to redeem up to 50% of the outstanding shares of Convertible Stock held by such holder at such time. (B) At any time after October 15, 2002, on any one occasion any holder of Convertible Stock may require the Corporation to redeem up to all of the outstanding shares of Convertible Stock held by such holder at such time. (ii) EXTRAORDINARY TRANSACTIONS. Upon the election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Convertible Stock in connection with (A) a merger or consolidation of the Corporation with or into another corporation (with respect to which less than a majority of the outstanding voting power of such surviving corporation is held by shareholders of the Corporation immediately prior to such event), (B) the sale or transfer of all or substantially all of the properties and assets of the Corporation and its subsidiaries, (C) any purchase by any party of shares of capital stock of the Corporation (either through a negotiated stock purchase or a tender for such shares), the effect of which is that such party that did not beneficially own a majority of the voting power of the outstanding shares of capital stock of the Corporation immediately prior to such purchase beneficially owns at least a majority of such voting power immediately after such purchase, or (D) the redemption or repurchase of shares representing a majority of the voting power of the outstanding shares of capital stock of the Corporation (each an - 4 - 5 "Extraordinary Transaction"), then, as a part of and as a condition to the effectiveness of such Extraordinary Transaction, UNLESS the holders of Convertible Stock shall have elected to convert their shares of Convertible Stock into Series A Redeemable Preferred Stock and Common Stock in accordance with the voluntary conversion provisions of Section C.6 prior to the effective date of such Extraordinary Transaction, the Corporation shall, on the effective date of such Extraordinary Transaction, redeem all (but not less than all) of the outstanding shares of Convertible Stock for an amount equal to the Convertible Liquidation Preference Amount, such amount to be payable in cash or, at the election of holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Convertible Stock, in the same form of consideration as is paid to the holders of Common Stock in such Extraordinary Transaction; PROVIDED, HOWEVER, that if upon any Extraordinary Transaction the holders of the outstanding shares of Convertible Stock would receive more than the Convertible Liquidation Preference Amount in the event their shares were converted into Series A Redeemable Preferred Stock and Common Stock immediately prior to such Extraordinary Transaction, then each holder of Convertible Stock shall receive with respect to each outstanding share of Convertible Stock held by such holder an amount equal to the per share liquidation preference for a share of Series A Redeemable Preferred Stock under Section D.4 before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, payable in cash, and thereafter shall share ratably with the holders of the Common Stock in the proceeds of such Extraordinary Transaction or, as applicable, shall receive from the Corporation an amount equal to the amount per share that would be paid if the shares of Common Stock receivable upon conversion of the Convertible Stock were being acquired in the Extraordinary Transaction at the same price per share as is paid for Common Stock, which amount shall be paid in the same form of consideration as is paid to holders of Common Stock, as if each share of Convertible Stock had been converted into the number of shares of Series A Redeemable Preferred Stock and Common Stock issuable upon the conversion of such share of Convertible Stock immediately prior to such Extraordinary Transaction. The foregoing election shall be made by such holders giving the Corporation and each other holder of Convertible Stock not less than five (5) business days prior written notice, which notice shall set forth the date for such redemption. The provisions of this Section C.5 shall not in any way limit the right of the holders of Convertible Stock to elect to convert their shares into shares of Series A Redeemable Preferred Stock and Common Stock pursuant to Section C.6 prior to or in connection with any Extraordinary Transaction. (b) VALUATION OF DISTRIBUTION SECURITIES. Any securities or other consideration to be delivered to the holders of the Convertible Stock upon any Extraordinary Transaction in accordance with the terms hereof shall be valued as follows: (i) If traded on a nationally recognized securities exchange or inter-dealer quotation system, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the 30-day period ending three (3) business days prior to the closing; - 5 - 6 (ii) If traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the closing; and (iii) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock, provided that if the Corporation and the holders of sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock are unable to reach agreement, then by independent appraisal by a mutually agreed to investment banker, the fees of which shall be paid by the Corporation. (c) NOTICE BY CORPORATION. Prior to the occurrence of any Extraordinary Transaction, the Corporation will furnish each holder of Convertible Stock notice in accordance with Section C.9 hereof, together with a certificate prepared by the chief financial officer of the Corporation describing in detail all material terms of such Extraordinary Transaction, including without limitation the consideration to be delivered in connection with such Extraordinary Transaction and the identities of the parties to the Extraordinary Transaction. (d) REDEMPTION DATE; REDEMPTION PRICE. Any holder of Convertible Stock may exercise such holder's right of redemption pursuant to Section C.5(a)(i) by such holder giving the Corporation not less than five (5) business days prior written notice, which notice shall set forth the date for such redemption. Upon the election of the holders of not less than sixty-six and two-thirds percent of the voting power of the outstanding Convertible Stock to cause the Corporation to redeem the Convertible Stock pursuant to Section C.5(a)(ii), all holders of Convertible Stock shall be deemed to have elected to cause the Convertible Stock to be so redeemed. Any date upon which a redemption shall actually occur in accordance with Section C.5(a) shall be referred to as a "Convertible Redemption Date." The redemption price for each share of Convertible Stock redeemed pursuant to this Section C.5 shall be the per share Convertible Liquidation Preference Amount or such greater per share amount as may be payable pursuant to the proviso to Section C.5(a)(ii), if applicable (the "Convertible Redemption Price"). The aggregate Convertible Redemption Price shall be payable in cash in immediately available funds to the respective holders of the Convertible Stock on the fifteenth (15th) day (or if such day is not a business day, the next business day after the 15th day) after the day on which the Corporation receives the redemption election pursuant to this Section C.5(d) (subject to Section C.5(e)) except to the extent contemplated by the proviso to Section C.5(a)(ii); provided, however, that such date may be postponed for up to an additional sixty (60) calendar days to permit the appraisal process under Section C.5(b)(iii). Until the aggregate Convertible Redemption Price has been paid for all shares of Convertible Stock being redeemed: (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any capital stock of the Corporation; and (B) except as permitted by Sections C.8(d)(i), (ii) and (iii), no shares of capital stock of the Corporation (other than the Convertible Stock in accordance with this Section C.5) shall be purchased, redeemed or acquired by the - 6 - 7 Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. (e) REDEMPTION PROHIBITED. If, at a Convertible Redemption Date, the Corporation is prohibited under Section 1701.35 of the Ohio Revised Code ("Section 1701.35") from redeeming all shares of Convertible Stock for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Convertible Stock in proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under Section 1701.35, subject to the last paragraph of Section C.8. The shares of Convertible Stock not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in this Article IV. In the event that the Corporation fails for any reason to redeem shares for which redemption is required pursuant to this Section C.5, including without limitation due to a prohibition of such redemption under Section 1701.35, then during the period from the applicable Convertible Redemption Date through the date on which such shares are redeemed, the applicable Convertible Base Liquidation Amount of such shares shall bear interest at the rate of 15% per annum, with such interest to accrue daily in arrears and to be compounded annually; PROVIDED, HOWEVER, that in no event shall such interest exceed the maximum permitted rate of interest under applicable law (the "Maximum Permitted Rate"). In the event that fulfillment of any provision hereof results in such rate of interest being in excess of the Maximum Permitted Rate, the obligation to be fulfilled shall automatically be reduced to eliminate such excess; PROVIDED, HOWEVER, that any subsequent increase in the Maximum Permitted Rate shall be retroactively effective to the applicable Redemption Date. (f) DIVIDEND AFTER CONVERTIBLE REDEMPTION DATE. From and after a Convertible Redemption Date, no shares of Convertible Stock subject to redemption shall be entitled to dividends, if any, as contemplated by Section C.3; PROVIDED, HOWEVER, that in the event that shares of Convertible Stock are unable to be redeemed and continue to be outstanding in accordance with Section C.5(e), such shares shall continue to be entitled to dividends and interest thereon as provided in Sections C.3 and C.5(e) until the date on which such shares are actually redeemed by the Corporation. (g) SURRENDER OF CERTIFICATES. Upon receipt of the applicable Convertible Preferred Redemption Price by certified check or wire transfer, each holder of shares of Convertible Stock to be redeemed shall surrender the certificate or certificates representing such shares to the Corporation, duly assigned or endorsed for transfer (or accompanied by duly executed stock powers relating thereto), or, in the event the certificate or certificates are lost, stolen or missing, shall deliver an affidavit or agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith (an "Affidavit of Loss") with respect to such certificates at the principal executive office of the Corporation or the office of the transfer agent for the Convertible Stock or such office or offices in the continental United States of an agent for redemption as may from time to time be designated by notice to the holders of Convertible Stock, and each surrendered certificate shall be canceled and retired; PROVIDED, HOWEVER, that if the holder has exercised its redemption right pursuant to Section C.5(a)(i)(A) or the Corporation is prohibited from redeeming all shares of - 7 - 8 Convertible Stock as provided in Section C.5(e), the holder shall not be required to surrender said certificate(s) to the Corporation until said holder has received a new stock certificate for those shares of Convertible Stock not so redeemed. 6. CONVERSION. The holders of the Convertible Stock shall have the following conversion rights: (a) AUTOMATIC CONVERSION UPON ELECTION OF HOLDERS. The holders of shares of Convertible Stock shall be entitled, upon the written election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock, without the payment of any additional consideration, (i) immediately prior to and subject to the closing or happening of a Liquidation Event or an Extraordinary Transaction and (ii) at any time after October 15, 1999, to cause each (but not less than all) of the outstanding shares of Convertible Stock to be automatically converted into (i) the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as defined in this Section C.6(a)) per share in effect for the Convertible Stock at the time of conversion into the per share Conversion Value (as defined in this Section C.6(a)) of the Convertible Stock (together with any other shares of Common Stock held by the holders of Convertible Stock (regardless of whether such holders continue to hold Convertible Stock), the "Conversion Shares") and (ii) one (1) fully paid and nonassessable share of Series A Redeemable Preferred Stock. Upon the election to so convert in the manner and on the basis specified in the preceding sentence, all holders of the Convertible Stock shall be deemed to have elected to voluntarily convert all outstanding shares of Convertible Stock pursuant to this Section C.6. Upon the filing of these Second Amended and Restated Articles of Incorporation with the Ohio Secretary of State's office, the "Conversion Price" per share of Convertible Stock shall be $6.99, and the per share "Conversion Value" of Convertible Stock shall be $69.89. The Conversion Price per share of Convertible Stock and the Common Stock Conversion Rate (as defined in this Section C.6(a)) shall be subject to adjustment from time to time as provided in Section C.7 hereof. The number of shares of Common Stock into which a share of a Convertible Stock is convertible is hereinafter referred to as the "Common Stock Conversion Rate." The number of shares of Series A Redeemable Preferred Stock into which a share of Convertible Stock is convertible is hereinafter referred to as the "Series A Redeemable Conversion Rate." If the holders of shares of Convertible Stock elect to convert the outstanding shares of Convertible Stock at a time when there are any declared but unpaid dividends or other amounts due on or in respect of such shares, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion. (b) AUTOMATIC CONVERSION UPON QPO. Each share of Convertible Stock shall automatically be converted, without the payment of any additional consideration, into shares of Common Stock and Series A Redeemable Preferred Stock as of, and in all cases subject to, the closing of the Corporation's first underwritten offering to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended, provided that (i) such registration statement covers the offer and sale of Common Stock of which the aggregate net proceeds attributable to sales for the account of the Corporation exceed $35,000,000, at a price per share equal to at least $11.00 (as appropriately adjusted for any stock split, combination, reorganization, recapitalization, - 8 - 9 stock dividend, or similar event), (ii) such Common Stock is listed for trading on either the New York Stock Exchange or the Nasdaq National Market and (iii) if a redemption election is made pursuant to Section D.5(a)(i) or (a)(ii), either (A) all outstanding shares of Series A Redeemable Preferred Stock which are outstanding or issuable upon such automatic conversion are redeemed immediately upon and as of the closing of such offering, (B) contemporaneously with such offering cash in an amount sufficient to redeem all outstanding shares of Series A Redeemable Preferred Stock is segregated and irrevocably held by the Corporation for payment to holders of Series A Redeemable Preferred Stock or (C) all outstanding shares of Series A Redeemable Preferred Stock are exchanged for Series A Notes (as defined in Section D.5(a)(i)) (a "QPO" or a "Qualified Public Offering"); PROVIDED that if a closing of a QPO occurs, all outstanding shares of Convertible Stock shall be deemed to have been converted into shares of Common Stock and Series A Redeemable Preferred Stock immediately prior to such closing. Any such conversion shall be at the Common Stock Conversion Rate and Series A Redeemable Conversion Rate in effect upon the closing of a QPO, as applicable. If the holders of shares of Convertible Stock are required to convert the outstanding shares of Convertible Stock pursuant to this Section C.6(b) at a time when there are any declared but unpaid dividends or any amounts due on or in respect of such shares pursuant to Section C.5(e) hereof, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion. (c) PROCEDURE FOR VOLUNTARY CONVERSION. Upon election to convert pursuant to Section C.6(a), each holder of Convertible Stock shall surrender the certificate or certificates representing its Convertible Stock, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Convertible Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Convertible Stock by the Corporation, or shall deliver an Affidavit of Loss with respect to such certificates. Upon surrender of a certificate representing Convertible Stock for conversion, or delivery of an Affidavit of Loss, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, certificates for the number of shares of Common Stock and Series A Redeemable Preferred Stock to which such holder shall be entitled upon conversion. The issuance of certificates for Common Stock and Series A Redeemable Preferred Stock upon conversion of Convertible Stock will be made without charge to the holders of such shares for any issuance tax in respect thereof or other costs incurred by the Corporation in connection with such conversion and the related issuance of such stock. If a Liquidation Event or conversion of Convertible Stock upon an Extraordinary Transaction or public offering not constituting a QPO occurs, all outstanding shares of Convertible Stock shall be deemed to have been converted into shares of Common Stock and Series A Redeemable Preferred Stock immediately prior thereto, provided that the Corporation shall make appropriate provisions (x) for the Common Stock issued upon such conversion to be treated on the same basis as all other Common Stock in such Liquidation Event, Extraordinary Transaction or public offering not constituting a QPO and (y) for the payment of the Series A Redeemable Liquidation Preference Amount in connection with any Liquidation - 9 - 10 Event or the redemption of the Series A Redeemable Preferred Stock (issued upon such conversion) upon election of such redemption in connection with any Extraordinary Transaction or public offering not constituting a QPO, if applicable, as provided herein. In the event of any public offering constituting a QPO, the provisions of Section C.5(d) shall apply. (d) PROCEDURE FOR AUTOMATIC CONVERSION. As of, and in all cases subject to, the closing of a QPO (the "Automatic Conversion Date"), all outstanding shares of Convertible Stock shall be converted automatically into shares of Common Stock and Series A Redeemable Preferred Stock at the applicable conversion rates specified in Section C.6(a) and without any further action by the holders of such shares and whether or not the certificates representing such shares of Convertible Stock are surrendered to the Corporation or its transfer agent; PROVIDED, HOWEVER, that all holders of Convertible Stock shall be given prior written notice of the occurrence of a QPO in accordance with Section C.9 hereof. The Corporation shall not be obligated to issue certificates evidencing the shares of Series A Redeemable Preferred Stock or Common Stock issuable on the Automatic Conversion Date (or the cash payment or issuance of the Series A Notes for the shares of Series A Redeemable Preferred Stock which are redeemed immediately after such automatic conversion as provided below and in Section D.5(a)(i) or D.5(a)(ii)) unless certificates evidencing such shares of the Convertible Stock being converted, or an Affidavit of Loss with respect to such certificates, are delivered to the Corporation or its transfer agent. On the Automatic Conversion Date, all rights with respect to the Convertible Stock so converted shall terminate, except any of the rights of the holders thereof upon surrender of their certificate or certificates therefor or delivery of an Affidavit of Loss thereof to receive certificates for the number of shares of Common Stock and Series A Redeemable Preferred Stock into which such Convertible Stock has been converted (or the cash payment or Series A Notes to which such holder is entitled as provided below and in Section D.5(a)(i) or (a)(ii)). If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. Upon surrender of such certificates or Affidavit of Loss the Corporation shall issue and deliver to such holder, promptly (and in any event in such time as is sufficient to enable such holder to participate in such QPO) at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock and number of shares of Series A Redeemable Preferred Stock or the Series A Notes into which the shares of the Convertible Stock surrendered were convertible on the Automatic Conversion Date. Notwithstanding anything to the contrary set forth in this Section C.6(d), the Corporation may deliver, in lieu of certificates for Series A Redeemable Preferred Stock, cash in an amount determined pursuant to Section D.5(b) hereof on account of the redemption of such Series A Redeemable Preferred Stock, and upon payment of such cash the Series A Redeemable Preferred Stock into which such Convertible Stock would have been converted shall be deemed to have been issued and redeemed by the Corporation. (e) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock and Series A Redeemable Preferred Stock solely for the purpose of effecting the - 10 - 11 conversion of the shares of Convertible Stock such number of its shares of Common Stock and Series A Redeemable Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Convertible Stock; and if at any time the number of authorized but unissued shares of Common Stock and Series A Redeemable Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of Convertible Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock and Series A Redeemable Preferred Stock to such number of shares as shall be sufficient for such purpose. (f) NO CLOSING OF TRANSFER BOOKS. The Corporation shall not close its books against the transfer of shares of Convertible Stock in any manner which would interfere with the timely conversion of any shares of Convertible Stock. 7. ADJUSTMENTS. The Conversion Price in effect from time to time shall be subject to adjustment from and after October 10, 1997 and regardless of whether any shares of Convertible Stock are then issued and outstanding as follows: (a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or split be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section C.7(a) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (b) SALE OF COMMON STOCK. In the event the Corporation shall at any time, or from time to time, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury but excluding up to 2,762,450 shares of Common Stock (as appropriately adjusted for stock splits, stock dividends and the like) issued to officers, directors or employees of the Corporation or upon the exercise of options or other rights issued to such officers, directors or employees pursuant to the stock option plans (the "Excluded Shares"), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares, then, and thereafter successively upon each such issuance, sale or exchange, the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares shall forthwith be reduced to an amount determined by multiplying such Conversion Price by a fraction: (i) the numerator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of - 11 - 12 such additional shares of Common Stock (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued would purchase at the Conversion Price (prior to adjustment), and (ii) the denominator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such additional shares of Common Stock (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the number of such additional shares of Common Stock so issued. (c) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event the Corporation shall at any time or from time to time, issue options, warrants or rights to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than any options or warrants for Excluded Shares), for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (i) the numerator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities plus the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (ii) the denominator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. - 12 - 13 (d) EXPIRATION OR CHANGE IN PRICE. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock, changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section C.7(c) hereof), at the time initially granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section A.7 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (e) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Convertible Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Convertible Stock been converted into Common Stock and Series A Redeemable Preferred Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section C.7 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Convertible Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section C.7), then and in each such event the holder of each share of Convertible Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Convertible Stock might - 13 - 14 have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (f) MERGERS AND OTHER REORGANIZATIONS. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section C.7) or a merger or consolidation of the Corporation with or into another Corporation or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of and as a condition to the effectiveness of such reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that the holders of the Convertible Stock shall thereafter be entitled to receive upon conversion of the Convertible Stock the number of shares of stock or other securities or property of the Corporation or of the successor Corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Convertible Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section C.7 (including without limitation provisions for adjustment of the Conversion Price and the number of shares purchasable upon conversion of the Convertible Stock) shall thereafter be applicable, as nearly as may be, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Convertible Stock. (g) All calculations under this Section C.7 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (h) Upon the occurrence of each adjustment or readjustment pursuant to this Section C.7, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Convertible Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Convertible Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Prices before and after such adjustment or readjustment, and (iii) the number of shares of Common Stock and Series A Redeemable Preferred Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Convertible Stock. 8. COVENANTS. So long as any shares of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) shall be outstanding, the Corporation shall not, without first having provided written notice of such proposed action to each holder of outstanding shares of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) and having obtained the affirmative vote or written consent of the holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable), voting as a single class, with each share of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) entitling the holder thereof to one vote per share of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) held by such holder: - 14 - 15 (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or a substantial portion of its assets or business, (b) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Corporation is not the surviving entity or the owners of the Corporation's outstanding equity securities prior to the transaction or series of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (c) dissolve, liquidate or wind up its operations, (d) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (i) for the redemption of Convertible Preferred Stock, Series A Redeemable Preferred Stock or Conversion Shares pursuant to and as provided in these Second Amended and Restated Articles of Incorporation, (ii) for the exchange of Series A Redeemable Preferred Stock for Series A Notes as contemplated by Section D.5(a)(i), (iii) as contemplated by Sections 1.2 and 4.5 of the Stock Purchase and Shareholders Agreement dated as of October 15, 1997 by and among the Corporation and the shareholders of the Corporation (the "Purchase Agreement"), or (iv) for the repurchase of shares of Common Stock from employees and consultants pursuant to agreements entered into in connection with the issuance of options and/or restricted stock, pursuant to the Corporation's 1997 Equity and Performance Incentive Plan, (e) propose or adopt any amendment to this Article IV of these Second Amended and Restated Articles of Incorporation, or any other amendment to these Second Amended and Restated Articles of Incorporation or the Corporation's regulations that eliminates, amends or restricts or otherwise adversely affects the rights and preferences of the Convertible Preferred Stock or the Series A Redeemable Preferred Stock, or increases the authorized shares of Convertible Preferred Stock or Series A Redeemable Preferred Stock, (f) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, (g) create, or obligate itself to create, any class or series of shares having preference over or being on a parity with the Convertible Preferred Stock or the Series A Redeemable Preferred Stock, (h) increase the size of the Board of Directors to more than seven (7) members, or (i) enter into or be a party to any transaction or agreement, including without limitation any lease (other than the lease in effect as of the date of filing these Second Amended and Restated Articles of Incorporation with respect to the Company's new offices located in Mayfield Heights, Ohio as set forth in the agreement by and between the Corporation and American National Development, Ltd., dated May, 1996) or other rental or purchase agreement providing for loans or extensions of credit by or to the Company with or for the benefit of any person or entity which is a shareholder, officer or director of the Company, a relative by blood or - 15 - 16 marriage of, a trust or estate for the benefit of, or a person or entity which directly or indirectly controls, is controlled by, or is under common control with, any such person or entity, except (i) for normal compensation paid to employees of the Company in the ordinary course of business and (ii) transactions expressly disclosed in or contemplated by the Agreement and the exhibits thereto. Further, the Corporation shall not, by amendment of these Second Amended and Restated Articles of Incorporation or through any Extraordinary Transaction or other reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, knowingly or purposefully avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation and each subsidiary of the Corporation but shall at all times in good faith assist in the carrying out of all the provisions of this Article IV and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Convertible Preferred Stock and the Series A Redeemable Preferred Stock set forth in this Certificate against impairment. Any successor to the Corporation or any subsidiary of the Corporation shall agree, as a condition to such succession, to carry out and observe the obligations of the Corporation hereunder with respect to the Convertible Preferred Stock and the Series A Redeemable Preferred Stock. 9. Notice ------ (a) LIQUIDATION EVENTS, EXTRAORDINARY TRANSACTIONS, ETC. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution or who are entitled to vote at a meeting (or by written consent) in connection with any of the transactions identified in clause (ii) hereof, or (ii) any Liquidation Event (as defined in Section C.4), any Extraordinary Transaction (as defined in Section C.5), any QPO (as defined in Section C.6) or any other public offering becomes reasonably likely to occur, the Corporation shall mail or cause to be mailed by first class mail (postage prepaid) to each holder of Convertible Stock (or each holder of Series A Redeemable Preferred Stock, as applicable) at least fifteen (15) days prior to such record date specified therein or the expected effective date of any such transaction, whichever is earlier, a notice specifying (A) the date of such record date for the purpose of such dividend or distribution or meeting or consent and a description of such dividend or distribution or the action to be taken at such meeting or by such consent, (B) the date on which any such Liquidation Event, Extraordinary Transaction, QPO or other public offering is expected to become effective, and (C) the date on which the books of the Corporation shall close or a record shall be taken with respect to any such event. (b) WAIVER OF NOTICE. The holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock (or Series A Redeemable Preferred Stock, as applicable) may, at any time upon written notice to the Corporation, waive any notice provisions specified herein for the benefit of such holders, and any such waiver shall be binding upon all holders of such securities. (c) GENERAL. In the event that the Corporation provides any notice, report or statement to any holder of Common Stock, the Corporation shall at the same time provide - 16 - 17 a copy of any such notice, report or statement to each holder of outstanding shares of Convertible Stock (or Series A Redeemable Preferred Stock, as applicable). 10. NO REISSUANCE OF CONVERTIBLE STOCK. No share or shares of Convertible Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. 11. CONTRACTUAL RIGHTS OF HOLDERS. The various provisions set forth herein for the benefit of the holders of the Convertible Stock and Series A Redeemable Preferred Stock shall be deemed contract rights enforceable by them, including without limitation, one or more actions for specific performance. D. Series A Redeemable Preferred Stock ----------------------------------- 1. DESIGNATION. A total of 250,400 shares of the Corporation's Preferred Stock shall be designated as a series known as Series A Redeemable Preferred Stock, par value $.01 per share (the "Series A Redeemable Preferred Stock"). 2. ELECTION OF DIRECTORS; VOTING. ------------------------------ (a) ELECTION OF DIRECTORS. The holders of outstanding shares of Series A Redeemable Preferred Stock shall, voting together as a separate class, be entitled to elect one (1) Director. Such Director shall be the candidate receiving the greatest number of affirmative votes (with each holder of Series A Redeemable Preferred Stock entitled to cast one vote for or against each candidate with respect to each share of Series A Redeemable Preferred Stock held by such holder) of the outstanding shares of Series A Redeemable Preferred Stock (the "Series A Redeemable Preferred Stock Director Designee"), with votes cast against such candidates and votes withheld having no legal effect). The election of the Series A Redeemable Preferred Stock Director Designee by the holders of the Series A Redeemable Preferred Stock shall occur (i) at the annual meeting of holders of capital stock, (ii) at any special meeting of holders of capital stock, (iii) at any special meeting of holders of Series A Redeemable Preferred Stock called by holders of a majority of the outstanding shares of Series A Redeemable Preferred Stock or (iv) by the unanimous written consent of holders of the outstanding shares of Series A Redeemable Preferred Stock. Upon conversion of the Convertible Stock, the holder or holders of not less than a majority in voting power of the outstanding Series A Redeemable Preferred Stock shall designate one of the Convertible Stock Director Designees then serving on the Corporation's board of directors to continue in such capacity as the Series A Redeemable Preferred Stock Designee. If at any time when any share of Series A Redeemable Preferred Stock is outstanding the Series A Redeemable Preferred Stock Director Designee should cease to be a Director for any reason, the vacancy shall only be filled by the vote or written consent of holders of the outstanding shares of Series A Redeemable Preferred Stock, voting together as a separate class, in the manner and on the basis specified above. (b) VOTING GENERALLY. Except as set forth above with respect to the election of the Series A Redeemable Preferred Stock Director Designee, the holders of Series A - 17 - 18 Redeemable Preferred Stock shall not be entitled to vote on any matters except to the extent otherwise required under the Ohio Revised Code. 3. DIVIDENDS. The holders of outstanding shares of Series A Redeemable Preferred Stock shall be entitled to receive, out of any funds legally available therefor, cumulative (non- compounding) dividends on the Series A Redeemable Preferred Stock in cash, at the per share rate per annum of seven percent (7%) of $62.90 (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Series A Redeemable Preferred Stock) (a "Series A Redeemable Cumulative Dividend"). Such dividends will accrue quarterly in arrears commencing as of the date of issuance of the Series A Redeemable Preferred Stock and be cumulative, to the extent unpaid, whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. Series A Redeemable Cumulative Dividends shall become due and payable with respect to any share of Series A Redeemable Preferred Stock as provided in Section D.4 and Section D.5. So long as any shares of Series A Redeemable Preferred Stock are outstanding and the Series A Redeemable Cumulative Dividends have not been paid in full in cash: (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any Common Stock or other capital stock of the Corporation ranking junior to the Series A Redeemable Preferred Stock; and (B) except as provided in Sections C.8(d)(i), (ii) and (iii), no shares of capital stock of the Corporation ranking junior to the Series A Redeemable Preferred Stock shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. All numbers relating to the calculation of dividends pursuant to this Section D.3 shall be subject to equitable adjustment in the event of any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the Series A Redeemable Preferred Stock. Nothing herein contained shall in any way or under any circumstances be construed or deemed to require the Board to declare, or the Corporation to pay or set apart for payment, any cash dividends of the Series A Redeemable Preferred Stock. Dividends payable on the Series A Redeemable Preferred Stock for any period less than a year shall be computed on the basis of a 365 day (366 day if applicable) year and the actual number of days elapsed. 4. LIQUIDATION. Upon any Liquidation Event, each holder of outstanding shares of Series A Redeemable Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus, or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Series A Redeemable Preferred Stock, an amount in cash equal to the sum of (a) $62.90 per share of Series A Redeemable Preferred Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Series A Redeemable Preferred Stock), plus (b) any unpaid dividends to which such holder of outstanding shares of Series A Redeemable Preferred Stock is entitled pursuant to Sections D.3 and D.5(d) hereof (the sum of clauses (a) and (b) being referred to herein as the"Series A Redeemable Base Liquidation Amount"), plus (c) any interest accrued pursuant to Section D.5(c) to which such holder of outstanding shares of Series A Redeemable Preferred Stock is entitled, if any (the sum of clauses (a), (b) and (c) being referred to herein as the"Series A Redeemable Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Series A Redeemable Liquidation Preference Amount are not paid in full, the holders of the Series A Redeemable - 18 - 19 Preferred Stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. 5. Redemption. ----------- (a) Redemption Events. ------------------ (i) UPON ELECTION OF HOLDERS UPON A QPO. Upon the election of the holder or holders of not less than sixty-six and two-thirds percent of the outstanding Convertible Stock, the Corporation shall redeem all (and not less than all, except as set forth in the third sentence of this Section D.5(a)) of the outstanding shares of Series A Redeemable Preferred Stock upon the closing of a QPO. The foregoing election shall be made by such holders giving the Corporation and each other holder of Series A Redeemable Preferred Stock (or Convertible Stock, as applicable) written notice not less than five (5) days prior to the closing of a QPO. In the event that the principal underwriter for a QPO shall reasonably and in good faith request in writing, or cause the Company to so request in writing, that the holders of Series A Redeemable Preferred Stock waive the holders' right to elect to have such holder's shares of Series A Redeemable Preferred Stock redeemed pursuant to this Section D.5(a)(i) and the holders of sixty-six and two-thirds percent in voting power of the outstanding shares of the Series A Redeemable Preferred Stock agree to so waive such redemption election, then all outstanding shares of Series A Redeemable Preferred Stock shall be exchanged, without the payment of additional consideration, for notes of the Company ("Series A Notes") in an aggregate principal amount equal to the aggregate Series A Redemption Price (as defined in Section D.5(b) below), which Series A Notes shall (i) mature on the second anniversary of the effective date of such QPO and (ii) bear interest on the outstanding principal balance thereof at the rate of fifteen percent (15%) per annum, which interest shall accrue daily in arrears and be paid on the last day of each month, commencing on the last day of the first month following the effective date of such QPO. (ii) UPON ELECTION OF CORPORATION UPON A QPO. The Corporation may elect to redeem all (but not less than all, other than pursuant to Section D.5(c) below) of the outstanding shares of Series A Redeemable Preferred Stock at any time upon the closing of a QPO. The foregoing election shall be made by the Corporation giving each holder of Series A Redeemable Preferred Stock written notice not less than five (5) days prior to the closing of a QPO. (iii) Lapse of Time. -------------- (A) At any time after the later of the first anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section C.6 (other than in connection with an Extraordinary Transaction) and October 15, 2001, on any one occasion any holder of Series A Redeemable Preferred Stock may require the Corporation to redeem up to 50% of the outstanding shares of Series A Redeemable Preferred Stock held by such holder at such time. - 19 - 20 (B) At any time after the later of the second anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section C.6 (other than in connection with an Extraordinary Transaction) and October 15, 2002, on any one occasion any holder of Series A Redeemable Preferred Stock may require the Corporation to redeem up to all of the outstanding shares of Series A Redeemable Preferred Stock held by such holder at such time. (iv) UPON EXTRAORDINARY TRANSACTIONS. Upon the election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Series A Redeemable Preferred Stock (or Convertible Stock, as applicable, proposing to convert the same in order to effect a redemption of the Series A Redeemable Preferred Stock received upon such conversion hereunder), the Corporation shall redeem all (and not less than all, other than pursuant to Section D.5(c) below) of the outstanding shares of Series A Redeemable Preferred Stock upon the occurrence of an Extraordinary Transaction (as defined in Section C.5) or public offering not constituting a QPO. The foregoing election shall be made by such holders giving the Corporation and each other holder of Series A Redeemable Preferred Stock (or Convertible Stock, as applicable) not less than five (5) days prior written notice, which notice shall set forth the date for such redemption. (v) Upon Election of Corporation. ----------------------------- (A) At any time after the later of the first anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section C.6 and October 15, 2001, the Corporation may redeem 50% (but not less than 50%) of the outstanding shares of Series A Redeemable Preferred Stock. The foregoing election shall be made by the Corporation giving each holder of Series A Redeemable Preferred Stock written notice not less than five (5) days prior to the date for such redemption. (B) At any time after the later of the second anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section C.6 and October 15, 2002, the Corporation may redeem all (but not less than all) of the outstanding shares of Series A Redeemable Preferred Stock. The foregoing election shall be made by the Corporation giving each holder of Series A Redeemable Preferred Stock written notice not less than five (5) days prior to such redemption. (b) REDEMPTION DATE; REDEMPTION PRICE. Any holder of Series A Redeemable Preferred Stock may exercise such holder's right of redemption pursuant to Section D.5(a)(iii) by such holder giving the Corporation not less than ten (10) days prior written notice, which notice shall set forth the date for such redemption. Upon the election of the holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Series A Redeemable Preferred Stock to cause the Corporation to redeem the Series A Redeemable Preferred Stock pursuant to Section D.5(a)(i) or (a)(iv), all holders of Series A Redeemable Preferred Stock shall be deemed to have elected to cause the - 20 - 21 Series A Redeemable Preferred Stock to be so redeemed. Any date upon which a redemption shall actually occur in accordance with Section D.5(a) shall be referred to as a "Series A Redemption Date." The redemption price for each share of Series A Redeemable Preferred Stock redeemed pursuant to this Section D.5 shall be the per share Series A Redeemable Liquidation Preference Amount (the "Series A Redemption Price"). The aggregate Series A Redemption Price shall be payable in cash in immediately available funds on the Series A Redemption Date. Until the aggregate Series A Redemption Price, including any interest thereon, has been paid in cash for all shares of Series A Redeemable Preferred Stock redeemed as of the applicable Series A Redemption Date or Series A Notes have been issued pursuant to Section D.5(a)(i): (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any capital stock of the Corporation; and (B) except as provided in Sections C.8(d)(i), (ii) and (iii), no shares of capital stock of the Corporation (other than the Series A Redeemable Preferred Stock in accordance with this Section D.5) shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. (c) REDEMPTION PROHIBITED. If, at a Series A Redemption Date, the Corporation is prohibited under Section 1701.35 from redeeming all shares of Series A Redeemable Preferred Stock for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Series A Redeemable Preferred Stock in proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under Section 1701.35, subject to the last paragraph of Section C.8. The shares of Series A Redeemable Preferred Stock not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in this Article III. In the event that the Corporation fails for any reason to redeem shares for which redemption is triggered pursuant to Section D.5 (other than pursuant to the third sentence of Section D.5(a)(i)), including without limitation due to a prohibition of such redemption under Section 1701.35, then during the period from the applicable Series A Redemption Date through the date on which such shares are redeemed, the applicable Series A Redeemable Base Liquidation Amount of such shares shall bear interest at the rate of 15% per annum, with such interest to accrue daily in arrears and to be compounded annually. (d) DIVIDEND AFTER REDEMPTION DATE. From and after the closing of a QPO or an Extraordinary Transaction or a public offering not constituting a QPO (in the case of a redemption pursuant to Section D.5(a)(i) or (iv)) or the date specified for redemption in the election notice as set forth in Section D.5(a)(ii) or (v) or Section D.5(b), no shares of Series A Redeemable Preferred Stock subject to redemption shall be entitled to any further dividends pursuant to Section D.3 hereof; PROVIDED, HOWEVER, that in the event that shares of Series A Redeemable Preferred Stock are unable to be redeemed and continue to be outstanding in accordance with Section D.5(c), such shares shall continue to be entitled to dividends and interest thereon as provided in Sections D.3 and D.5(c) until the date on which such shares are actually redeemed by the Corporation. (e) SURRENDER OF CERTIFICATES. Upon receipt of the applicable Series A Redemption Price by certified check or wire transfer or receipt of the Series A Notes - 21 - 22 pursuant to the third sentence of Section D.5(a)(i), each holder of shares of Series A Redeemable Preferred Stock to be redeemed shall surrender the certificate or certificates representing such shares to the Corporation, duly assigned or endorsed for transfer (or accompanied by duly executed stock powers relating thereto), or shall deliver an Affidavit of Loss with respect to such certificates at the principal executive office of the Corporation or the office of the transfer agent for the Series A Redeemable Preferred Stock or such office or offices in the continental United States of an agent for redemption as may from time to time be designated by notice to the holders of Series A Redeemable Preferred Stock (or the holders of Convertible Stock, as applicable), and each surrendered certificate shall be canceled and retired; PROVIDED, HOWEVER, that if the holder has exercised its redemption right pursuant to Section D.5(a)(iii)(A), the holder shall not be required to surrender said certificate(s) to the Corporation until said holder has received a new stock certificate for those shares of Series A Redeemable Preferred Stock not so redeemed. 6. NOTICE. In the event that the Corporation provides or is required to provide notice to any holder of Convertible Stock or Common Stock in accordance with the provisions of these Second Amended and Restated Articles of Incorporation (including the provisions of Sections C.5(c) and C.9) and/or the Corporation's regulations, the Corporation shall at the same time provide a copy of any such notice to each holder of outstanding shares of Series A Redeemable Preferred Stock. 7. NO REISSUANCE OF SERIES A REDEEMABLE PREFERRED STOCK. No share or shares of Series A Redeemable Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion, exchange or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. 8. COVENANTS. So long as any shares of Series A Redeemable Preferred Stock shall be outstanding the provisions of Section C.8 shall apply to all shares of Series A Redeemable Preferred Stock as if such shares were shares of Convertible Preferred Stock. E. Common Stock. ------------- Subject to any Preferred Stock Designation, the holders of shares of Common Stock shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders for each share of Common Stock held of record by such holder as of the record date for such meeting. Each share of Common Stock will be equal to every other share of Common Stock. ARTICLE V --------- The Board of Directors shall be authorized hereby to exercise all powers now or hereafter permitted by law providing rights to the Board of Directors to adopt amendments to these Second Amended and Restated Articles of Incorporation (i) to fix or change the express terms of any unissued or treasury shares of any class, including, without limiting the generality of the foregoing: division of such shares into series and the designation and authorized number of shares of each series; voting rights of such shares (to the extent now or hereafter permitted by law); dividend or distribution rate; dates of payment of dividends or distributions and the dates - 22 - 23 from which they are cumulative; liquidation price; redemption rights and price; sinking fund requirements; conversion rights; and restrictions on the issuance of shares of the same series or any other class or series; all as may be established by resolution of the Board of Directors from time to time (collectively with the terms of the Preferred Stock, a "Preferred Stock Designation"), and (ii) to include within these Second Amended and Restated Articles of Incorporation such additional provisions, or amendments to any existing provisions, as may hereafter be authorized by law. ARTICLE VI A. Except as set forth in Section C of this Article VI, the affirmative vote of the holders of at least 70% of the voting power of the Corporation, voting together as a single class, is required: 1. to adopt an agreement for the merger or consolidation of the Corporation with or into any other entity; or 2. to authorize the sale, lease, exchange, transfer or other disposition of all or substantially all of the assets of the Corporation, to another person, corporation or other entity; or 3. to authorize any sale, transfer or other disposition by the Corporation of any of its shares in a transaction in which shareholder approval is otherwise required by applicable Ohio law; or 4. to authorize any amendment of these Second Amended and Restated Articles of Incorporation so as to change issued or unissued shares of any class, whether with or without par value, into the same or a different number of shares of any class with or without par value, theretofore or then authorized; or 5. to authorize any amendment of these Second Amended and Restated Articles of Incorporation so as to change any of the express terms of issued or unissued shares of any class; or 6. to authorize any control share acquisition for which shareholder approval is required pursuant to Ohio Revised Code Section 1701.831 (or any successor section thereto) as such provision is amended from time to time; provided, however, that this Article VI will not alter the voting entitlement of shares that, by virtue of any Preferred Stock Designation, are expressly entitled to vote on any amendment to these Second Amended and Restated Articles of Incorporation. B. For purposes of these Second Amended and Restated Articles of Incorporation, (1) "voting power of the Corporation" means the aggregate voting power of (a) all the outstanding Common Stock of the Corporation and (b) all the outstanding shares of any class or series of shares of the Corporation that has (i) rights to distributions senior to those of the Common Stock including, without limitation, any relative, participating, optional, or other - 23 - 24 special rights and privileges of, and any qualifications, limitations or restrictions on, such shares and (ii) voting rights entitling such shares to vote generally in the election of directors; and (2) "control share acquisition" has the meaning for such term in Ohio Revised Code Section 1701.01(Z)(1) (or any successor section thereto) as such provision is amended from time to time. C. The provisions of Section A of this Article VI will not apply to any vote of the shareholders made with respect to any of the matters enumerated in Section 1 of this Article VI if, prior to such vote, all of the directors of the Corporation then in office have, by a resolution adopted at a duly convened meeting or by unanimous written action in lieu of a meeting, approved such matter and recommended the approval of such matter to the shareholders. D. The vote required under Section A.6 of this Article VI is in addition to the requirements of Section 1701.831 of the Ohio Revised Code. ARTICLE VII ----------- Except as may be provided in any Preferred Stock Designation, holders of shares of capital stock of the Corporation shall not be entitled to cumulative voting rights in the election of directors. ARTICLE VIII ------------ Except as may be provided in any Preferred Stock Designation, no holder of any shares of capital stock of the Corporation shall have any preemptive right to acquire any shares of unissued capital stock of any class or series, now or hereafter authorized, or any treasury shares or securities convertible into such shares or carrying a right to subscribe to or acquire such shares of capital stock. ARTICLE IX ---------- The Corporation may from time to time, pursuant to authorization by the Board of Directors and without action by the shareholders, purchase or otherwise acquire capital stock of the Corporation of any class or classes in such manner, upon such terms and in such amounts as the Board of Directors shall determine; subject, however, to such limitation or restriction, if any, as is contained in any Preferred Stock Designation at the time of such purchase or acquisition. ARTICLE X --------- Subject to Article VI and Article XI of these Second Amended and Restated Articles of Incorporation and any Preferred Stock Designation, and notwithstanding any provision of the Ohio Revised Code now or hereafter in force requiring for any purpose the vote, consent, waiver or release of the holders of shares entitling them to exercise two-thirds, or any other proportion, of the voting power of the Corporation or of any class or classes of shares thereof, such action, unless otherwise expressly required by statute or by these Second Amended and Restated Articles of Incorporation, may be taken by the vote, consent, waiver or release of the holders of - 24 - 25 shares entitling them to exercise a majority of the voting power of the Corporation or of such classes. ARTICLE XI ---------- Notwithstanding anything to the contrary contained in these Second Amended and Restated Articles of Incorporation, the affirmative vote of the holders of at least 70% of the voting power of the Corporation, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, Article V, Article VI, Article VIII, Article IX, Article X or this Article XI; provided, however, (a) that this Article XI shall not alter the voting entitlement of shares that, by virtue of any Preferred Stock Designation, are expressly entitled to vote on any amendment to these Second Amended and Restated Articles of Incorporation, and (b) that this Article XI will not apply to any amendment, repeal or adoption of any provision if, prior to such vote, all of the directors of the Corporation then in office have, by a resolution adopted at a duly convened meeting or by unanimous written action in lieu of a meeting, approved such matter and recommended the approval of such matter to the shareholders. ARTICLE XII ----------- Any and every statute of the State of Ohio hereafter enacted, (i) whereby the rights, powers or privileges of corporations or of the shareholders of corporations organized under the laws of the State of Ohio are increased or diminished or in any way affected, or (ii) whereby effect is given to the action taken by any number, less than all, of the shareholders of any such corporation, or (iii) whereby the authority of the directors to adopt amendments to the articles of incorporation without shareholder approval shall be expanded, will apply to the Corporation and will be binding not only upon the Corporation but upon every shareholder of the Corporation to the same extent as if such statute had been in force at the date of filing these Second Amended and Restated Articles of Incorporation in the office of the Secretary of State of Ohio. ARTICLE XIII ------------ Except as may be otherwise provided in any Preferred Stock Designation, the number of the directors of the Corporation will not be less than six nor more than 16 as may be determined from time to time only (i) by a vote of a majority of the total number of directors that the Corporation would have if there were no vacancies on the Board, or (ii) by the affirmative vote of the holders of at least 80% of the voting power of the Corporation, voting together as a single class. The directors, other than those who may be expressly elected by virtue of the terms of any Preferred Stock Designation, will be classified with respect to the time for which they severally hold office into two classes, as nearly equal in size as possible and consisting of not less than three directors in each class, designated Class I and Class II. The directors first appointed to Class I will hold office for a term expiring at the annual meeting of shareholders to be held in 1999 and the directors first appointed to Class II will hold office for a term expiring at the annual meeting of shareholders to be held in 2000. The members of each class will hold office until their successors are elected. Except as may be otherwise provided in any Preferred Stock Designation, at each annual meeting of the shareholders of the Corporation, the successors of the class of directors whose terms expire at that meeting shall be elected by plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of - 25 - 26 shareholders held in the third year following the year of their election. Except as may be otherwise provided in any Preferred Stock Designation, directors may be elected by the shareholders only at an annual meeting of shareholders. No decrease in the number of directors constituting the Board of Directors may shorten the term of any incumbent director. Election of directors of the Corporation need not be by written ballot unless requested by the presiding officer or by the holders of a majority of the voting power of the Corporation present in person or represented by proxy at a meeting of the shareholders at which directors are to be elected. ARTICLE XIV ----------- These Second Amended and Restated Articles of Incorporation supersede the existing Amended and Restated Articles of Incorporation of the Corporation, as amended. - 26 - EX-5 4 EXHIBIT 5 1 Exhibit 5 March 1, 1999 Conley, Canitano & Associates, Inc. 5800 Landerbrook Drive Mayfield Heights, Ohio 44124 Re: 5,000,000 Shares of Common Stock, no par value, of Conley, Canitano & Associates, Inc. to Be Offered Through Underwriters --------------------------------------------------- Gentlemen: We are acting as counsel for Conley, Canitano & Associates, Inc., an Ohio corporation (the "Corporation"), in connection with (i) the issuance and sale of 4,000,000 shares of Common Stock, no par value, of the Corporation (the "Primary Shares") in accordance with the Underwriting Agreement (the "Underwriting Agreement") among the Corporation, the shareholders of the Corporation named in Schedule II to the Underwriting Agreement (collectively, the "Selling Shareholders"), and the Representatives of the several Underwriters named in Schedule I to the Underwriting Agreement (collectively, the "Underwriters"), (ii) the sale by the Selling Shareholders identified on ATTACHMENT A hereto of up to 20,010 shares of Common Stock, no par value, of the Corporation and (iii) the sale by the remaining Selling Shareholders of up to 979,990 shares of Common Stock, no par value, of the Corporation ((ii) and (iii) collectively, the "Secondary Shares") in accordance with the Underwriting Agreement. We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion, and based thereon we are of the opinion that: 1. The Primary Shares are duly authorized and, when issued and delivered to the Underwriters pursuant to the Underwriting Agreement against payment of the consideration therefor as provided therein, will be validly issued, fully paid and nonassessable. 2. The Secondary Shares to be sold by the Selling Shareholders identified on ATTACHMENT A hereto are duly authorized and, when issued and delivered in accordance with the terms of the respective option agreements between the Corporation and such Selling Shareholders, will be validly issued, fully paid and nonassessable. 3. The remainder of the Secondary Shares are duly authorized, validly issued, fully paid and nonassessable. 2 Conley, Canitano & Associates, Inc March 1, 1999 Page 2 We hereby consent to the filing of this opinion as Exhibit 5 to the Registration Statement No. 33-59909 on Form S-1 filed by the Corporation to effect registration of the Primary Shares and the Secondary Shares under the Securities Act of 1933, as amended (the "Registration Statement"), and to the reference to us under the caption "Legal Matters" in the Prospectus comprising a part of the Registration Statement. Very truly yours, Jones, Day, Reavis & Pogue 3 ATTACHMENT A ------------ 1. Option Agreement, dated April 3, 1998, between Brent Bearden and Conley, Canitano & Associates, Inc. 2. Option Agreement, dated April 3, 1998, between John Gravitt and Conley, Canitano & Associates, Inc. 3. Option Agreement, dated April 3, 1998, between Claudia Kendler and Conley, Canitano & Associates, Inc. 4. Option Agreement, dated April 3, 1998, between Laura McDonel and Conley, Canitano & Associates, Inc. 5. Option Agreement, dated April 3, 1998, between Bryan Pepper and Conley, Canitano & Associates, Inc. 6. Option Agreement, dated April 3, 1998, between Rob Peterson and Conley, Canitano & Associates, Inc. 7. Option Agreement, dated April 3, 1998, between Ted Renneker and Conley, Canitano & Associates, Inc. EX-10.31 5 EXHIBIT 10.31 1 Exhibit 10.31 RESTATED AND AMENDED LOAN AGREEMENT BY AND BETWEEN CONLEY, CANITANO & ASSOCIATES, INC. AND FLEET NATIONAL BANK, AS AGENT AND A LENDER AND THE OTHER FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO $20,000,000 SECURED TERM LOAN AND $7,500,000 SECURED REVOLVING CREDIT LOAN JANUARY 12, 1999 2 INDEX TO LOAN AGREEMENT
Page ---- RECITALS.........................................................................................................1 ARTICLE 1. DEFINITIONS AND ACCOUNTING AND OTHER TERMS............................................................1 SECTION 1.1. CERTAIN DEFINED TERMS..........................................................................1 SECTION 1.2. ACCOUNTING TERMS..............................................................................15 SECTION 1.3. OTHER TERMS...................................................................................15 ARTICLE 2. AMOUNT AND TERMS OF THE LOANS........................................................................16 SECTION 2.1. THE LOANS.....................................................................................16 Section 2.1.0. The Revolving Credit Loans.............................................................16 Section 2.1.1. Term Loans.............................................................................17 SECTION 2.2. INTEREST AND FEES ON THE LOANS................................................................18 Section 2.2.1. Interest...............................................................................18 Section 2.2.2. Fees...................................................................................19 Section 2.2.3. Increased Costs - Capital..............................................................19 SECTION 2.3. NOTATIONS.....................................................................................20 SECTION 2.4. COMPUTATION OF INTEREST.......................................................................20 SECTION 2.5. TIME OF PAYMENTS AND PREPAYMENTS IN IMMEDIATELY AVAILABLE FUNDS...............................20 Section 2.5.1. Time...................................................................................20 Section 2.5.2. Setoff, etc............................................................................21 Section 2.5.3. Unconditional Obligations and No Deductions............................................22 SECTION 2.6. PREPAYMENT AND CERTAIN PAYMENTS...............................................................24 Section 2.6.1. Mandatory Payments.....................................................................24 Section 2.6.2. Voluntary Prepayments..................................................................25 Section 2.6.3. Prepayment of Libor Loans..............................................................25 Section 2.6.4. Permanent Reduction of Commitment......................................................25 SECTION 2.7. PAYMENT ON NON-BUSINESS DAYS..................................................................25 SECTION 2.8. USE OF PROCEEDS...............................................................................26 SECTION 2.9. SPECIAL LIBOR LOAN PROVISIONS.................................................................26 Section 2.9.1. Requests...............................................................................26 Section 2.9.2. Libor Loans Unavailable................................................................26 Section 2.9.3. Libor Lending Unlawful.................................................................27 Section 2.9.4. Additional Costs on Libor Loans........................................................28 Section 2.9.5. Libor Funding Losses...................................................................29 Section 2.9.6. Banking Practices......................................................................29 Section 2.9.7. Borrower's Options on Unavailability or Increased Cost of Libor Loans.................30 Section 2.9.8. Assumptions Concerning Funding of Libor Loans..........................................30 SECTION 2.10. INTEREST RATE PROTECTION.....................................................................30 ARTICLE 3. CONDITIONS OF LENDING................................................................................31 SECTION 3.1. CONDITIONS PRECEDENT TO THE COMMITMENT AND TO ALL LOANS.......................................31 Section 3.1.1. The Commitment and Initial Loans.......................................................31
i 3 Section 3.1.2. The Commitment and the Loans...........................................................34 ARTICLE 4. REPRESENTATIONS AND WARRANTIES.......................................................................34 SECTION 4.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER................................................34 Section 4.1.1. Organization and Existence.............................................................34 Section 4.1.2. Authorization and Absence of Defaults..................................................35 Section 4.1.3. Acquisition of Consents................................................................35 Section 4.1.4. Validity and Enforceability............................................................35 Section 4.1.5. Financial Information..................................................................35 Section 4.1.6. No Litigation..........................................................................36 Section 4.1.7. Regulation U...........................................................................36 Section 4.1.8. Absence of Adverse Agreements..........................................................36 Section 4.1.9. Taxes..................................................................................37 Section 4.1.10. ERISA.................................................................................37 Section 4.1.11. Ownership of Properties...............................................................37 Section 4.1.12. Accuracy of Representations and Warranties............................................38 Section 4.1.13. No Investment Company.................................................................38 Section 4.1.14. Solvency, etc.........................................................................38 Section 4.1.15. Approvals.............................................................................38 Section 4.1.16. Ownership Interests...................................................................38 Section 4.1.17. Licenses, Registrations, Compliance with Laws, etc....................................39 Section 4.1.18. Principal Place of Business; Books and Records........................................39 Section 4.1.19. Subsidiaries..........................................................................39 Section 4.1.20. Copyright.............................................................................39 Section 4.1.21. Environmental Compliance..............................................................39 Section 4.1.22. Material Agreements, etc..............................................................40 Section 4.1.23. Patents, Trademarks and Other Property Rights.........................................40 Section 4.1.24. Related Transaction Documents.........................................................40 Section 4.1.25. Material Adverse Effect...............................................................40 Section 4.1.26. Year 2000.............................................................................40 ARTICLE 5. COVENANTS OF THE BORROWER............................................................................41 SECTION 5.1. AFFIRMATIVE COVENANTS OF THE BORROWER OTHER THAN REPORTING REQUIREMENTS.......................41 Section 5.1.1. Payment of Taxes, etc..................................................................41 Section 5.1.2. Maintenance of Insurance...............................................................41 Section 5.1.3. Preservation of Existence, etc.........................................................42 Section 5.1.4. Compliance with Laws, etc..............................................................42 Section 5.1.5. Visitation Rights......................................................................42 Section 5.1.6. Keeping of Records and Books of Account................................................42 Section 5.1.7. Maintenance of Properties, etc.........................................................42 Section 5.1.8. Post-Closing Items.....................................................................42 Section 5.1.9. Other Documents, etc...................................................................42 Section 5.1.10. Minimum Interest Coverage Ratio.......................................................43 Section 5.1.11. Minimum Fixed Charge Coverage Ratio...................................................43 Section 5.1.12. Maximum Ratio of Total Indebtedness for Borrowed Money to EBITDA......................43 Section 5.1.13. Officer's Certificates and Requests...................................................43 Section 5.1.14. Depository............................................................................43 Section 5.1.15. Chief Executive Officer...............................................................43 Section 5.1.16. Notice of Purchase of Real Estate and Leases..........................................43 Section 5.1.17. Additional Assurances.................................................................44 Section 5.1.18. Appraisals............................................................................44 Section 5.1.19. Environmental Compliance..............................................................44 Section 5.1.20. Remediation...........................................................................44 Section 5.1.21. Site Assessments......................................................................44 Section 5.1.22. Indemnity.............................................................................44
ii 4 Section 5.1.23. Trademarks, Copyrights, etc................................................................45 SECTION 5.2. NEGATIVE COVENANTS OF THE BORROWER.................................................................45 Section 5.2.1. Liens, etc..................................................................................45 Section 5.2.2. Assumptions, Guaranties, etc. of Indebtedness of Other Persons..............................46 Section 5.2.3. Acquisitions, Dissolution, etc..............................................................46 Section 5.2.4. Change in Nature of Business................................................................47 Section 5.2.5. Ownership...................................................................................47 Section 5.2.6. Sale and Leaseback..........................................................................47 Section 5.2.7. Sale of Accounts, etc.......................................................................47 Section 5.2.8. Indebtedness................................................................................47 Section 5.2.9. Other Agreements............................................................................48 Section 5.2.11. Dividends, Payments and Distributions......................................................48 Section 5.2.12. Investments in or to Other Persons.........................................................48 Section 5.2.13. Transactions with Affiliates...............................................................48 Section 5.2.14. Change of Fiscal Year......................................................................48 Section 5.2.15. Subordination of Claims....................................................................48 Section 5.2.16. Compliance with ERISA......................................................................48 Section 5.2.17. Capital Expenditures.......................................................................49 Section 5.2.18. Hazardous Waste............................................................................49 Section 5.2.19 Other Restrictions on Liens or Dividends....................................................49 Section 5.2.20 Limitation on Creation of Subsidiaries, etc.................................................49 SECTION 5.3. REPORTING REQUIREMENTS.............................................................................49 ARTICLE 6. EVENTS OF DEFAULT.........................................................................................51 SECTION 6.1. EVENTS OF DEFAULT..................................................................................51 ARTICLE 7. REMEDIES OF LENDERS.......................................................................................53 ARTICLE 8. AGENT.....................................................................................................54 SECTION 8.1. APPOINTMENT........................................................................................54 SECTION 8.2. POWERS; GENERAL IMMUNITY...........................................................................54 Section 8.2.1. Duties Specified............................................................................54 Section 8.2.2. No Responsibility For Certain Matters.......................................................54 Section 8.2.3. Exculpatory Provisions......................................................................54 Section 8.2.4. Agent Entitled to Act as Lender.............................................................55 SECTION 8.3. REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF CREDITWORTHINESS................55 SECTION 8.4. RIGHT TO INDEMNITY.................................................................................55 SECTION 8.5. PAYEE OF NOTE TREATED AS OWNER.....................................................................56 SECTION 8.6. RESIGNATION BY AGENT...............................................................................56 SECTION 8.6. SUCCESSOR AGENT....................................................................................56 ARTICLE 9. MISCELLANEOUS.............................................................................................57 SECTION 9.1. CONSENT TO JURISDICTION AND SERVICE OF PROCESS.....................................................57 SECTION 9.2. RIGHTS AND REMEDIES CUMULATIVE.....................................................................57 SECTION 9.3. DELAY OR OMISSION NOT WAIVER.......................................................................58 SECTION 9.4. WAIVER OF STAY OR EXTENSION LAWS...................................................................58 SECTION 9.5. AMENDMENTS, ETC....................................................................................58 SECTION 9.6. ADDRESSES FOR NOTICES, ETC.........................................................................59 SECTION 9.7. COSTS, EXPENSES AND TAXES..........................................................................60 SECTION 9.8. PARTICIPATIONS.....................................................................................60 SECTION 9.9. BINDING EFFECT; ASSIGNMENT.........................................................................60 SECTION 9.10. ACTUAL KNOWLEDGE..................................................................................60 SECTION 9.11. SUBSTITUTIONS AND ASSIGNMENTS.....................................................................61 SECTION 9.12. PAYMENTS PRO RATA.................................................................................62 SECTION 9.13. INDEMNIFICATION...................................................................................63
iii 5 SECTION 9.14. GOVERNING LAW...................................................................................64 SECTION 9.15. SEVERABILITY OF PROVISIONS......................................................................64 SECTION 9.16. HEADINGS........................................................................................64 SECTION 9.17. COUNTERPARTS....................................................................................64
iv 6 SCHEDULE OF EXHIBITS EXHIBIT 1.1 EQUITY INVESTMENTS, OWNERSHIP INTERESTS AND SUBSIDIARIES EXHIBIT 1.2 RELATED TRANSACTION DOCUMENTS EXHIBIT 1.4 FORM OF INTEREST RATE ELECTION EXHIBIT 1.5 FORM OF REVOLVING CREDIT NOTE EXHIBIT 1.6 FORM OF TERM NOTE EXHIBIT 1.8 PERMITTED ENCUMBRANCES EXHIBIT 1.9 PRO RATA SHARES, AGENT'S AND LENDERS' NOTICE ADDRESSES AND WIRE TRANSFER INSTRUCTIONS EXHIBIT 1.10 FORM OF REQUEST EXHIBIT 2.1.0 BORROWING BASE CERTIFICATE EXHIBIT 3.1.1.8 PERMITTED INDEBTEDNESS AND CAPITALIZED LEASES EXHIBIT 3.1.1.10 FORM OF COMPLIANCE CERTIFICATE EXHIBIT 4.1.1 FOREIGN QUALIFICATIONS EXHIBIT 4.1.2 AUTHORIZATIONS EXHIBIT 4.1.3 CONSENTS EXHIBIT 4.1.6 LITIGATION EXHIBIT 4.1.8 ADVERSE AGREEMENTS EXHIBIT 4.1.9 TAXES EXHIBIT 4.1.11 REAL PROPERTY EXHIBIT 4.1.17 GOVERNMENTAL PERMITS EXHIBIT 4.1.20 COPYRIGHTS EXHIBIT 4.1.21 HAZARDOUS WASTE EXHIBIT 4.1.22 MATERIAL CONTRACTS EXHIBIT 4.1.23 INTELLECTUAL PROPERTY EXHIBIT 5.2.2 GUARANTIES EXHIBIT 5.2.13 TRANSACTIONS WITH AFFILIATES EXHIBIT 9.11.1 FORM OF SUBSTITUTION AGREEMENT v 7 RESTATED AND AMENDED LOAN AGREEMENT Conley, Canitano & Associates, Inc., an Ohio corporation with a principal place of business at CCAi Renaissance Centre, 5800 Landerbrook Drive, Mayfield Heights, Ohio 44124 (hereinafter the "Borrower"), Fleet National Bank, a national banking association organized under the laws of the United States and having an office at One Federal Street, Boston, Massachusetts 02110 (hereinafter sometimes the "Agent") as Agent for itself (sometimes "Fleet") and each of the other Lenders who now and/or hereafter become parties to this Agreement pursuant to the terms of Section 9.11 hereof, and sometimes in its capacity as a Lender ("Lender"), and the Lenders hereby agree as follows: RECITALS WHEREAS, on or about April 7, 1998, the Borrower obtained from Fleet a secured revolving credit/term loan commitment of up to $15,000,000 all on the terms and conditions contained in that certain Loan Agreement by and between the Borrower, Fleet and the Agent dated as of April 7, 1998 (the "Existing Credit Agreement"); and WHEREAS, the Borrower has requested that the Agent and the Lenders amend and restate said credit facility by replacing same with a Revolving Credit Loan Commitment in a maximum principal amount not to exceed $7,500,000 and a Term Loan in the amount of $20,000,000 and the Agent and the Lenders are willing to amend and restate the Existing Credit Agreement to permit certain indebtedness outstanding thereunder to remain outstanding on the terms and conditions set forth in this Amended and Restated Loan Agreement, to provide for the Revolving Credit Loan Commitment and the Term Loan and to amend and restate certain other provisions thereof. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower, the Lenders and the Agent agree that the Existing Credit Agreement is hereby amended and restated and shall remain in effect as amended and restated hereby on the terms and conditions contained herein, each of which are agreed to by the Borrower, the Lenders and the Agent as follows: ARTICLE 1. DEFINITIONS AND ACCOUNTING AND OTHER TERMS Section 1.1. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acquired Company" means Bureau Van Dijk Computer Services, Inc., a Georgia corporation and a Subsidiary. 1 8 "Adjusted Libor Rate" means, with respect to any Libor Loan to be made by the Lenders for the Interest Period applicable to such Libor Loan, the interest rate per annum determined by the Agent (fixed throughout such Interest Period (subject to adjustments for the Libor Rate Reserve Percentage)) and rounded upwards, if necessary, to the next 1/16 of 1%) which is equal to the quotient of (i) the rate of interest determined by the Agent to be the average of the interest rates per annum at which Dollar deposits in immediately available funds are offered to each Reference Lender by first-class banks in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the Business Day on which such Interest Period begins, in an amount approximately equal to the principal amount of such Libor Loan, for a period of time equal to such Interest Period and (ii) a number equal to the number one minus the Libor Rate Reserve Percentage. The "Libor Rate Reserve Percentage" applicable to any Interest Period means the average of the maximum effective rates (expressed as a decimal) of the statutory reserve requirements (without duplication, but including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to each Reference Lender during such Interest Period under regulations of the Board of Governors of the Federal Reserve System (or any successor), including without limitation Regulation D or any other regulation dealing with maximum reserve requirements which are applicable to each Reference Lender with respect to its "Eurocurrency Liabilities", as that term may be defined from time to time by the Board of Governors of the Federal Reserve System (or any successor) or are otherwise imposed by the Board of Governors of the Federal Reserve System (or any successor) and which in any other respect relate directly to the funding of loans bearing interest at rates based on the interest rates at which Dollar deposits in immediately available funds are offered to banks by first-class banks in the London interbank market. If any Reference Lender fails to provide its offered quotation to the Agent, the Adjusted Libor Rate shall be determined on the basis of the offered quotation of the other Reference Lender. The Adjusted Libor Rate shall be adjusted automatically on and as of the effective date of any change in the Libor Rate Reserve Percentage. "Adjusted Four Quarterly Basis" means (i) for the Borrower fiscal quarter ending December 31, 1998, EBITDA, Interest Expense and Total Debt Service, respectively shall be the sum of (a) the EBITDA, Interest Expense and Total Debt Service, respectively, of the Borrower and any Subsidiaries for said Borrower fiscal quarter and for the immediately preceding two Borrower fiscal quarters times 1.33, plus, (b) the Acquired Company EBITDA, Interest Expense and Total Debt Service, respectively, calculated in the same manner as the Borrower's EBITDA, Interest Expense and Total Debt Service, respectively, set forth above for the Acquired Company fiscal quarter ending December 31, 1998 and the immediately preceding three Acquired Company fiscal quarters; (ii) for the Borrower fiscal quarter ending March 31, 1999, EBITDA, Interest Expense and Total Debt Service, respectively, shall be the sum of (c) the EBITDA, Interest Expense and Total Debt Service, respectively, of the Borrower and any Subsidiaries for said fiscal quarter and for the immediately preceding three Borrower fiscal quarters plus (d) the Acquired Company's EBITDA, Interest Expense and Total Debt Service, respectively, for the Acquired Company's fiscal quarters ending June 30, September 30, and December 31, of 1998; (iii) for the Borrower fiscal quarter ending June 30, 1999, EBITDA, Interest Expense and Total Debt Service, respectively, shall be the sum of (e) the EBITDA, Interest Expense and Total Debt Service, respectively, of the Borrower and any Subsidiaries for said fiscal quarter and for the immediately preceding three Borrower fiscal quarters plus (f) the Acquired Company's EBITDA, Interest Expense and Total Debt Service, respectively, for the Acquired Company's fiscal 2 9 quarters ending September 30, 1998 and December 31, 1998; (iv) for the Borrower fiscal quarter ending September 30, 1999, EBITDA, Interest Expense and Total Debt Service, respectively, shall be the sum of (g) the EBITDA, Interest Expense and Total Debt Service, respectively, of the Borrower and any Subsidiaries for said fiscal quarter and for the immediately preceding three Borrower fiscal quarters plus (h) the EBITDA, Interest Expense and Total Debt Service, respectively, of the Acquired Company for the Acquired Company's fiscal quarter ending December 31, 1998; and for the Borrower fiscal quarter ending December 31, 1999 and thereafter, EBITDA, Interest Expense and Total Debt Service, respectively, shall be the EBITDA, Interest Expense and Total Debt Service, respectively, of the Borrower and any Subsidiaries for the Borrower fiscal quarter in question and the immediately preceding three Borrower fiscal quarters. "Advance" and "Advances" means the funding by any Lender of all or a portion of the Loans in accordance with this Agreement. "Affiliate" means singly and collectively, TA Associates and any Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, the Borrower. For purposes of this definition, a Person shall be deemed to be "controlled by" the Borrower if the Borrower possesses, directly or indirectly, power either to (i) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise, and the legal representative, successor or assign of any such Person. "Agent" means Fleet National Bank or any other Person which is at the time in question serving as the agent under the terms of Article 8 hereof and the other Financing Documents. "Agreement" means this loan agreement, as the same may from time to time be amended. "A.M." means a time from and including 12 o'clock midnight to and excluding 12 o'clock noon on any Business Day using Eastern Standard (Daylight Savings) time. "Applicable Margin" means, (i) for each Libor Loan, 3.25% per annum, and (ii) for each Prime Rate Loan, 1.50% per annum; provided, however, that if, at any time on or after the receipt by the Agent (a) of the Borrower's quarterly financial statements for the Borrower's December 31, 1998 fiscal quarter (which for purposes of this definition shall be adjusted to give effect to the Loans and the closing of the Related Transactions as provided in Section 3.1.10) and (b) the Borrower's quarterly financial statements for each subsequent Borrower fiscal quarter provided to the Agent by the Borrower pursuant to Section 5.3.3 hereof, the ratio of total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of the most recently ended Borrower fiscal quarter to EBITDA calculated on the Adjusted Four Quarterly Basis is within the ratios set forth below and if and so long as no Default or Event of Default exists, the applicable margin, shall, subject to the last sentence of this definition, equal the rate set forth below opposite the applicable ratio: 3 10 Ratio Prime Rate+ LIBOR Rate+ < 3.00:1.00 > 2.50:1.00 1.00% 2.75% - < 2.50:1.00 > 1.50:1.00 .50% 2.25% - < 1.50 .00% 1.50% Any change in the Applicable Margin required pursuant to the foregoing shall become effective on the first day of the calendar month commencing after the month in which the Agent receives the Borrower's financial statement for the Borrower's fiscal quarter or year-end, as the case may be, in question; provided, however, that each of the above-referenced interest rates shall remain in effect only so long as Borrower qualifies therefor and provided further, however, that interest rate reductions shall become final only on the basis of Borrower's annual audited financial statements and in the event that such annual audited financial statements establish that the Borrower was not entitled to a rate reduction which was previously granted, the Borrower shall, upon written demand by the Agent repay to the Agent for the account of each Lender an amount equal to the excess of interest at the rate which should have been charged based on such annual audited financial statements and the rate actually charged on the basis of Borrower's quarterly financial statement(s) (provided that in the event of a dispute as to the appropriate fiscal quarter as to which any adjustment should be allocated, the decision of the independent accountants of the Borrower shall be made in accordance with GAAP and shall be binding upon the Agent, the Lenders and the Borrower absent manifest error); and provided further, however, that in the event that Borrower fails to provide any financial statement on a timely basis in accordance with Section 5.3.3, any interest rate increase payable as a result thereof shall be retroactively effective to the date on which the financial statement in question should have been received by the Agent in accordance with Section 5.3.3, and the Borrower shall pay any amount due as a result thereof upon written demand from the Agent. The Agent shall endeavor to provide the Borrower with written notice of any such rate increases. "Authorized Representative" means such senior personnel of the Borrower as shall be duly authorized and designated in writing by the Borrower to execute documents, instruments and agreements on its behalf and to perform the functions of Authorized Representative under any of the Financing Documents. "Borrowed Money" means any obligation to repay funded Indebtedness, any Indebtedness evidenced by notes, bonds, debentures, guaranties or similar obligations including without limitation the Loans and any obligation to pay money under a conditional sale or other title retention agreement, the net aggregate rentals payable under any Capitalized Lease Obligation, any reimbursement obligation for any letter of credit, any obligations in respect of banker's and other acceptances or similar obligations and the maximum amount of KLA Deferred Payments which could be owed by the Borrower at or after the date of determination. "Borrower" has the meaning assigned in the first paragraph of this Agreement. 4 11 "Borrowing Base" means an amount equal to eighty percent (80%) of the Net Outstanding Amount of Eligible Receivables. "Budget" has the meaning assigned to such term in Section 5.3.7. "Business Condition" means the financial condition, business, assets, liabilities and operations of a Person. "Business Day" means (i) for all purposes other than as covered by clause (ii) below, any day on which banks in Boston, Massachusetts or New York, New York are not authorized or required by applicable law to close; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Libor Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the London interbank market. "Capital Expenditures" means all expenditures paid or incurred by the Borrower or any Subsidiary in respect of (i) the acquisition, construction, improvement or replacement of land, buildings, machinery, equipment, any other fixed assets or leaseholds and (ii) to the extent related to and not included in (i) above, materials, contract labor and direct labor, which expenditures have been or should be, in accordance with GAAP, capitalized on the books of the Borrower or such Subsidiary. Where a fixed asset is acquired by a lease which is required to be capitalized pursuant to Statement of Financial Accounting Standards number 13 or any successor thereto, the amount required to be capitalized in accordance therewith shall be considered to be an expenditure in the year such asset is first leased. "Capitalized Lease Obligations" means all lease obligations which have been or should be, in accordance with GAAP, capitalized on the books of the lessee. "Cash Equivalent Investments" means any Investment in (i) direct obligations of the United States or any agency, authority or instrumentality thereof, or obligations guaranteed by the United States or any agency, authority or instrumentality thereof, whether or not supported by the full faith and credit of, a right to borrow from or the ability to be purchased by the United States; (ii) commercial paper rated in the highest grade by a nationally recognized statistical rating agency or which, if not rated, is issued or guaranteed by any issuer with outstanding long-term debt rated A or better by any nationally recognized statistical rating agency; (iii) demand and time deposits with, and certificates of deposit and bankers acceptances issued by, any office of the Agent, any Lender or any other bank or trust company which is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits aggregating at least $500,000,000, the outstanding long-term debt of which or of the holding company of which it is a subsidiary is rated A or better by any nationally recognized statistical rating agency; (iv) any short-term note which has a rating of MIG-2 or better by Moody's Investors Service Inc. or a comparable rating from any other nationally recognized statistical rating agency; (v) any municipal bond or other governmental obligation (including without limitation any industrial revenue bond or project note) which is rated A or better by any nationally recognized statistical rating agency; (vi) any other obligation of any issuer, the outstanding long-term debt of which is rated A or better by any nationally recognized statistical 5 12 rating agency; (vii) any repurchase agreement with any financial institution described in clause (iii) above, relating to any of the foregoing instruments and fully collateralized by such instruments; (viii) shares of any open-end diversified investment company that has its assets invested only in investments of the types described in clause (i) through (vii) above at the time of purchase and which maintains a constant net asset value per share; and (ix) shares of any open-end diversified investment company registered under the Investment Company Act of 1940, as amended, which maintains a constant net asset value per share in accordance with regulations of the Securities & Exchange Commission, has aggregate net assets of not less than $50,000,000 on the date of purchase and either derives at least 95% of its gross income from interest on or gains from the sale of investments of the type described in clauses (i) through (vii), above or has at least 85% of the weighted average value of its assets invested in investments of such types; provided that the purchase of any shares in any particular investment company shall be limited to an aggregate amount owned at any one time of $500,000. Each Cash Equivalent Investment shall have a maturity of less than one year at the time of purchase; provided that the maturity of any repurchase agreement shall be deemed to be the repurchase date and not the maturity of the subject security and that the maturity of any variable or floating rate note subject to prepayment at the option of the holder shall be the period remaining (including any notice period remaining) before the holder is entitled to prepayment. "Change of Control" means, at any time: (i) any "person" or "group" (each as used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time) either (A) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of voting capital stock of the Borrower (or securities convertible into or exchangeable for such voting capital stock) representing 30% or more of the combined voting power of all voting capital stock of the Borrower (on a fully diluted basis) or (B) otherwise has the ability, directly or indirectly, to elect a majority of the board of directors of the Borrower; or (ii) during any period of up to 24 consecutive months, commencing on the Closing Date, individuals who at the beginning of such 24-month period were directors of the Borrower shall cease for any reason (other than (A) the death, disability or retirement of a director or (B) the death, disability or retirement of an officer of the Borrower that is serving as a director at such time so long as another officer of the Borrower replaces such Person as a director) to constitute a majority of the board of directors of the Borrower. "Closing Date" means the date on which all of the conditions precedent set forth in Section 3.1 of this Agreement have been satisfied and the Term Loan is funded in accordance with this Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means the Lenders' several commitments to make or maintain the Loans as set forth in Section 2.1 hereof in the maximum outstanding amount of each Lender's Pro Rata Share of $27,500,000 less the reductions set forth in Section 2.1 and less any reductions and prepayments or repayments of the Term Loan as set forth in Section 2.6. 6 13 "Commonly Controlled Entity" means a Person, whether or not incorporated, which is under common control with the Borrower within the meaning of section 414(b) or (c) of the Code. "Current Liabilities" means all liabilities of the Borrower and the Subsidiaries which would, in accordance with GAAP on a consolidated basis, be classified as current liabilities of corporations conducting a business the same as or similar to that of the Borrower and any Subsidiaries, including without limitation, all lease rental payments under Capitalized Lease Obligations and fixed prepayments of, and sinking fund payments and reserves with respect to, Indebtedness, in each case required to be made within one year from the date of determination. "Default" means an event or condition which with the giving of notice or lapse of time or both would become an Event of Default. "Discharged Rights and Obligations" shall have the meaning assigned to such term in Section 9.11.4. "Dollars" and the sign "$" mean lawful money of the United States of America. "EBITDA" means, for any fiscal period, Net Income plus, to the extent accounted for in Net Income: (i) Interest Expense, (ii) taxes, (iii) depreciation, (iv) amortization, (v) other noncash charges, (vi) non-recurring extraordinary costs incurred by the Borrower and any Subsidiaries prior to March 31, 1999 in connection with closing of the Loans and the Related Transactions and (vii) accrued KLA Deferred Payments, for such period determined on an accrual and consolidated basis in accordance with GAAP. "Effective Prime" means the Prime Rate plus the Applicable Margin for Prime Rate Loans. "Eligible Receivables" means accounts receivable of the Borrower evidencing Indebtedness of Persons located in the United States of America to the Borrower for goods actually sold and delivered or services actually performed in the ordinary course of business by the Borrower to or for such Person, as to which goods or services no written notice has been received by Borrower from such Person that alleges a breach by the Borrower of its obligation to deliver such goods and/or services and which accounts receivable have been outstanding for less than ninety (90) days since their respective invoicing dates, but excluding, however, (i) accounts receivable owing by officers, directors, shareholders or employees of Borrower, (ii) accounts receivable with respect to which goods are placed on consignment, guaranteed sale, "bill and hold" or other terms by reason of which the payment by the account debtor may be conditional, (iii) accounts receivable owing by the United States or any agency, department or instrumentality thereof unless such accounts are freely assignable to the Agent under the United States Assignment of Claims Act and the Borrower has separately assigned each such account to the Agent in compliance with such Act, (iv) accounts receivable owing by any Subsidiary or Affiliate of Borrower, (v) accounts receivable with respect to which Borrower or any Subsidiary or Affiliate is liable to the account debtor for goods sold or services provided to Borrower or any Subsidiary or Affiliate by such account debtor to the extent of Borrower's or any Subsidiary's or 7 14 Affiliate's liability to such account debtor, (vi) any accounts receivable as to which the account debtor has claimed in writing any setoff or any dispute as to the amount owing by the account debtor to the extent of the amount in dispute, (vii) any accounts receivable subject to any Lien other than pursuant to the Security Documents, (viii) any accounts receivable owing by any Person which is insolvent and/or the subject of any bankruptcy, receivership or other insolvency proceeding, and (ix) any accounts receivable deemed by the Agent in the Agent's sole discretion exercised in good faith difficult to collect or uncollectible. "ERISA" means the Employee Retirement Income Security Act of 1974 as amended from time to time. "Events of Default" has the meaning assigned to that term in Section 6.1 of this Agreement. "Excess Cash Flow" means, for any fiscal year of the Borrower, the sum of EBITDA for each Borrower fiscal quarter in such fiscal year, minus the sum of (i) an amount equal to the sum of payments included in Total Debt Service paid during each fiscal quarter in such fiscal year, (ii) to the extent not included in Total Debt Service, all Capital Expenditures permitted under Section 5.2.17 and paid during each Borrower fiscal quarter in such fiscal year, (iii) KLA Deferred Payments paid during such fiscal year, (iv) taxes payable during each Borrower fiscal quarter in such fiscal year and (v) non-recurring extraordinary costs incurred by the Borrower and any Subsidiaries prior to March 31, 1999 in connection with the closing of the Loans and the Related Transactions and (v) plus decreases and minus increases in working capital for the fiscal period in question. "Exhibit" means, when followed by a letter, the exhibit attached to this Agreement bearing that letter and by such reference fully incorporated in this Agreement. "Facility Fee" means, the fee payable by the Borrower in accordance with Section 2.2.2 and accordance with the Fee Letter. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/16th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next succeeding Business Day as so published, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Agent on such day on such transactions as determined by the Agent in its discretion exercised in good faith. "Fee Letter" means that certain side letter of even date with this Agreement between the Borrower and the Agent regarding certain fees payable by the Borrower. "Financing Documents" means, collectively, this Agreement, each Note, the Security Documents, the Fee Letter, the Post-Closing Letter, any Letter of Credit, any Letter of Credit 8 15 Agreement, any agreement with any Lender providing any interest rate protection arrangement and each other agreement, instrument or document now or hereafter executed in connection herewith or therewith. "Fixed Charge Coverage Ratio" means the ratio of (i) EBITDA calculated on the Adjusted Four Quarterly Basis minus all Capital Expenditures permitted under Section 5.2.17 and paid during each Borrower fiscal quarter during the period in question, and taxes payable during each Borrower fiscal quarter during the period in question to (ii) Total Debt Service calculated on the Adjusted Four Quarterly Basis. "GAAP" means generally accepted accounting principles in effect from time to time in the United States of America. "Hazardous Material" shall mean any substance or material defined or designated as a hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or other similar term, by any United States federal, state or local environmental statute, regulation or ordinance. "Indebtedness" means, without duplication for any Person, (i) all indebtedness or other obligations of said Person for Borrowed Money or for the deferred purchase price of property or services, including, without limitation, all reimbursement obligations of said Person with respect to standby and/or documentary letters of credit (ii) all indebtedness or other obligations of any other Person ("Other Person") for Borrowed Money or for the deferred purchase price of property or services, the payment or collection of which said Person has guaranteed (except by reason of endorsement for deposit or collection in the ordinary course of business) or in respect of which said Person is liable, contingently or otherwise, including, without limitation, liable by way of agreement to purchase or lease, to provide funds for payment, to supply funds to purchase, sell or lease property or services primarily to assure a creditor of such Other Person against loss or otherwise to invest in or make a loan to the Other Person, or otherwise to assure a creditor of such Other Person against loss, (iii) all indebtedness or other obligations of any Person for Borrowed Money or for the deferred purchase price of property or services secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property owned by said Person, whether or not said Person has assumed or become liable for the payment of such indebtedness or obligations, (iv) Capitalized Lease Obligations of said Person and (v) obligations of such Person under contracts pursuant to which such Person has agreed to purchase interest rate protection or swap interest rate obligations. "Ineligible Securities" means Securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1993 (12 U.S.C. ss.24, Seventh), as amended. "Interest Adjustment Date" means (i) as to any Prime Rate Loan to be converted to a Libor Loan the Business Day elected by the Borrower in its applicable Interest Rate Election, but being not less than three (3) Business Days after the receipt by the Agent before 12:00 o'clock P.M. on a Business Day of an Interest Rate Election electing the Libor Rate as the interest rate on 9 16 such Loan; and (ii) as to any Libor Loan, the last Business Day of the Interest Period pertaining to such Libor Loan. "Interest Expense" means, with respect to any fiscal quarter, the aggregate amount required to be accrued by the Borrower and any Subsidiaries and by the Acquired Company when calculated on the Adjusted Four Quarterly Basis in such fiscal quarter for interest, fees (excluding, however, the Facility Fee being paid to the Agent on or after the Closing Date), charges and expenses, however characterized, on its Indebtedness, including, without limitation, all such interest, fees, charges and expenses required to be accrued with respect to Indebtedness under the Financing Documents, all determined in accordance with GAAP. "Interest Period" means: (a) With respect to each Libor Loan: (i) initially, the period commencing on the date of such Libor Loan and ending one, two, three, four or six months thereafter as the Borrower may elect in the applicable Interest Rate Election and subject to Section 2.9; and (ii) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such Libor Loan and ending one, two, three, four or six months thereafter as the Borrower may elect in the applicable Interest Rate Election and subject to Section 2.9; provided that clauses (i) and (ii) of this definition are subject to the following: (A) any Interest Period (other than an Interest Period determined pursuant to clause (C) below) which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (B) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (C) below, end on the last Business Day of a calendar month; and (C) for the Term Loan, no Interest Period shall end after the Term Loan Repayment Date and for the Revolving Credit Loan, no Interest Period shall end after the Revolving Credit Repayment Date; and (D) with respect to all Libor Loans, no more than six (6) Interest Periods may be in effect at any time. (b) With respect to each Prime Rate Loan, the period during which such Loan is outstanding: 10 17 "Interest Rate Election" means the Borrower's irrevocable telecopied or telephonic notice of election, which shall be promptly confirmed by a written notice of election that Effective Prime or the Libor Rate shall apply to all or any portion of the Loans, which shall, subject to this Agreement, be effective on the next Interest Adjustment Date, such telecopied or telephonic notice and written confirmation thereof to be in the form of Exhibit 1.4 and to be received by the Agent prior to 12:00 o'clock P.M. on a Business Day and at least three (3) Business Days prior to an Interest Adjustment Date in the case of a Libor Loan, and by 12:00 p.m. on an Interest Adjustment Date in the case of a Prime Rate Loan, each such Interest Rate Election, subject to the terms of this Agreement to apply to the Advance or the Loan referred to in such Interest Rate Election or to effect a change in the interest rate on the applicable portion of the Loans then outstanding, as applicable, with respect to which such Interest Rate Election was made, such change to occur on the Interest Adjustment Date next succeeding receipt of such Interest Rate Election by the Agent. Any Interest Rate Election received by the Agent after 12 o'clock P.M. on a Business Day shall be deemed, for all purposes of this Agreement to have been received prior to 12 o'clock P.M. on the next succeeding Business Day. "Investment" means any investment in any Person whether by means of a purchase of capital stock, notes, bonds, debentures or other evidences of Indebtedness and/or by means of a capital or partnership contribution, loan, deposit, advance or other means. "KLA" means Kelley-Levey & Associates, Inc., a Kentucky corporation. "KLA Deferred Payments" means the financial obligations of Borrower under the Retention Incentive Bonus Plan Agreements between the Borrower and certain former employees of KLA each dated as of April 3, 1998 and the Earnout Agreement among the Borrower, KLA, Anthony Kelley, Gary Levey and Ronnie Crumpler, dated as of April 3, 1998. "Lender" means Fleet, or any financial institution which hereafter becomes a party hereto pursuant to the terms of Section 9.11, each in their individual capacity, and "Lenders" means Fleet and each of such financial institutions. "Letter of Credit" means an irrevocable stand-by or commercial letter of credit issued by the Agent for the account of the Borrower pursuant to a Letter of Credit Agreement subject to and in accordance with this Agreement. "Letter of Credit Agreement" means an application and agreement for stand-by or commercial letter of credit in such form as may at any time be customarily required by the Agent for its issuance of stand-by or commercial letters of credit. "Libor Loan" means any portion of any Loan bearing interest at the Libor Rate. "Libor Rate" means, for any Interest Period, the Adjusted Libor Rate in effect on the first day of such Interest Period (subject to adjustment as provided in the definition of Adjusted Libor Rate) plus the Applicable Margin for Libor Loans from time to time in effect. 11 18 "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other) or other security agreement or preferential arrangement of any kind or nature whatsoever (including without limitation any conditional sale or other title retention agreement and any Capitalized Lease Obligation) having substantially the same economic effect as any of the foregoing and the filing of any financing statement under the applicable Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing. "Loans" and "Loan" means at any time the outstanding principal amount of Indebtedness owed to the Lenders or to any Lender, as the context may require pursuant to this Agreement. "Majority Lenders" means Lenders holding an aggregate Pro Rata Share of the outstanding principal balance of the Loans in an amount equal to or in excess of 50.1% of the total outstanding principal balance of the Loans and if there is no outstanding principal balance of the Loans, Lenders having at least 50.1% of the Commitment. "Material Adverse Effect" means material adverse effect on (i) the ability of the Borrower or any Subsidiary to fulfill their obligations under any of the Financing Documents or (ii) the Business Condition of the Borrower or any Subsidiary. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Income" means, for any fiscal period, the net after tax income (loss) of the Borrower and any Subsidiaries for such period determined on an accrual and consolidated basis in accordance with GAAP. "Net Outstanding Amount of Eligible Receivables" means the net amount of Eligible Receivables outstanding after eliminating from the aggregate amount of outstanding Eligible Receivables all payments, adjustments and credits applicable thereto. "Note" means any promissory note of the Borrower payable to the order of a Lender and substantially in the form of Exhibit 1.5 or Exhibit 1.6 and evidencing all or a portion of the Loan and "Notes" means all of the Notes, collectively. "Obligations" mean any and all Indebtedness, obligations and liabilities of Borrower and/or any Subsidiaries under any of the Financing Documents to any one or more of the Lenders and/or the Agent of every kind and description, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising, including, without limitation, all Loans, interest, taxes, fees, charges, and expenses under the Financing Documents and attorneys' fees chargeable to the Borrower and/or any Subsidiaries or incurred by any of the Lenders and/or the Agent under any of the Financing Documents. "Officer's Certificate" means a certificate signed by an Authorized Representative and delivered to the Agent on behalf of the Lenders. 12 19 "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to subtitle A of Title IV of ERISA. "P.M." means a time from and including 12 o'clock noon on any Business Day to the end of such Business Day using Eastern Standard (Daylight Savings) time. "Permitted Acquisition" means any acquisition (whether in one transaction or in a series of transactions) of all or any substantial portion of the assets or ownership interests in another Person, or any merger, consolidation or combination(whether in one transaction or in a series of transactions) with another Person permitted pursuant to the terms of Section 5.2.3 hereof, including, without limitation, the acquisition of the Acquired Company by the Borrower pursuant to the Related Transaction Documents. "Permitted Encumbrances" means each Lien granted pursuant to any of the Security Documents, those Liens, security interests and defects in title permitted under Section 5.2.1 and those Liens listed on Exhibit 1.8 hereto. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "Plan" means an employee benefit plan as defined in Section 3(3) of ERISA maintained for employees of the Borrower or any Commonly Controlled Entity. "Post-Closing Letter" means that certain letter agreement between the Borrower and the Agent dated the Closing Date and listing certain post-closing actions to be completed by the Borrower. "Premises" has the meaning assigned to such term in Section 4.1.21.1. "Prime Rate" means the higher of (i) the floating rate of interest per annum designated from time to time by the Agent as being its "prime rate" of interest, such interest rate to be adjusted on the effective date of any change thereof by the Agent, it being understood that such rate of interest may not be the lowest rate of interest from time to time charged by the Agent and (ii) the Federal Funds Rate, such interest rate to be adjusted on the effective date of any change thereof by the Federal Reserve Bank of New York. "Prime Rate Loan(s)" means any portion of the Loans bearing interest at Effective Prime. "Prior Permitted Acquisition" means Borrower's acquisition of KLA. "Projections" means the Borrower's written projections of Borrower's three-year future performance on a consolidated basis delivered to the Agent prior to the Closing. "Pro Rata Share" means (i) with respect to the Commitment, each Lender's percentage share of the Commitment as set forth immediately opposite such Lender's name on Exhibit 1.9, 13 20 and (ii) with respect to the Loans, each Lender's percentage share of the aggregate outstanding principal balance of the Loans and "Pro Rata Shares" means such percentage shares of the Lenders. "Qualified Initial Public Offering" means the Borrower and/or any Subsidiary filing a Form S-1 or any other form of registration statement then available for registration with the Securities and Exchange Commission or otherwise conducting an initial public offering of any class of the Borrower's or any Subsidiary's securities, which such offering generates $35,000,000 or more in net proceeds and results in a price per share of $11.00 or more (subject to adjustment for stock splits, stock dividends, recapitalizations and the like). "Quick Ratio" means the (i) the sum of (w) cash on hand or on deposit in any bank or trust company which has not suspended business, (x) Cash Equivalent Investments (without duplication with (w)), (y) Net Outstanding Amount of Eligible Receivables and (z) the excess, if any, of the Revolving Credit Loan Commitment over the sum of the outstanding principal balance of the Revolving Credit Loans, the outstanding stated amounts of any Letters of Credit and Letter of Credit Agreements and the amount of any unreimbursed drawings thereunder to (ii) (a) Current Liabilities plus the maximum KLA Deferred Payments which could be payable by the Borrower during the immediately succeeding twelve-month period, but excluding any KLA Deferred Payments which have been accrued in Borrower's Current Liabilities. Each item described in clauses (i) and (ii) of this Section 5.1.11 shall be calculated as of the last day of the Borrower fiscal quarter and include only the item(s) in question of the Borrower and its Subsidiaries on a consolidated basis. "Reference Lender(s)" means the Agent unless the Agent resigns said responsibility, at which time and thereafter such term means one or two Lenders selected by the Agent in its discretion from time to time as a reference lender for purposes of determining the Adjusted Libor Rate. "Related Transactions" means the acquisition by the Borrowers of the issued and outstanding capital stock of the Acquired Company. "Related Transaction Documents" means the documents listed on Exhibit 1.2. "Reportable Event" shall have the meaning assigned to that term in Section 4043 of ERISA for which the requirement of 30 days' notice to the PBGC has not been waived by the PBGC. "Request" means a written request for the Loans in the form of Exhibit 1.10, received by the Agent on behalf of the Lenders from the Borrower in accordance with this Agreement, specifying the date on which the Borrower desires such Loans and the disbursement instructions of the Borrower with respect thereto. "Revolving Credit Loan" means the revolving credit loans to be made by the Lenders to the Borrower from time to time in the maximum outstanding principal amount of the Revolving Credit Loan Commitment, all subject and pursuant to Section 2.1.0. 14 21 "Revolving Credit Loan Commitment" means the Lenders' several commitments to make Revolving Credit Loans to the Borrower in accordance with Section 2.1.0 and this Agreement and in the maximum outstanding amount of each Lender's Pro Rata Share of the lesser of (i) the Borrowing Base and (ii) $7,500,000, as such amount may be reduced pursuant to Section 2.6.4. "Revolving Credit Note" means each revolving credit note of the Borrower, payable to the order of a Lender in the form of Exhibit 1.5 hereto evidencing the Indebtedness of the Borrower to such Lender with respect to the Revolving Credit Loan. "Revolving Credit Repayment Date" means the earlier to occur of (i) June 30, 2001 and (ii) such earlier date on which the Revolving Credit Loan becomes due and payable pursuant to the terms hereof. "Section" means, when followed by a number, the section or subsection of this Agreement bearing that number. "Section 20 Subsidiary" means a subsidiary of the bank holding company controlling any Lender, which subsidiary has been granted authority by the Federal Reserve Board to underwrite and deal in certain Ineligible Securities. "Security Documents" means any and all documents, instruments and agreements now or hereafter providing security for the Loans and any other Indebtedness of the Borrower or any Subsidiary to any of the Lenders and/or the Agent, including without limitation the following documents, instruments and agreements between the Agent and the Borrower or any Subsidiary: any mortgages on and collateral assignments of real property interests (fee, leasehold and easement) of the Borrower and any Subsidiary granting Liens thereon; landlord lien waivers and consents as may be reasonably requested by the Agent; security agreements granting first Liens on all Borrower's and any Subsidiary's fixtures and tangible and intangible personal property; collateral assignments of Borrower's and any Subsidiary's contracts, licenses, permits, easements and leases; collateral assignments of Borrower's and any Subsidiary's copyrights; conditional assignments of Borrower's and any Subsidiary's trademarks and patents; any guaranty by a Subsidiary; any pledge of the capital stock of any Subsidiary; casualty and liability insurance policies providing coverage to the Agent for the benefit of the Lenders; UCC-1 financing statements or similar filings perfecting the above-referenced security interests, pledges and assignments, all as executed, delivered to and accepted by the Agent on or prior to the Closing Date or subsequent to the Closing Date as may be required by this Agreement, as any of the foregoing may be amended in writing by the Agent and any other party or parties thereto. "Selling Lender" shall have the meaning assigned to such term in Section 9.11.1. "Single Employer Plan" means any Plan as defined in Section 4001(a)(15) of ERISA. "Stockholders" means, collectively, TA Associates, Nicholas A. and Annette M. Canitano (and/or any trusts established for the benefit of Nicholas A. and Annette M. Canitano), Kenneth L. and Karen M. Conley (and/or any trusts established for the benefit of Kenneth L. and Karen M. Conley) and Paul A. Farmer. 15 22 "Subsidiary" means any corporation or entity other than the Borrower of which more than 50% of the outstanding capital stock or voting interests or rights having ordinary voting power to elect a majority of the board of directors or other managers of such entity (irrespective of whether or not at the time capital stock or voting interests or rights of any other class or classes of such Person 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 the Borrower and/or one or more Subsidiaries or the management of which corporation or entity is under control of the Borrower and/or any other Subsidiary, directly or indirectly through one or more Persons and any other Person which, under GAAP, should at any time for financial reporting purposes be consolidated or combined with the Borrower and/or any other Subsidiary. "Substituted Lender" has the meaning set forth in Section 9.11 hereof. "Substitution Agreement" has the meaning assigned to such term in Section 9.11.1. "TA Associates" means TA Venture Investors Limited Partnership, TA/Advent VIII L.P., Advent Atlantic and Pacific III, L.P., McDonald Investments Inc., McD Venture Capital Fund, L.P., GHK Investments, L.L.C. and any venture capital or other fund or entity for which TA Associates, Inc., a Delaware corporation and/or one or more general partners of TA Associates, Inc. directly or indirectly through one or more intermediaries serves as general partner, manager or in a like capacity. "Term Loan" means the term loan in the aggregate principal amount of $20,000,000 to be made or maintained by the Lenders pursuant to Section 2.1.1 hereof. "Term Note" means a term note of the Borrower payable to the order of a Lender in the form of Exhibit 1.6 hereto evidencing the Indebtedness of the Borrower to such Lender with respect to the Term Loan. "Term Loan Repayment Date" means the earlier to occur of (i) December 31, 2003 and (ii) such earlier date on which the Term Loan becomes due and payable pursuant to the terms hereof. "Total Debt Service" means, at any date of determination, the sum of (i) Interest Expense, ii) scheduled and mandatory principal payments for the fiscal period in question due on account of any Indebtedness of the Borrower, but excluding any mandatory payments of principal required pursuant to Sections 2.6.1.2, 2.6.1.3, and 2.6.1.4 and (iii) KLA Deferred Payments accrued over the fiscal period in question all calculated on the Adjusted Four Quarterly Basis. "Unused Fees" has the meaning assigned to such term in Section 2.2.2. Section 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, calculations of amounts for the purposes of calculating any financial covenants or ratios hereunder shall be made in accordance with GAAP applied on a basis consistent with those used in the Borrower's financial statements referred to in Section 4.1.5 (other than departures therefrom not material in their impact), and all financial data 16 23 submitted pursuant to this Agreement shall be prepared in accordance with GAAP (except, in the case of unaudited financial statements, the absence of footnotes and that such statements are subject to changes resulting from year-end adjustments made in accordance with GAAP). Section 1.3. Other Terms. References to "Articles", "Sections", "subsections" and "Exhibits" shall be to Sections, subsections and Exhibits and of this Agreement unless otherwise specifically provided. In this Agreement, "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other genders; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Financing Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. ARTICLE 2. AMOUNT AND TERMS OF THE LOANS Section 2.1. The Loans. Section 2.1.0. The Revolving Credit Loans. Each of the Lenders severally agrees, subject to the terms and conditions of this Agreement, to make Advances of Revolving Credit Loans to the Borrower from time to time after receipt by the Agent from time to time before the Revolving Credit Repayment Date of, and at the times provided for in, a Request and an Interest Rate Election from the Borrower in accordance with this Agreement, during the period commencing on the Closing Date and ending on the Business Day immediately preceding the Revolving Credit Repayment Date, in an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) such Lender's Pro Rata Share of the Revolving Credit Loan Commitment less (ii) in each case, such Lender's Pro Rata Share of the aggregate outstanding stated amount of any Letters of Credit or Letter of Credit Agreements and any unreimbursed amounts drawn thereunder. Promptly after receipt of a Request and Interest Rate Election, Agent shall notify each Lender by telephone, telex or telecopy of the proposed borrowing. Subject to the immediately preceding paragraph, each Lender agrees that after its receipt of notification from Agent of Agent's receipt of a Request and Interest Rate Election, such Lender shall send its Pro Rata Share (or such portion thereof as may be necessary to provide Agent with such Pro Rata Share in Dollars and in immediately available funds, without consideration or use of any contra accounts of any Lender) of the requested Loan by wire transfer to Agent so that Agent receives such Pro 17 24 Rata Share in Dollars and in immediately available funds not later than 12:00 P.M. (Boston, Massachusetts time) on the first day of the Interest Period for any such requested Libor Loan and on the Business Day for such Advance set forth in Borrower's Request for any such requested Prime Rate Loan, and Agent shall advance funds to the Borrower by depositing such funds in Borrower's account with the Agent upon Agent's receipt of such Pro Rata Shares in the amount of the Pro Rata Shares of such Loan in Agent's possession. Unless Agent shall have been notified by any Lender (which notice may be telephonic if confirmed promptly in writing) prior to the first day of the Interest Period in respect of any Loan which such Lender is obligated to make under this Agreement, that such Lender does not intend to make available to Agent such Lender's Pro Rata Share of such Loan on such date, Agent may assume that such Lender has made such amount available to Agent on such date and Agent in its sole discretion may, but shall not be obligated to, make available to the Borrower a corresponding amount on such date. If such corresponding amount is not in fact made available to Agent by such Lender, Agent shall be entitled to recover such corresponding amount from such Lender promptly upon demand by Agent together with interest thereon, for each day from such date until the date such amount is paid to Agent, at the Federal Funds Rate for three (3) Business Days and thereafter at the interest rate on the Loan in question. If such Lender does not pay such corresponding amount forthwith upon Agent's demand therefor, Agent shall promptly notify the Borrower and the Borrower shall promptly pay such corresponding amount to Agent. Nothing contained in this Section shall be deemed to relieve any Lender from its obligation to fulfill its obligations hereunder or to prejudice any rights which the Borrower may have against any Lender as a result of any default by such Lender hereunder. Throughout the term of the Revolving Credit Loans, $2,500,000 of the Revolving Credit Loan Commitment and principal amount of the Revolving Credit Loans may, in the Agent's discretion, be made available to the Borrower prior to the Revolving Credit Repayment Date by issuance of Letters of Credit having an expiration date prior to the earlier to occur of (a) the first anniversary date of the date of issuance of any such Letter of Credit or (b) three (3) Business Days prior to the Revolving Credit Repayment Date, reasonably promptly after submission by the Borrower to the Agent of a Letter of Credit Agreement, duly completed and executed by the Borrower and otherwise in form and substance satisfactory to the Agent. The Borrower shall pay upon demand by the Agent such fees and costs as the Agent may from time to time establish for issuance, transfer, amendment and negotiation of each Letter of Credit and shall pay to the Agent for the Agent's account upon issuance of any Letter of Credit an annual Letter of Credit fee in an amount equal to the product of (i) the stated amount of each Letter of Credit multiplied by (ii) the Applicable Margin then in effect with respect to any Revolving Credit Loan which is a Libor Loan. In the event that the Borrower shall fail to reimburse the Agent under any Letter of Credit or Letter of Credit Agreement, and any outstanding Indebtedness of the Borrower relating thereto, the Agent shall promptly notify each Lender of the unreimbursed amount together with accrued interest thereon, and each Lender agrees to purchase, and it shall be deemed to have purchased, a participation in such Letter of Credit or Letter of Credit Agreement and such indebtedness in an amount equal to its Pro Rata Share of the unpaid amount together with unpaid interest thereon. Upon one (1) Business Day's notice from the Agent, each Lender shall deliver to the Agent an amount equal to its respective participation in same day funds, at the place and on the date and by the time notified by the Agent. The obligation of each Lender to deliver to the Agent an amount equal to its respective participation pursuant to the foregoing sentence shall be 18 25 absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or the failure to satisfy any condition set forth in Article III of this Agreement. As soon as is practicable following the close of each month after the Closing Date and in any event within fifteen (15) days thereafter, the Borrower will submit to the Agent a borrowing base certificate in the form of Exhibit 2.1.0 or on such other form as the Agent may from time to time prescribe, which certificate shall contain information adequate to identify accounts receivable which the Borrower wishes to include in Eligible Receivables. During the continuance of a Default or Event of Default, the Borrower shall also, if the Lender so requests, accompany such information with assignments of accounts in form and substance satisfactory to the Lender which assignments shall give the Lender full power to collect, compromise or otherwise deal with the assigned accounts as the sole owner thereof. Concurrently with each of such reports, and immediately if material in amount, the Borrower shall notify the Lender of each return or adjustment, rejection, repossession or loss, theft or damage of or to merchandise represented by Eligible Receivables or any other collateral for any Indebtedness of the Borrower to the Lender and of any credit, adjustment or dispute arising in connection with the goods or services represented by Eligible Receivables. All payments on Eligible Receivables and all adjustments and credits with respect thereto, whether unilateral, negotiated or otherwise, shall be immediately reflected in the Net Outstanding Amount of Eligible Receivables. Section 2.1.1. Term Loans. Each of the Lenders severally agrees, subject to the terms and conditions of this Agreement, to make a Term Loan to the Borrower in the amount of its respective Pro Rata Share of $20,000,000. Borrower shall pay on the last day of each calendar quarter ending on or in between the dates set forth below the amount of the Term Loans set forth immediately opposite such dates below:
Repayment Quarterly Dates Payment Amount --------- -------------- September 30, 1999 through June 30, 2000 $ 500,000 September 30, 2000 through June 30, 2001 750,000 September 30, 2001 and December 31, 2001 1,000,000 March 31, 2002 and June 30, 2002 1,250,000 September 30, 2002 through June 30, 2003 1,500,000 September 30, 2003 2,250,000 December 31, 2003 the greater of $2,250,000 and the entire outstanding principal amount of the Term Loan
Section 2.2. Interest and Fees on the Loans. Section 2.2.1. Interest. Interest shall accrue and be paid currently on the Loans at Effective Prime or the Libor Rate for each of the Loans' Interest Periods in accordance with the Borrower's Interest Rate Elections for the Loans subject to and in accordance with the terms and conditions of this Agreement and the Note(s); provided that if a Default or an Event of Default 19 26 exists and is continuing, no Interest Rate Election electing the Libor Rate shall be effective and any Prime Rate Loan shall bear interest, payable on demand, at Effective Prime plus, so long as an Event of Default exists and is continuing, two percent (2.0%) and each Libor Loan shall bear interest, payable on demand, at the Libor Rate plus two percent (2.0%); all of the foregoing being applicable until such Default or Event of Default is cured or waived and an Interest Rate Election electing the Libor Rate for such Loan or portion thereof which is effective in accordance with this Agreement is submitted to the Agent; and provided further that the Borrower shall submit Interest Rate Elections so that on any date on which under Section 2.1.1 a regularly scheduled payment of principal of the Term Loans is to be made, at least the amount of the Term Loans to be so repaid is bearing interest at Effective Prime and/or such payment date is an Interest Adjustment Date for outstanding Libor Loans in such amount of the Term Loans. The Borrower shall pay such interest to the Agent for the pro rata account of each Lender in arrears on the Loans (including without limitation Libor Loans) outstanding from time to time after the Closing Date, such payments to be made, with respect to Libor Loans with Interest Periods of three months or less on each Interest Adjustment Date for such Loans, and with respect to Libor Loans with Interest Periods of more than three months and with respect to Prime Rate Loans, quarterly on the last Business Day of each calendar quarter of each year commencing March 31, 1999. In the event no Interest Rate Election has been made by the Borrower with respect to any Loan or Advance (or an Interest Rate Election shall have expired without an effective substitute Interest Rate Election), Effective Prime shall be the rate applicable to such Loan or Advance. All provisions of each Note and any other agreements between the Borrower and the Lenders are expressly subject to the condition that in no event, whether by reason of acceleration of maturity of the Indebtedness evidenced by any Note or otherwise, shall the amount paid or agreed to be paid to the Lenders which is deemed interest under applicable law exceed the maximum permitted rate of interest under applicable law (the "Maximum Permitted Rate"), which shall mean the law in effect on the date of this Agreement, except that if there is a change in such law which results in a higher Maximum Permitted Rate, then each Note shall be governed by such amended law from and after its effective date. In the event that fulfillment of any provision of any Note, or this Agreement or any document, instrument or agreement providing security for any Note results in the rate of interest charged under any Note being in excess of the Maximum Permitted Rate, the obligation to be fulfilled shall automatically be reduced to eliminate such excess. If, notwithstanding the foregoing, any Lender receives an amount which under applicable law would cause the interest rate under any Note to exceed the Maximum Permitted Rate, the portion thereof which would be excessive shall automatically be deemed a prepayment of and be applied to the unpaid principal balance of such Note to the extent of then outstanding Prime Rate Loans and not a payment of interest and to the extent said excessive portion exceeds the outstanding principal amount of Prime Rate Loans, said excessive portion shall be repaid to the Borrower. Section 2.2.2. Fees. On the Closing Date and thereafter if so provided in the Fee Letter, the Borrower shall pay the Facility Fee to the Agent for the account of Fleet. In addition, on the last Business Day of each March, June, September and December commencing March 31, 1999 and continuing through the Revolving Credit Repayment Date, the Borrower shall pay to the Agent for the pro rata account of each Lender, a fee in an amount equal to .50% per annum of the amount, if any, by which the average actual daily amount of the Revolving Credit Loan Commitment for the quarterly period just ended (or in the case of the first such payment, the 20 27 period from the Closing Date to the date such payment is due) exceeds the average of the actual daily outstanding principal balances of the Revolving Credit Loans plus (y) the average of the actual daily aggregate amount of the outstanding stated amount of any Letter of Credit or Letter of Credit Agreement, and any unreimbursed amounts thereunder; provided, however, that if at any time after the receipt by the Agent of the quarterly financial statements for the Borrower's December 31, 1998 fiscal quarter and each subsequent Borrower fiscal quarter provided to the Agent by the Borrower pursuant to Section 5.3.3 hereof, the ratio of (a) total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of the most recently ended fiscal quarter of the Borrower to (b) EBITDA calculated on the Adjusted Four Quarterly Basis, (i) is less than 2.5:1.0 and if and so long as no Event of Default or Default exists and is continuing, the Borrower shall pay to the Agent for the pro rata account of each Lender a fee in an amount equal to .35% per annum of the amount, if any, by which the average actual daily amount of the Revolving Credit Loan Commitment for the quarterly period just ended (or in the case of the first such payment, the period from the Closing Date to the date such payment is due) exceeds the sum of (x) the average of the actual daily outstanding principal balance of the Revolving Credit Loans plus (y) the average of the actual daily aggregate amount of the outstanding stated amount of any Letter of Credit or Letter of Credit Agreement, and any unreimbursed amounts thereunder (the "Unused Fees), Section 2.2.3. Increased Costs - Capital. If, after the date hereof, any Lender shall have reasonably determined that the adoption after the date hereof of any applicable law, governmental rule, regulation or order regarding capital adequacy of banks or bank holding companies, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender or such Lender's holding company with any policy, guideline, directive or request regarding capital adequacy (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or such Lender's holding company as a consequence of the obligations hereunder of such Lender to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration the policies of such Lender or such Lender's holding company with respect to capital adequacy immediately before such adoption, change or compliance and assuming that the capital of such Lender or such Lender's holding company was fully utilized prior to such adoption, change or compliance) by an amount reasonably deemed by such Lender to be material, then such Lender shall notify the Agent and the Borrower thereof and the Borrower shall pay to the Agent for the account of such Lender from time to time as specified by such Lender such additional amounts as shall be sufficient to compensate such Lender for such reduced return, each such payment to be made by the Borrower within five (5) Business Days after each demand by such Lender; provided that the liability of the Borrower to pay such costs shall only accrue with respect to costs accruing from and after the 180th day prior to the date of each such demand. A certificate in reasonable detail of one of the officers of such Lender describing the event giving rise to such reduction and setting forth the amount to be paid to such Lender hereunder and a computation of such amount shall accompany any such demand and shall, in the absence of manifest error, be conclusive. In determining such amount, such Lender shall act reasonably and will use any reasonable averaging and attribution methods. If the Borrower shall, as a result of the 21 28 requirements of this Section 2.2.3 above, be required to pay any Lender the additional costs referred to above and the Borrower, in its sole discretion, shall deem such additional amounts to be material, the Borrower shall have the right to substitute another bank satisfactory to the Agent for such Lender which has certified the additional costs to the Borrower, and the Agent shall use reasonable efforts at no cost to the Agent to assist the Borrower to locate such substitute bank. Any such substitution shall take place in accordance with Section 9.11 and shall otherwise be on terms and conditions reasonably satisfactory to the Agent, and until such time as such substitution shall be consummated, the Borrower shall continue to pay such additional costs. Upon any such substitution, the Borrower shall pay or cause to be paid to the Lender that is being replaced, all principal, interest (to the date of such substitution) and other amounts owing hereunder to such Lender and such Lender will be released from liability hereunder. Section 2.3. Notations. At the time of (i) the making of each Advance evidenced by any Note, (ii) each change in the interest rate under any Note effected as a result of an Interest Rate Election; and (iii) each payment or prepayment of any Note, each Lender may enter upon its records an appropriate notation evidencing (a) such Lender's Pro Rata Share of the Loans and (b) the interest rate and Interest Adjustment Date applicable thereto or (c) such payment or prepayment (voluntary or involuntary) of principal and (d) in the case of payments or prepayments (voluntary or involuntary) of principal, the portion of the applicable Loan which was paid or prepaid. No failure to make any such notation shall affect the Borrower's unconditional obligations to repay the Loans and all interest, fees and other sums due in connection with this Agreement and/or any Note in full, nor shall any such failure, standing alone, constitute grounds for disproving a payment of principal by the Borrower. However, in the absence of manifest error, such notations and each Lender's records containing such notations shall constitute presumptive evidence of the facts stated therein, including, without limitation, the outstanding amount of such Lender's Pro Rata Share of the Loans and all amounts due and owing to such Lender at any time. Any such notations and such Lender's records containing such notations may be introduced in evidence in any judicial or administrative proceeding relating to this Agreement, the Loans or any Note. Section 2.4. Computation of Interest. Interest due under this Agreement and any Note shall be computed on the basis of a year of 360 days for the actual number of days elapsed. Section 2.5. Time of Payments and Prepayments in Immediately Available Funds. Section 2.5.1. Time. All payments and prepayments of principal, fees, interest and any other amounts owed from time to time under this Agreement and/or under each Note shall be made to the Agent for the pro rata account of each Lender at the address referred to in Section 9.6 in Dollars and in immediately available funds prior to 12:00 o'clock P.M. on the Business Day that such payment is due, provided that the Borrower hereby authorizes and instructs the Agent to charge against the Borrower's accounts with the Agent on each date on which a payment is due hereunder and/or under any Note and on any subsequent date if and to the extent any such payment is not made when due an amount up to the principal, interest and fees due and payable to the Lenders, the Agent or any Lender hereunder and/or under any Note and such charge shall be deemed payment hereunder and under the Note(s) in question to the extent that immediately available funds are then in such accounts. The Agent shall use 22 29 reasonable efforts in accordance with the Agent's customary procedures to give subsequent notice of any such charge to the Borrower, but the failure to give such notice shall not affect the validity of any such charge. To the extent that immediately available funds are then in such accounts, the failure of the Agent to charge any such account or the failure of the Agent to charge any such account prior to 12 o'clock P.M. shall not be basis for an Event of Default under Section 6.1.1 and any amount due on the Loans on such date shall be deemed paid; provided that the Agent shall have the right to charge any such account on any subsequent date for such unpaid payment and an Event of Default shall exist if sufficient immediately available funds are not in such accounts on the date the Agent so charges such account after the expiration of any applicable cure period. In the event of any charge against the Borrower's accounts by the Agent pursuant to the immediately preceding sentence, the Agent shall use reasonable efforts to provide notice to the Borrower of such charge in accordance with the Agent's customary procedures, but the failure to provide such notice shall not in any way be a basis for any liability of the Agent nor shall such failure adversely affect the validity and effectiveness of any such action by the Agent. Any such payment or prepayment which is received by the Agent in Dollars and in immediately available funds after 12 o'clock P.M. on a Business Day shall be deemed received for all purposes of this Agreement on the next succeeding Business Day unless the failure by Agent to receive such funds prior to 12 o'clock P.M. is due to Agent's failure to charge the account of Borrower prior to 12 o'clock P.M., except that solely for the purpose of determining whether a Default or Event of Default has occurred under Section 6.1.1, any such payment or prepayment, if received by the Agent prior to the close of the Agent's business on a Business Day, shall be deemed received on such Business Day. All payments of principal, interest, fees and any other amounts which are owing to any or all of the Lenders or the Agent hereunder and/or under any of the Notes that are received by the Agent in immediately available Dollars prior to 12:00 o'clock P.M. on any Business Day shall, to the extent owing to the Lenders other than the Agent, be sent by wire transfer by the Agent to any such other Lenders (in each case, without deduction for any claim, defense or offset of any type) before 3:00 o'clock P.M. on the same Business Day. Each such wire transfer shall be addressed to each Lender in accordance with the wire instructions set forth in Exhibit 1.9 hereto. The amount of each payment wired by the Agent to each such Lender shall be such amount as shall be necessary to provide such Lender with its Pro Rata Share of such payment (without consideration or use of any contra accounts of any Lender), or with such other amount as may be owing to such Lender in accordance with this Agreement (in each case, without deduction for any claim, defense or offset of any type). Each such wire transfer shall be sent by the Agent only after the Agent has received immediately available Dollars from or on behalf of the Borrower and each such wire transfer shall provide each Lender receiving same with immediately available Dollars on receipt by such Lender. Any such payments of immediately available Dollars received by the Agent after 12:00 o'clock P.M. and before 3:00 o'clock P.M. on any Business Day shall be forwarded in the same manner by the Agent to such Lender(s) as soon as practicable on said Business Day, and if any such payments of immediately available Dollars are received by the Agent after 3:00 o'clock P.M. on a Business Day, the Agent shall so forward same to such Lender(s) before 10:00 o'clock A.M. on the immediately succeeding Business Day. Section 2.5.2. Setoff, etc. Regardless of the adequacy of any collateral for any of the Obligations, upon the occurrence and during the continuance of any Event of Default, each Lender is hereby authorized at any time and from time to time, without notice to the Borrower 23 30 (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and any other Indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the Obligations of the Borrower irrespective of whether or not such Lender shall have made any demand under this Agreement or any Note and although such obligations may be unmatured. Each such Lender agrees to promptly notify the Borrower and the Agent after any such setoff and application; provided that the failure to give such notice shall not affect the validity of such setoff and application. Promptly following any notice of setoff received by the Agent from a Lender pursuant to the foregoing, the Agent shall notify each other Lender thereof. The rights of each Lender under this Section 2.5.2 are in addition to all other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have and are subject to Section 9.12. Section 2.5.3. Unconditional Obligations and No Deductions. Section 2.5.3.1 The Borrower's obligation to make all payments provided for in this Agreement and the other Financing Documents shall be unconditional. Each such payment shall be made without deduction for any claim, defense or offset of any type, including without limitation any withholdings and other deductions on account of income or other taxes (except to the extent provided in Section 2.5.3.2) and regardless of whether any claims, defenses or offsets of any type exist. Section 2.5.3.2. (a) Any and all payments by the Borrower to or for the account of any Lender or the Agent hereunder or under any other Financing Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its applicable lending office) or the Agent (as the case may be) is organized or any political subdivision thereof, other than to the extent such income or franchise tax is imposed solely as a result of the activities of the Agent or a Lender pursuant to or in respect of this Agreement or any of the other Financing Documents (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable under this Agreement or any other Financing Document to any Lender or the Agent,(i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.5.3.2) such Lender or the Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.6 hereof, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Agreement or any other Financing Document or from the 24 31 execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 2.5.3.2) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower or the Agent (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Agent with (i) a properly completed Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) a properly completed Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from United States backup withholding, and (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Lender is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Agreement or any of the other Financing Documents. (e) For any period with respect to which a Lender has failed to provide the Borrower and the Agent with the appropriate form pursuant to Section 2.5.3.2(d) hereof (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 2.5.3.2(a) or 2.5.3.2(b) hereof with respect to Taxes imposed by the United States; provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request and at such Lender's cost to assist such Lender to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section 2.5.3.2, then such Lender will agree to use reasonable efforts to change the jurisdiction of its applicable lending office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. Alternatively, in the event of such an additional cost, the Borrower shall have the right to substitute another bank satisfactory to the Agent, and the Agent and such Lender shall use reasonable efforts at no cost to the Agent and such Lender to assist the Borrower to locate and effect the substitution in favor of such substitute bank. Any such substitution shall take place in accordance with Section 9.11 and shall otherwise 25 32 be on terms and conditions reasonably satisfactory to the Agent, and until such time as such substitution shall be consummated, the Borrower shall continue to pay such additional costs. Upon any such substitution, the Borrower shall pay or cause to be paid to the Lender that is being replaced, all principal, interest (to the date of such substitution) and other amounts owing hereunder to such Lender and such Lender will be released from liability hereunder. (g) Within thirty (30) days after the date of any payment of Taxes, the Borrower shall furnish to the Agent the original or a certified copy of a receipt evidencing such payment. (h) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.5.3.2 shall survive until the first anniversary of the Repayment Date. (i) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.5.3.2 in respect of any Taxes, and such Lender determines that it has received (i) a refund of such Taxes, or (ii) a credit against, relief or remission for, or a reduction in the amount of, any tax or other governmental charge as a result of any deduction or credit for any Taxes with respect to which it has received payments under this Section 2.5.3.2, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as shall be reasonably determined by such Lender to be solely attributable to the deduction or withholding of such Taxes. If such Lender later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.5.3.2(i), the Borrower shall upon demand of such Lender promptly repay the amount of such overpayment. Nothing in this Section 2.5.3.2(i) shall be construed as requiring such Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of such Lender. Section 2.6. Prepayment and Certain Payments. Section 2.6.1. Mandatory Payments. Section 2.6.1.1. In addition to each other principal payment required hereunder, the outstanding principal balances of the Term Loans shall be repaid on the Term Loan Repayment Date and the outstanding principal balances of the Revolving Credit Loans shall be repaid on the Revolving Credit Repayment Date. Section 2.6.1.2. On or before the 90th day after the end of each fiscal year of the Borrower commencing with the fiscal year ending December 31, 1999, the Borrower shall prepay to the Agent for the accounts of the Lenders in accordance with their Pro Rata Shares an amount of the outstanding principal balances of the Term Loans equal to (i) 50% of the amount, if any, of Excess Cash Flow for such fiscal year less (ii) voluntary prepayments of the Term Loan made during such fiscal year. Such prepayments shall be in addition to any and all other mandatory and voluntary prepayments required or permitted hereunder and shall be applied to the principal installments of the Term Loans in the inverse order of their maturities. 26 33 Section 2.6.1.3. In the event that the Borrower or any Subsidiary is entitled to receive, collectively, proceeds from any casualty insurance policies maintained by any of them on account of any interest of the Borrower and/or any Subsidiary in any property, which proceeds are in an aggregate amount in excess of $100,000 during the term of this Agreement, such proceeds shall be received by the Agent and, to the extent that such proceeds result from a casualty to property of the Borrower and/or any Subsidiary, so long as no Default or Event of Default exists and is continuing and the Borrower elects to repair, replace or restore such property, such proceeds shall be released to the Borrower subject to reasonable procedures and conditions established by the Agent to the extent necessary to so repair, replace or restore such property within 3 months (or as soon as reasonably practicable if such restoration, replacement or repair is not susceptible to being completed within 3 months) from the date of receipt of such proceeds by the Agent and to the extent such proceeds are not so used or do not result from such a casualty,] the Borrower shall make a prepayment of the Term Loans for the accounts of the Lenders in accordance with their Pro Rata Shares upon written notice from the Agent. All such payments shall be applied to the principal installments of the Term Loans in the inverse order of their maturities. Section 2.6.1.4. In the event that the Borrower and/or any Subsidiary sells, assigns or otherwise transfers title to any asset other than in the ordinary course of its business, the Borrower and/or such Subsidiary shall remit 100% of the net cash proceeds of such sale, assignment or other transfer to the Agent for the accounts of the Lenders in accordance with their Pro Rata Shares to be applied to the principal installments of the Term Loans in the inverse order of their maturities within 10 Business Days of the date of Borrower's or any Subsidiary's receipt of such net cash proceeds; provided, however, that Borrower may sell any of its equipment which is obsolete, worn-out or no longer used or useful in Borrower's business and Borrower may use the proceeds of such sale to purchase other equipment which is useful or necessary in the operation of Borrower's business. Section 2.6.1.5. [Intentionally omitted.] Section 2.6.1.6. If at any time the aggregate principal amount of the Revolving Credit Loans shall exceed the Revolving Credit Loan Commitment, the Borrower shall immediately pay to the Agent in immediately available Dollars the amount of such excess. Section 2.6.2. Voluntary Prepayments. All or any portion of the unpaid principal balance of the Loans (other than portions of any Loans constituting Libor Loans) may be prepaid at any time, without premium or penalty, by giving the Agent at least 3 days' prior written notice of such prepayment and by a payment to the Agent for the accounts of the Lenders in accordance with their Pro Rata Shares of such prepayment in immediately available Dollars by the Borrower; provided that each such partial payment or prepayment of principal of the Loans shall be in a principal amount of at least $100,000 or an integral multiple of $50,000 in excess thereof and provided further that each such prepayment of the Term Loans shall be applied to the principal installments of the Term Loans in the inverse order of their maturities. Section 2.6.3. Prepayment of Libor Loans. Notwithstanding anything to the contrary contained in any Note or in any other agreement executed in connection herewith or 27 34 therewith, the Borrower shall be permitted to prepay any portion of the Loans constituting Libor Loans only in accordance with Section 2.9 hereof. Section 2.6.4. Permanent Reduction of Commitment. At the Borrower's option the Commitment and the Revolving Credit Loan Commitment may be permanently and irrevocably reduced in whole or in part by an amount of at least $100,000 and to the extent in excess thereof in integral multiples of $50,000 at any time; provided that (i) the Borrower gives the Agent written notice of the exercise of such option at least three (3) Business Days prior to the effective date thereof, (ii) the aggregate outstanding balance of the Loans, if any, does not exceed the Commitment and the aggregate outstanding balance of the Revolving Credit Loans, plus the aggregate outstanding amount of any Letters of Credit or Letter of Credit Agreement and any unreimbursed drawn amounts thereunder, if any, does not exceed the Revolving Credit Loan Commitment, both as so reduced in any such case on the effective date of such reduction and (iii) the Borrower is not, and after giving effect to such reduction, would not be in violation of Section 2.6.3. Any such reduction shall concurrently reduce the Dollar amount of each Lender's Pro Rata Share of the Commitment and the Revolving Credit Loan Commitment. Section 2.7. Payment on Non-Business Days. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of fees, if any, and interest under this Agreement and under such Note. Section 2.8. Use of Proceeds. (a) The Borrower shall use the proceeds of the Term Loans to complete the Related Transactions and to pay costs incurred by the Borrower in connection with the closing of the Loans, including without limitation, the Facility Fee and costs incurred in connection with the Related Transactions and shall use the proceeds of the Revolving Credit Loans for Borrower's working capital needs and for Investments permitted by Section 5.2.12. The Borrower shall obtain any Letters of Credit solely for working capital and general corporate purposes. (b) No portion of the proceeds of any Loans is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of (a) knowingly purchasing, or providing credit support for the purchase of, Ineligible Securities from a Section 20 Subsidiary during any period in which such Section 20 Subsidiary makes a market in such Ineligible Securities, (b) knowingly purchasing, or providing credit support for the purchase of, during the underwriting or placement period, any Ineligible Securities being underwritten or privately placed by a Section 20 Subsidiary, or (c) making, or providing credit support for the making of, payments of principal or interest on Ineligible Securities underwritten or privately placed by a Section 20 Subsidiary and issued by or for the benefit of the Borrower or any Subsidiary or other Affiliate of the Borrower. Section 2.9. Special Libor Loan Provisions. The Libor Loans shall be subject to and governed by the following terms and conditions: 28 35 Section 2.9.1. Requests. Each Request accompanied by an Interest Rate Election selecting the Libor Rate must be received by the Agent in accordance with the definition of Interest Rate Election. Section 2.9.2. Libor Loans Unavailable. Notwithstanding any other provision of this Agreement, if, prior to or on the date on which all or any portion of the Loans is to be made as or converted into a Libor Loan, any of the Lenders (or the Agent with respect to (ii) below) shall reasonably determine (which determination shall be conclusive and binding on the Borrower), that (i) Dollar deposits in the relevant amounts and for the relevant Interest Period are not offered to such Lender in the London interbank market, (ii) by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the Adjusted Libor Rate, or (iii) the Adjusted Libor Rate shall no longer represent the effective cost to such Lender for Dollar deposits in the London interbank market for reasons other than the fact, standing alone, that the Adjusted Libor Rate is based on an averaging of rates determined by the Agent and that such Lender's rate may exceed such average, such Lender may elect not to accept any Interest Rate Election electing a Libor Loan and such Lender shall notify the Agent by telephone or telex thereof, stating the reasons therefor, not later than the close of business on the second Business Day prior to the date on which such Libor Loan is to be made. The Agent shall promptly give notice of such determination and the reason therefor to the Borrower, and all or such portion of the Loans, as the case may be, which are subject to any of Section 2.9.2 (i), (ii) through (iii) as a result of such Lender's determination shall be made as or converted into, as the case may be, Prime Rate Loans and such Lender shall have no further obligation to make Libor Loans, until further written notice to the contrary is given by the Agent to the Borrower. If such circumstances subsequently change so that such Lender shall no longer be so affected, such Lender's obligation to make or maintain its Pro Rata Share of all or any portion of the Loans as Libor Loans shall be reinstated when such Lender obtains actual knowledge of such change of circumstances and promptly after obtaining such actual knowledge such Lender shall forward written notice thereof to the Agent. After receipt of such notice, the Agent shall promptly forward written notice thereof to the Borrower. Upon or after receipt by the Borrower of such written notice, the Borrower may submit an Interest Rate Election in accordance with this Agreement electing an Interest Period ending no later than the Interest Adjustment Date for the then current Interest Period for the other Lenders' Pro Rata Shares of Libor Loans and electing the Libor Rate for such Lenders' or Lender's Pro Rata Share(s) of the Loans as to which such Lender's or Lenders' obligation(s) to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans was suspended and such Pro Rata Share(s) shall be converted to Libor Loans in accordance with this Agreement. During any period throughout which any of the Lenders has or have no obligation to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans, no Interest Rate Elections electing the Libor Rate shall be effective with regard to the Loans to the extent of the Pro Rata Share(s) of such Lender(s), but shall be effective as to the other Lenders. 29 36 Section 2.9.3. Libor Lending Unlawful. In the event that any change in applicable laws or regulations (including the introduction of any new applicable law or regulation) or in the interpretation thereof (whether or not having the force of law) by any governmental or other regulatory authority charged with the administration thereof, shall make it unlawful for any of the Lenders to make or continue to maintain its Pro Rata Share of all or any portion of the Loans as Libor Loans, each such Lender shall promptly notify the Agent by telephone or telex thereof, and of the reasons therefor, and the obligation of such Lender to make or maintain its Pro Rata Share of the Loans or such portion thereof as Libor Loans shall, upon the happening of such event, terminate and the Agent shall, by telephonic notice to the Borrower, declare that such obligation has so terminated with respect to such Lender, and such Pro Rata Share of the Loans or any portion thereof to the extent then maintained as Libor Loans, shall, on the last day on which such Lender can lawfully continue to maintain such Pro Rata Share of the Loans or any portion thereof as Libor Loans, automatically convert into Prime Rate Loans without additional cost to the Borrower. If circumstances subsequently change so that such Lender shall no longer be so affected, such Lender's obligation to make or maintain its Pro Rata Share of all or any portion of the Loans as Libor Loans shall be reinstated when such Lender obtains actual knowledge of such change of circumstances, and promptly after obtaining such actual knowledge such Lender shall forward written notice thereof to the Agent. After receipt of such notice, the Agent shall promptly forward written notice thereof the Borrower. Upon or after receipt by the Borrower of such written notice, the Borrower may submit an Interest Rate Election in accordance with this Agreement electing an Interest Period ending no later than the Interest Adjustment Date for the then current Interest Period for the other Lenders' Pro Rata Shares of Libor Loans and electing the Libor Rate for such Lenders' or Lender's Pro Rata Share(s) of the Loans as to which such Lender's or Lenders' obligation(s) to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans was suspended and such Pro Rata Share(s) shall be converted to Libor Loans in accordance with this Agreement. During any period throughout which any of the Lenders has or have no obligation to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans, no Interest Rate Elections electing the Libor Rate shall be effective with regard to the Loans to the extent of the Pro Rata Share(s) of such Lender(s), but shall be effective as to the other Lenders. Section 2.9.4. Additional Costs on Libor Loans. The Borrower further agrees to pay to the Agent for the account of the applicable Lender or Lenders such amounts as will compensate any of the Lenders for any increase in the cost to such Lender of making or maintaining (or of its obligation to make or maintain) all or any portion of its Pro Rata Share of the Loans as Libor Loans and for any reduction in the amount of any sum receivable by such Lender under this Agreement in respect of making or maintaining all or any portion of such Lender's Pro Rata Share of the Loans as Libor Loans, in either case, from time to time by reason of: (i) any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, such Lender, under or pursuant to any law, treaty, rule, regulation (including, without limitation, any Regulations of the Board of Governors of the Federal Reserve System) or requirement in effect on or after the date hereof, any interpretation thereof by any governmental authority charged with administration thereof or by any central bank or other fiscal or monetary authority or other authority, or any 30 37 requirement imposed by any central bank or such other authority whether or not having the force of law; or (ii) any change in (including the introduction of any new) applicable law, treaty, rule, regulation or requirement or in the interpretation thereof by any official authority, or the imposition of any requirement of any central bank, whether or not having the force of law, which shall subject such Lender to any tax (other than taxes on net income imposed on such Lender), levy, impost, charge, fee, duty, deduction or withholding of any kind whatsoever or change the taxation of such Lender with respect to making or maintaining all or any portion of its Pro Rata Share of the Loans as Libor Loans and the interest thereon (other than any change which affects, and to the extent that it affects, the taxation of net income of such Lender); provided, that with respect to any withholding the foregoing shall not apply to any withholding tax described in sections 1441, 1442 or 3406 of the Code, or any succeeding provision of any legislation that amends, supplements or replaces any such section, or to any tax, levy, impost, duty, charge, fee, deduction or withholding that results from any noncompliance by a Lender with any federal, state or foreign law or from any failure by a Lender to file or furnish any report, return, statement or form the filing or furnishing of which would not have an adverse effect on such Lender and would eliminate such tax, impost, duty, deduction or withholding; In any such event, such Lender shall promptly notify the Agent thereof, and of the reasons therefor, and the Agent shall promptly notify the Borrower thereof in writing stating the reasons provided to the Agent by such Lender therefor and the additional amounts required to fully compensate such Lender for such increased or new cost or reduced amount as reasonably determined by such Lender. Such additional amounts shall be payable on each date on which interest is to be paid hereunder or, if there is no outstanding principal amount under any of the Notes, within 10 Business Days after the Borrower's receipt of said notice. Such Lender's certificate as to any such increased or new cost or reduced amount (including calculations, in reasonable detail, showing how such Lender computed such cost or reduction) shall be submitted by the Agent to the Borrower and shall, in the absence of manifest error, be conclusive. In determining any such amount, the Lender(s) may use any reasonable averaging and attribution methods. Notwithstanding anything to the contrary set forth above, the Borrower shall not be obligated to pay any amounts pursuant to this Section 2.9.4 as a result of any requirement or change referenced above with respect to any period prior to the one hundred and eightieth (180th) day prior to the date on which the Borrower is first notified thereof (other than any amounts which relate to any such requirement or change which is adopted with retroactive effect in which case the Borrower shall be obligated to pay all such amounts accrued from the date as of which such requirement or change is retroactively effective) unless the failure to give such notice within such one hundred and eighty (180) day period resulted from reasonable circumstances beyond such Lender's reasonable control. Section 2.9.5. Libor Funding Losses. In the event that any payment or prepayment of a Libor Loan is received on a date other than the last day of an Interest Period, such payment or prepayment shall be held by the Agent in a separate account and be pledged to the Agent as collateral for the obligations of the Borrower arising in connection with this Agreement, the Notes and the other Financing Documents until the end of the then current 31 38 Interest Period, at which time the Agent shall apply such payment or prepayment, for the accounts of the Lenders in accordance with their Pro Rata Shares, to the outstanding Libor Loans. Notwithstanding the foregoing, in the event any of the Lenders shall incur any loss or expense (including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain all or any portion of the Loans as Libor Loans) as a result of: (i) payment or prepayment by the Borrower of all or any portion of any Libor Loan on a date other than the Interest Adjustment Date for such Libor Loan, for any reason; provided, however that this clause shall not be deemed to grant the Borrower any right to convert a Libor Loan to a Prime Rate Loan prior to the end of any Interest Period or to imply such right; (ii) conversion of all or any portion of any Libor Loan on a day other than the last day of an Interest Period applicable to such Loan to a Prime Rate Loan for any reason including, without limitation, acceleration of the Loans upon or after an Event of Default, any Interest Rate Election or any other cause whether voluntary or involuntary and whether or not referred to or described in this Agreement, other than any such conversion resulting solely from application of Sections 2.9.2 or 2.9.3 by any Lender; or (iii) any failure by the Borrower to borrow the Loans as Libor Loans on the date specified in any Interest Rate Election selecting the Libor Rate, other than any such failure resulting solely from application of Sections 2.9.2 or 2.9.3 by any Lender; such Lender shall promptly notify the Agent thereof, and of the reasons therefor. Upon the request of the Agent, the Borrower shall pay directly to the Agent for the account of such Lender such amount as will (in the reasonable determination of such Lender, which shall be conclusive in the absence of manifest error) reimburse such Lender for such loss or expense. Each Lender shall furnish to the Borrower, upon written request from the Borrower received by the Agent, a written statement setting forth the computation of any such amounts payable to such Lender under this Section 2.9.5. Section 2.9.6. Banking Practices. Each Lender agrees that upon the occurrence of any of the events described in Sections 2.2.3 and/or 2.9.2, 2.9.4 or 2.9.5, such Lender will exercise all reasonable efforts to take such reasonable actions at no expense to such Lender (other than reasonable expenses which are covered by the Borrower's advance deposit of funds with such Lender for such purpose, or if such Lender agrees, which the Borrower has agreed to pay or reimburse to such Lender in full upon demand), in accordance with such Lender's usual banking practices in such situations and subject to any statutory or regulatory requirements applicable to such Lender, as such Lender may take without the consent or participation of any other Person to, in the case of an event described in Sections 2.2.3 and/or 2.9.4 or 2.9.5, mitigate the cost of such events to the Borrower and, in the case of an event described in Sections 2.9.2(i), (ii) or (iii), to seek Dollar deposits in any other interbank Libor market in which such Lender regularly participates and in which the applicable determination(s) described in Sections 2.9.2(i), (ii) or (iii), as the case may be, does not apply. 32 39 Section 2.9.7. Borrower's Options on Unavailability or Increased Cost of Libor Loans. In the event of any conversion of all or any portion of any Lender's Pro Rata Share of any Libor Loans to a Prime Rate Loan for reasons beyond the Borrower's control or in the event that any Lender's Pro Rata Share of all or any portion of the Libor Loans becomes subject, under Sections 2.9.4 or 2.9.5, to additional costs, the Borrower shall have the option, subject to the other terms and conditions of this Agreement, to convert such Lender's Pro Rata Share to a Prime Rate Loan by making Interest Rate Elections for Interest Periods which (i) end on the Interest Adjustment Date for such Libor Loan or (ii) end on Business Days occurring prior to such Interest Adjustment Date, in which case, at the end of the last of such Interest Periods any such Libor Rate Loan shall automatically convert to a Prime Rate Loan and the Borrower shall have no further right to make an Interest Rate Election with respect to such Prime Rate Loan other than an Interest Rate Election which is effective on the Interest Adjustment Date for such Libor Loan. The Borrower's options set forth in this Section 2.9.7 may be exercised, if and only if the Borrower pays, concurrently with delivery to the Agent of each such Interest Rate Election and thereafter in accordance with Sections 2.9.4, 2.9.5 and 2.9.6 all amounts provided for therein to the Agent in accordance with this Agreement. If the Borrower shall, as a result of the requirements of Section 2.9.4 above, be required to pay any Lender the additional costs referred to therein, but not be required to pay such additional costs to the other Lender or Lenders and the Borrower, in its sole discretion, shall deem such additional amounts to be material or in the event that Libor Loans from a Lender are unavailable to the Borrower as a result solely of the provisions of Sections 2.9.2, 2.9.3 or 2.9.4, but are available from the other Lender or Lenders, the Borrower shall have the right to substitute another bank satisfactory to the Agent for such Lender which is entitled to such additional costs or which is relieved from making Libor Loans and the Agent shall use reasonable efforts (with all reasonable costs of such efforts by the Agent to be borne by the Borrower) to assist the Borrower to locate such substitute bank. Any such substitution shall take place in accordance with Section 9.11 and otherwise be on terms and conditions reasonably satisfactory to the Agent, and until such time as such substitution shall be consummated, the Borrower shall continue to pay such additional costs and comply with the above-referenced Sections. Upon any such substitution, the Borrower shall pay or cause to be paid to the Lender that is being replaced, all principal, interest (to the date of such substitution) and other amounts owing hereunder to such Lender and such Lender will be released from liability hereunder. Section 2.9.8. Assumptions Concerning Funding of Libor Loans. The calculation of all amounts payable to the Lenders under this Section 2.9 shall be made as though each Lender actually funded its relevant Libor Loans through the purchase of a deposit in the London interbank market bearing interest at the Libor Rate in an amount equal to that Libor Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such deposit from an offshore office of such Lender to a domestic office of such Lender in the United States of America; provided, however, that each Lender may fund each of its Libor Loans in any manner it sees fit and the foregoing assumption shall be utilized solely for the calculation of amounts payable under this Section 2.9. Section 2.10. Interest Rate Protection. On or before January 31, 1999, the Borrower shall enter into an interest rate protection arrangement covering not less than $10,000,000 of the 33 40 then outstanding Term Loans. Such interest rate protection arrangement may consist of any one or a combination of the following: (i) the purchase of an interest rate swap arrangement from a financial institution reasonably acceptable to the Majority Lenders covering such Loans effectively converting the Borrower's interest payment obligations with respect to such portion of the Term Loans to a fixed rate per annum reasonably acceptable to the Majority Lenders for a term expiring not earlier than two years from the effective date of such arrangement or (ii) the purchase of an interest rate cap from a financial institution reasonably acceptable to the Majority Lenders covering such Loans at a cap rate per annum reasonably acceptable to the Majority Lenders for a term expiring not earlier than two years from the effective date of such arrangement. The other terms and conditions of any such interest rate swap or interest rate cap shall be reasonably satisfactory to the Majority Lenders. ARTICLE 3. CONDITIONS OF LENDING Section 3.1. Conditions Precedent to the Commitment and to all Loans. Section 3.1.1. The Commitment and Initial Loans. The Commitment and the obligation of the Lenders to make the initial Advances of the Loans and/or to issue any Letter of Credit or Letter of Credit Agreement are subject to performance by the Borrower of all of its obligations under this Agreement and to the satisfaction of the conditions precedent that all legal matters incident to the transactions contemplated hereby or incidental to the Loans shall be reasonably satisfactory to counsel for the Agent and that the Lenders shall have received on or before the Closing Date all of the following, each dated the Closing Date or another date acceptable to the Lenders and each to be in form and substance reasonably satisfactory to the Agent or if any of the following is not a deliverable, the satisfaction of such condition in form and substance reasonably satisfactory to the Agent: Section 3.1.1.1. The Financing Documents, including, without limitation, those hereinafter set forth and the Borrower's and any Subsidiary's certificate of incorporation or other organizational documents, by-laws and each agreement or instrument relating thereto. Section 3.1.1.2. Certificate of the secretary, clerk or similar officer of the Borrower and each Subsidiary certifying as to the resolutions of the shareholders or board of directors of the Borrower and each Subsidiary authorizing and approving each of the Financing Documents to which the Borrower and each Subsidiary is a party and other matters contemplated hereby and certifying as to the names and signatures of the Authorized Representative(s) of the Borrower and each Subsidiary authorized to sign each Financing Document to be executed and delivered by or on behalf of the Borrower and each Subsidiary. The Agent and the Lenders may conclusively rely on each such certificate until the Agent shall receive a further certificate canceling or amending the prior certificate and submitting the signatures of the Authorized Representative(s) named in such further certificate. 34 41 Section 3.1.1.3. Favorable opinions of Jones, Day, Reavis & Pogue, counsel for the Borrower, in form and substance reasonably satisfactory to the Agent. Section 3.1.1.4. An Officer's Certificate stating that: Section 3.1.1.4.1. The representations and warranties contained in Section 4.1 and/or contained in any of the other Financing Documents are correct on and as of the Closing Date as though made on and as of such date; and Section 3.1.1.4.2. No Default or Event of Default has occurred and is continuing, or would result from the making of the Loans. Section 3.1.1.5. Certificates of good standing or legal existence of the secretaries of state (or equivalent officials) of the states (or jurisdictions) of organization and qualification of and covering the Borrower and any Subsidiaries dated reasonably near the Closing Date. Section 3.1.1.6. Evidence that (i) the ownership interests in the Borrower are as set forth in Exhibit 1.1, and (ii) that except for receipt and application of certain proceeds of the Loans, the Related Transactions have been completed in accordance with the Related Transaction Documents without any waiver or amendment of any term or condition contained therein without the prior written approval of the Lenders, and in compliance with any applicable laws and necessary governmental authority approvals. Section 3.1.1.7. A Request and an Interest Rate Election. Section 3.1.1.8. All documents, instruments and agreements necessary to terminate, cancel and discharge the documents, instruments and agreements evidencing or securing any and all existing Indebtedness of the Borrower and any Subsidiary and Liens securing such Indebtedness other than those listed in Exhibit 3.1.1.8. Section 3.1.1.9. Payment to the Agent and the Lenders of the fees specified in this Agreement or in the Fee Letter as being payable on the Closing Date and all reasonable out-of-pocket costs and expenses incurred by the Agent and Fleet in connection with the transactions contemplated hereby, including, but not limited to, reasonable outside legal expenses and any accounting fees, auditing fees, appraisal fees, and other fees associated with any independent analyses of the Borrower and any Subsidiary and evidence that all other reasonable fees and costs payable by the Borrower in connection with the transactions contemplated by the Financing Documents and completed on the Closing Date have been paid in full. Section 3.1.1.10. An Officer's Certificate in the form of Exhibit 3.1.1.10, duly completed and reflecting, inter alia, compliance by the Borrower as of the opening of business on the first Business Day after the Closing Date but based on the Borrower's financial information as of the last day of the Borrower's most recent fiscal quarter, adjusted to give effect 35 42 to the Loans made on the Closing Date and completion of the Related Transactions to be completed on or prior to the Closing Date, with the financial covenants provided for herein. Section 3.1.1.11. Such other information about the Borrower, any Subsidiaries and/or their Business Condition as the Lenders may reasonably request. Section 3.1.1.12. True copies of, and/or true copies of any revisions to, the financial statements, the Projections, the pro forma Closing Date financial statements giving effect to the Loans and completion of the Related Transactions to be completed on or prior to the Closing Date, and other information provided pursuant to Section 4.1.5 and certification by the Borrower of the Projections. Section 3.1.1.13. Certificates of fire, business interruption, liability and extended coverage insurance policies, each such policy to name the Agent as mortgagee and loss payee and, on all liability policies, as additional insured. Section 3.1.1.14. True descriptions of any pending or threatened litigation against or by Borrower or any Subsidiary. Section 3.1.1.15. Evidence that all necessary material third party consents to the Related Transactions and the Loans have been obtained and remain in effect without the imposition of any terms or condition not reasonably acceptable to the Lenders and all required filings with any governmental authority have been duly completed. Section 3.1.1.16. The financial statements described in Section 4.1.5 together with the Borrower's pro forma Closing Date balance sheet. Such financial statements shall be accompanied by an Officer's Certificate of the chief financial officer of the Borrower to the effect that (i) the representations of the Borrower set forth in Section 4.1.14 are accurate as of the Closing Date and (ii) that no Material Adverse Effect has occurred since the date of the Borrower's most recent audited financial statements delivered to the Lenders except as set forth or reflected in the financial statements described in Section 4.1.5 or otherwise disclosed in writing and acceptable to the Agent. Section 3.1.1.17. True copies of all documents, instruments and agreements relating to the Borrower's capital structure and the Related Transaction Documents. Section 3.1.1.18. The fact that the representations and warranties of the Borrower contained in Article 4, infra, and in each of the other Financing Documents are true and correct in all material respects on and as of the Closing Date except as altered hereafter by actions not prohibited hereunder. The Borrower's delivery of each Note and Letter of Credit Agreement to the Lenders and of each Request to the Agent shall be deemed to be a representation and warranty by the Borrower as of the date thereof to such effect. Section 3.1.1.19. That there has been no enactment of any law or regulation by any governmental authority which would make it (i) unlawful, (ii) prevent, (iii) 36 43 restrain or (iv) impose conditions which the Lenders determine to be adverse, in any respect as to the foregoing, to the making of the Loans and/or the completion of the Related Transactions. Section 3.1.1.20. The Security Documents, after the completion of any required filings or recordations, will grant to the Agent perfected, first priority security interests or mortgages, as the case may be, with respect to the collateral identified therein and the Agent shall received the favorable opinions of counsel referred to in Section 3.1.1.3 above with respect to such perfection. The Agent shall also have received such searches, landlord consents, access agreements and/or title insurance commitments as reasonably requested by the Agent, all in form and substance reasonably satisfactory to the Agent and/or its counsel. Without limiting the generality of the foregoing, the Agent shall be reasonably satisfied with the terms and conditions of all real property leases in which the Borrower and any Subsidiary has a leasehold interest, including the terms of such leaseholds and the assumability of the lessee's obligations thereunder upon the transfer of or foreclosure upon of the Borrower's or any Subsidiary's leasehold interest. Section 3.1.1.21. No Material Adverse Effect has occurred and there shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental or regulatory agency or authority that could reasonably be expected to result in a Material Adverse Effect. Section 3.1.1.22. All information and materials supplied to the Agent prior to the date hereof shall be true and correct in all material aspects; and no additional information shall have come to the attention of the Agent or the Lenders that is inconsistent in any material respect with the information and materials supplied to the Agent prior to the date hereof or that could reasonably be expected to have a Material Adverse Effect. Section 3.1.2. The Commitment and the Loans. The Commitment and the obligation of each Lender to make or maintain its Pro Rata Share of any Advance or Loan and/or to issue any Letter of Credit or Letter of Credit Agreement are subject to performance by the Borrower of all its obligations under this Agreement and to the satisfaction of the following further conditions precedent: (a) The fact that, immediately prior to and upon the making of each Loan, no Event of Default or Default shall have occurred and be continuing; (b) The fact that the representations and warranties of the Borrower contained in Article 4, infra and in each of the other Financing Documents, are true and correct in all material respects on and as of the date of each Advance or Loan except as altered hereafter by actions consented to or not prohibited hereunder. The Borrower's delivery of the Notes to the Lenders and of each Request to the Agent shall be deemed to be a representation and warranty by the Borrower as of the date of such Advance or Loan as to the facts specified in Sections 3.1.2(a) and (b); (c) Receipt by Agent on or prior to the Business Day specified in the definition of Interest Rate Election of a written Request stating the amount requested for the 37 44 Loan or Advance in question and an Interest Rate Election for such Loan or Advance, all signed by a duly authorized officer of the Borrower on behalf of the Borrower; (d) That there exists no law or regulation by any governmental authority having jurisdiction over the Agent or any of the Lenders which would make it unlawful in any respect for such Lender to make its Pro Rata Share of the Loan or Advance, including, without limitation, Regulations U, T and X of the Board of Governors of the Federal Reserve System; and (e) No Material Adverse Effect has occurred. ARTICLE 4. REPRESENTATIONS AND WARRANTIES Section 4.1. Representations and Warranties of the Borrower. The Borrower represents and warrants to the Agent and the Lenders that, after giving effect to the Loans and the application of the proceeds thereof (which representations and warranties shall survive the making of the Loans) as follows: Section 4.1.1. Organization and Existence. The Borrower and any Subsidiary is a corporation or limited liability company, duly organized, validly existing and in good standing under the laws of the state (or applicable jurisdiction) of its incorporation or organization and is duly qualified to do business in all jurisdictions in which such qualification is required, all as noted on Exhibit 4.1.1, except where failure to so qualify would not have a Material Adverse Effect, and has all requisite power and authority to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under the Financing Documents. Section 4.1.2. Authorization and Absence of Defaults. Except as described on Exhibit 4.1.2, the execution, delivery to the Agent and/or the Lenders and performance by the Borrower and any Subsidiary of the Financing Documents and Related Transaction Documents have been duly authorized by all requisite corporate action and do not and will not (i) require any consent or approval of the shareholders or board of directors of the Borrower or any Subsidiary which has not been obtained, (ii) violate any provision of any law, rule, regulation (including, without limitation, Regulations U and X of the board of governors of the federal reserve system), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower and/or any Subsidiary and/or the articles of organization or by-laws, as applicable, of the Borrower and/or any Subsidiary, (iii) result in a material breach of or constitute a material default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower and/or any Subsidiary is or are a party or parties or by which it or they or its or their properties may be bound or affected; or (iv) result in, or require, the creation or imposition of any Lien on any of the Borrower's and/or any Subsidiary's respective properties or revenues other than Liens granted to the Agent by any of the Financing Documents securing the Obligations. The Borrower and any Subsidiary are in compliance with any such applicable law, rule, regulation, order, writ, judgment, injunction, 38 45 decree, determination or award or any such indenture, other agreement, lease or instrument, except where the failure to be in compliance does not have a Material Adverse Effect. Section 4.1.3. Acquisition of Consents. Except as noted on Exhibit 4.1.3, no authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, other than those which have been obtained, is or will be necessary to the valid execution and delivery to the Agent and/or the Lenders or performance by the Borrower or any Subsidiary of any Financing Documents and each of the foregoing which has been obtained is in full force and effect. Section 4.1.4. Validity and Enforceability. Each of the Financing Documents when delivered hereunder will constitute the legal, valid and binding obligations of each of the Borrower and any Subsidiary which is or are a party thereto enforceable against the Borrower, and any Subsidiary which is or are a party thereto in accordance with their respective terms except as the enforceability thereof may be limited by the effect of general principles of equity and bankruptcy and similar laws affecting the rights and remedies of creditors generally. Section 4.1.5. Financial Information. The following information with respect to the Borrower has heretofore been furnished to the Agent: Section 4.1.5.1. Audited annual financial statements of the Borrower for the periods ended December 31, 1996 and December 31, 1997 ; and Section 4.1.5.2. Interim, consolidated balance sheets of the Borrower and any Subsidiaries as of the end of the most recent fiscal quarter prior to the Closing for which such statements are available and the related statements of income and cash flows and shareholders' equity, such balance sheets and statements to be prepared and certified by an Authorized Representative in an Officer's Certificate as having been prepared in accordance with GAAP except for footnotes and year-end adjustments, and to be in form reasonably satisfactory to the Agent; Section 4.1.5.3. The Projections. Section 4.1.5.4. The pro forma financial statements of the Borrower as of the Closing Date provided pursuant to Section 3.1.1.12. Section 4.1.5.5. The (a) unaudited balance sheets of Acquired Company as of December 31, 1996 and 1997 and the related statements of operations and cash flows for the years then ended and (b) the reviewed balance sheet of the Acquired Company as of September 30, 1998 and the related statements of operations and cash flows for the nine-month period then ended. Each of the financial statements referred to above in Section 4.1.5.1 and 4.1.5.2 was prepared in accordance with GAAP (subject, in the case of interim statements, to the absence of footnotes and normal year-end adjustments) applied on a consistent basis, except as 39 46 stated therein. To the best of the Borrower's knowledge, each of the financial statements referred to above in Sections 4.1.5.1, 4.1.5.2 and 4.1.5.4 fairly presents the financial condition or pro forma financial condition, as the case may be, of the Person being reported on at such dates and is complete and correct in all material respects and no Material Adverse Effect has occurred since the date thereof. The Projections were prepared by the Borrower in good faith. Section 4.1.6. No Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower and/or any Subsidiary or any of their properties before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which if determined adversely to the Borrower and/or any Subsidiary would draw into question the legal existence of the Borrower and/or any such Subsidiary and/or the validity, authorization and/or enforceability of any of the Financing Documents and/or any provision thereof and/or could have a Material Adverse Effect except those matters, if any, described on Exhibit 4.1.6 none of which, in Borrower's good faith opinion, will (i) have such Material Adverse Effect or (ii) draw into question (a) the legal existence of the Borrower and/or any such Subsidiary or (b) the validity, authorization and/or enforceability of any of the Financing Documents and/or any provision thereof. Section 4.1.7. Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR Part 221), does not own and has no present intention of acquiring any such margin stock or a "margin security" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR, Part 207). None of the proceeds of the Loans will be used directly or indirectly by the Borrower for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry, any such margin security or margin stock or for any other purpose which might constitute the transaction contemplated hereby a "purpose credit" within the meaning of said Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities and Exchange Act of 1934, as amended, or any rules or regulations promulgated under either said statute. Section 4.1.8. Absence of Adverse Agreements. Neither the Borrower nor any Subsidiary is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any corporate or partnership restriction which would have a Material Adverse Effect. Section 4.1.9. Taxes. The Borrower and each Subsidiary has filed all tax returns (federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, except for those taxes, if any, which are being contested in good faith and by appropriate proceedings, and for which proper reserve or other provision has been made in accordance with GAAP and except where any failure to file or pay would not have a Material Adverse Effect on the Borrower or any Subsidiary and except as described in Exhibit 4.1.9. Section 4.1.10. ERISA. Borrower and any Commonly Controlled Entity do not maintain or contribute to any Plan which is not in substantial compliance with ERISA, or any 40 47 Single Employer Plan which has incurred any accumulated funding deficiency within the meaning of sections 412 and 418 of the Code or which has applied for or obtained a waiver from the Internal Revenue Service of any minimum funding requirement under section 412 of the Code. Borrower and any Commonly Controlled Entity have not incurred any liability to the PBGC in connection with any Plan covering any employees of Borrower or any Commonly Controlled Entity in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate or ceased operations at any facility or withdrawn from any Plan in a manner which could subject any of them to liability under sections 4062(e), 4063 or 4064 of ERISA in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate, and know of no facts or circumstance which might give rise to any liability of Borrower or any Commonly Controlled Entity to the PBGC under Title IV of ERISA in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate. Borrower and any Commonly Controlled Entity have not incurred any withdrawal liability in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate (including but not limited to any contingent or secondary withdrawal liability) within the meaning of sections 4201 and 4202 of ERISA, to any Multiemployer Plan, and no event has occurred, and there exists no condition or set of circumstances known to the Borrower, which presents a risk of the occurrence of any withdrawal from or the partition, termination, reorganization or insolvency of any Multiemployer Plan which could result in any liability to a Multiemployer Plan in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate. Except for payments for which the minimum funding requirement has been waived under section 412 of the Code, full payment has been made of all amounts which Borrower and any Commonly Controlled Entity are required to have paid as contributions to any Plan under applicable law or under any plan or any agreement relating to any Plan to which Borrower or any Commonly Controlled Entity is a party. Borrower and each Commonly Controlled Entity have made adequate provision for reserves to meet contributions that have not been made because they are not yet due under the terms of any Plan or related agreements. Neither Borrower nor any Commonly Controlled Entity has any knowledge, nor do any of them have any reason to believe, that any Reportable Event which could result in a liability or liabilities of Fifty Thousand Dollars ($50,000) or more in the aggregate has occurred with respect to any Plan. Section 4.1.11. Ownership of Properties. Section 4.1.11.1. Except for Permitted Encumbrances, Borrower and any Subsidiary has good title to all of its properties and assets free and clear of all restrictions and Liens of any kind other than those which could not have a Material Adverse Effect or a material adverse effect on the validity, authorization and/or enforceability of the Financing Documents and/or any provision thereof. Section 4.1.11.2. Exhibit 4.1.11 accurately and completely lists the location of all real property owned or leased by Borrower or any Subsidiary. Borrower and each Subsidiary enjoys quiet possession under all material leases of real property to which it is a party as a lessee, and all of such leases are valid, subsisting and, to Borrower's knowledge, in full force and effect. 41 48 Section 4.1.11.3. To Borrower's knowledge, except as specified in Exhibit 4.1.11, none of the real property occupied by Borrower or any Subsidiary is located within any federal, state or municipal flood plain zone. Section 4.1.11.4. Except as set forth in Exhibit 4.1.11, all of the material properties used in the conduct of the Borrower's and each Subsidiary's business (i) are in good repair, working order and condition (reasonable wear and tear excepted) and reasonably suitable for use in the operation of Borrower's, and each Subsidiary's business; and (ii) to Borrower's knowledge are currently operated and maintained, in all material respects, in accordance with the requirements of applicable governmental authorities. Section 4.1.12. Accuracy of Representations and Warranties. None of Borrower's representations or warranties set forth in this Agreement or in any document or certificate furnished pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary to make any statement of fact contained herein or therein, in light of the circumstances under which it was made, not misleading; except that unless provided otherwise any such document or certificate which is dated speaks as of the date stated and not the present. Section 4.1.13. No Investment Company. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended, which is required to register thereunder. Section 4.1.14. Solvency, etc. After giving effect to the consummation of each Loan outstanding and to be made under this Agreement as of the time this representation and warranty is given, the Borrower (a) will be able to pay its debts as they become due, (b) will have funds and capital sufficient to carry on its business and all businesses in which it is about to engage, and (c) will own property in the aggregate having a value both at fair valuation and at fair saleable value in the ordinary course of the Borrower's business greater than the amount required to pay its Indebtedness, including for this purpose unliquidated and disputed claims. The Borrower will not be rendered insolvent by the execution and delivery of this Agreement and the consummation of any transactions contemplated herein. Section 4.1.15. Approvals. Except as set forth in Exhibit 4.1.3, all approvals required from all Persons including without limitation all governmental authorities with respect to the Financing Documents have been obtained. Section 4.1.16. Ownership Interests. The schedule of ownership interests in the Borrower and any Subsidiaries set forth in Exhibit 1.1 is true, accurate and complete and the Investments to be made for all ownership interests disclosed therein have in fact been fully paid in immediately available Dollars after giving effect to the closing of the Related Transactions. Section 4.1.17. Licenses, Registrations, Compliance with Laws, etc. Exhibit 4.1.17 accurately and completely describes all permits, governmental licenses, registrations and approvals, material to carrying out of Borrower's and each of the Subsidiaries' 42 49 businesses as presently conducted and as required by law or the rules and regulations of any federal, foreign governmental, state, county or local association, corporation or governmental agency, body, instrumentality or commission having jurisdiction over the Borrower or any of the Subsidiaries, including but not limited to the United States Environmental Protection Agency, the United States Department of Labor, the United States Occupational Safety and Health Administration, the United States Equal Employment Opportunity Commission, the Federal Trade Commission and the United States Department of Justice and analogous and related state and foreign agencies. All existing authorizations, licenses and permits are in full force and effect, are duly issued in the name of, or validly assigned to the Borrower or a Subsidiary and the Borrower or a Subsidiary has full power and authority to operate thereunder. There is no material violation or material failure of compliance or, to Borrower's knowledge, allegation of such violation or failure of compliance on the part of the Borrower or any Subsidiary with any of the foregoing permits, licenses, registrations, approvals, rules or regulations and there is no action, proceeding or investigation pending or to the knowledge of the Borrower threatened nor has the Borrower or any Subsidiary received any notice of such which might result in the termination or suspension of any such permit, license, registration or approval which in any case could have a Material Adverse Effect. Section 4.1.18. Principal Place of Business; Books and Records. The Borrower's chief executive offices are located at Borrower's addresses set forth in Section 9.6. All of the Borrower's books and records are kept at one or more of its addresses set forth in Section 9.6. Section 4.1.19. Subsidiaries. The Borrower has only the Subsidiaries identified on Exhibit 1.1. Section 4.1.20. Copyright. Except as set forth in Exhibit 4.1.20 the Borrower has not violated any of the provisions of the Copyright Revision Act of 1976, 17 U.S.C. 101, et seq. The Borrower has filed all registration statements, notices and statements of account and all necessary supplements and adjustment schedules thereto with the United States Copyright Office and has made all payments to the United States Copyright Office that are required. Exhibit 4.1.20 accurately and completely sets forth all copyrights held by the Borrower or any of the Subsidiaries and contains exceptions to the representations contained in this Section 4.1.20. No inquiries regarding any such filings have been received by the Copyright Office. The Borrower has not allocated revenues in any manner inconsistent with the rules and regulations of the Copyright Office. Section 4.1.21. Environmental Compliance. Neither the Borrower nor, to the knowledge of the Borrower, any other Person: Section 4.1.21.1. has ever caused, permitted, or suffered to exist any Hazardous Material to be spilled, placed, held, located or disposed of on, under, or about, any of the facilities owned, leased or used by the Borrower (the "Premises"), or from the Premises into the atmosphere, any body of water, any wetlands, or on any other real property, nor to Borrower's knowledge does any Hazardous Material exist on, under or about the Premises other than as disclosed on Exhibit 4.1.21, or in respect of Hazardous Material used or disposed of in compliance with law; 43 50 Section 4.1.21.2. has any knowledge that any of the Premises has ever been used (whether by the Borrower or, to the knowledge of the Borrower, by any other Person) as a treatment, storage or disposal (whether permanent or temporary) site for any Hazardous Waste as defined in 42 U.S.C.A. 6901, et seq. (the Resource Recovery and Conservation Act); and Section 4.1.21.3. has any knowledge of any notice of violation, Lien or other notice issued by any governmental agency with respect to the environmental condition of the Premises or any other property occupied by the Borrower, or any other property which was included in the property description of the Premises or such other real property within the preceding three years except as disclosed to the Agent. Section 4.1.22. Material Agreements, etc. Exhibit 4.1.22 attached hereto accurately and completely lists all material agreements to which the Borrower or any of the Subsidiaries are a party including without limitation all software licenses, and all material construction, engineering, consulting, employment, management, operating and related agreements, if any, which are presently in effect. All of the material agreements to which Borrower or any Subsidiary is a party, are legally valid, binding, and, to Borrower's knowledge, in full force and effect and neither the Borrower, any of the Subsidiaries nor, to Borrower's knowledge, any other parties thereto are in material default thereunder. Section 4.1.23. Patents, Trademarks and Other Property Rights. Exhibit 4.1.23 attached hereto contains a complete and accurate schedule of all registered trademarks, registered copyrights and patents of the Borrower and/or any of the Subsidiaries, and pending applications therefor, and all other intellectual property in which the Borrower and/or any of the Subsidiaries has any rights other than "off-the shelf" software which is generally available to the general public at retail. Except as set forth in Exhibit 4.1.23, the Borrower and any Subsidiaries own, possess, or have licenses to use all the patents, trademarks, service marks, trade names, copyrights and non-governmental licenses, and all rights with respect to the foregoing, necessary for the conduct of their respective businesses as now conducted, without, to the Borrower's knowledge any conflict with the rights of others with respect thereto. Section 4.1.24. Related Transaction Documents. The Borrower has, prior to the date hereof, delivered to the Lenders true copies of the Related Transaction Documents, and each and every amendment or modification thereto and, except for receipt and application of certain proceeds of the Loans, the Related Transactions have been completed in accordance with the Related Transaction Documents, without any waiver or amendment of any term or condition contained therein without the prior written approval of the Lenders, and in compliance with any applicable laws and necessary governmental authority approvals. Section 4.1.25. Material Adverse Effect. No Material Adverse Effect has occurred and there exists no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental or regulatory agency or authority that could reasonably be expected to result in a Material Adverse Effect. 44 51 Section 4.1.26. Year 2000. On the basis of comprehensive review and assessment undertaken by the Borrower of the Borrowers' and its Subsidiaries' computer applications and an assessment by the Borrower of its and its Subsidiaries' material suppliers, vendors and customers, the Borrower reasonably believes that the "Year 2000 Problem" (that is, the risk that computer applications used by any person may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999) will not result in a Material Adverse Effect. ARTICLE 5. COVENANTS OF THE BORROWER Section 5.1. Affirmative Covenants of the Borrower Other than Reporting Requirements. From the date hereof and thereafter for so long as there is Indebtedness of the Borrower to any Lender and/or the Agent under any of the Financing Documents or any part of the Commitment is in effect, the Borrower will, with respect to itself and, unless noted otherwise below, with respect to each of its Subsidiaries, ensure that each Subsidiary will, unless the Majority Lenders shall otherwise consent in writing: Section 5.1.1. Payment of Taxes, etc. Pay and discharge all taxes and assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims for the same which, if unpaid, might become a Lien upon any of its properties, provided that (unless and until foreclosure, restraint, sale or any similar proceeding is pending and is not stayed, discharged or bonded within 30 days after commencement) the Borrower shall not be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings and for which proper reserve or other provision has been made in accordance with GAAP, unless failure to pay could not result in a Material Adverse Effect. Section 5.1.2. Maintenance of Insurance. Maintain on the collateral under any of the Security Documents insurance against loss by fire, hazards included within the term "extended coverage", and such other hazards, casualties and contingencies as the Agent may from time to time require, in an amount equal to one hundred percent (100%) of the replacement cost of the collateral under any of the Security Documents and business interruption insurance in an amount reasonably acceptable to the Agent. All policies of such insurance and all renewals thereof shall be in form and substance acceptable to Agent, shall be made payable in case of loss to the Agent as loss payee and mortgagee and shall contain an endorsement requiring thirty (30) days prior written notice to the Agent prior to cancellation or change in the coverage, scope or amount of any such policies. Borrower shall also keep in full force and effect a policy of public liability insurance against claims of bodily injury, death or property damage occurring in any building in which the limits of liability shall not be less than One Million Dollars ($1,000,000) per person and One Million Dollars ($1,000,000) per accident, together with an excess liability policy in the amount of Two Million Dollars ($2,000,000) which shall be in addition to the limits above set forth. Borrower shall increase the limits of such liability insurance to such higher 45 52 amounts as the Agent may from time to time reasonably require. Certificates of all such insurance shall be delivered to the Agent concurrently with the execution and delivery of this Agreement, and thereafter all renewal or replacement certificates shall be delivered to the Agent not less than thirty (30) days prior to the expiration date of the policy to be renewed or replaced, accompanied by evidence satisfactory to the Agent that all premiums payable with respect to such policies have been paid by Borrower. Borrower shall have the right of free choice in the selection of the agent or the insurer through or by which the insurance required hereunder is to be placed; provided, however, said insurer has at all times a general policyholders' rating of A or A+ in Best's latest rating guide. Furthermore, the Agent shall have the right and is hereby constituted and appointed the true and lawful attorney irrevocable of Borrower, in the name and stead of Borrower, but in the uncontrolled discretion of said attorney, (i) to adjust, sue for, compromise and collect any amounts due under such insurance policies in the event of loss and (ii) to give releases for any and all amounts received in settlement of losses under such policies; and the same shall, subject to Section 2.6.1.3 of this Agreement, at the option of the Agent, be applied, after first deducting the costs of collection, on account of any Indebtedness the payment of which is secured by any of the Financing Documents, whether or not then due, or, notwithstanding the claims of any subsequent lienor, be used or paid over to Borrower in accordance with reasonable procedures established by the Agent for use in repairing or replacing any damaged or destroyed collateral under any of the Security Documents. Section 5.1.3. Preservation of Existence, etc. Preserve and maintain in full force and effect its legal existence, and all material rights, franchises and privileges in the jurisdiction of its organization, preserve and maintain all material licenses, governmental approvals, trademarks, patents, trade secrets, copyrights and trade names owned or possessed by it and which are necessary or, in the reasonable business judgment of the Borrower, desirable in view of its business and operations or the ownership of its properties and qualify or remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or, in its reasonable business judgment, desirable in view of its business and operations and ownership of its properties except where the failure to so qualify will not have a Material Adverse Effect; provided that Borrower may liquidate or dissolve Consulting Professionals Limited. Section 5.1.4. Compliance with Laws, etc. Comply with the requirements of all present and future applicable laws, rules, regulations and orders of any governmental authority having jurisdiction over it and/or its business including, without limitation, regulations of the United States Copyright Office and the Copyright Royalty Tribunal, except where the failure to comply would not have a Material Adverse Effect. Section 5.1.5. Visitation Rights. Permit, during normal business hours and upon the giving of reasonable notice, the Agent, the Lenders and any agents or representatives thereof, to examine and make copies of (at Borrower's cost and expense) and abstracts from the records and books of account of, and visit the properties of the Borrower and any Subsidiary to discuss the affairs, finances and accounts of the Borrower or any Subsidiary with any of their partners, officers or management level employees and/or any independent certified public accountant of the Borrower and/or any Subsidiary. 46 53 Section 5.1.6. Keeping of Records and Books of Account. Keep adequate records and books of account, in which complete entries will be made in accordance with GAAP and with applicable requirements of any governmental authority having jurisdiction over the Borrower and/or any Subsidiary in question, reflecting all financial transactions. Section 5.1.7. Maintenance of Properties, etc. Maintain and preserve all of its properties necessary or useful in the proper conduct of its business, in good working order and condition, ordinary wear and tear excepted, and in accordance with each of the Security Documents. Section 5.1.8. Post-Closing Items. Complete in a timely fashion all actions required in the Post-Closing Letter. Section 5.1.9. Other Documents, etc. Except as otherwise required by this Agreement, pay, perform and fulfill all of its obligations and covenants under each material document, instrument or agreement to which it is a party including, without limitation, the Related Transaction Documents; provided that so long as the Borrower or any Subsidiary is contesting any claimed default by it or them under any of the foregoing by proper proceedings conducted in good faith and for which any proper reserve or other provision in accordance with and to the extent required by GAAP has been made, such default shall not be deemed a violation of this covenant. Section 5.1.10. Minimum Interest Coverage Ratio. Maintain a ratio of EBITDA to Interest Expense of not less than 4.0:1.0, such ratio to be calculated at each Borrower fiscal quarter end on the Adjusted Four Quarterly Basis. Section 5.1.11. Minimum Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio of not less than 1.25:1.00, such ratio to be calculated at each Borrower fiscal quarter end on the Adjusted Four Quarterly Basis. Section 5.1.12. Maximum Ratio of Total Indebtedness for Borrowed Money to EBITDA. Maintain at the end of each fiscal quarter of the Borrower in each period set forth below a ratio of (i) total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of such fiscal quarter to (ii) EBITDA calculated on the Adjusted Four Quarterly Basis of not greater than the ratio set forth below opposite such period: Borrower Fiscal Quarter(s) Ending Ratio - --------------------------------- ----- December 31, 1998 3.50:1.00 March 31, 1999 3.25:1.00 June 30, 1999 3.00:1.00 September 30, 1999 2.75:1.00 December 31, 1999 2.25:1.00 Thereafter 2.00:1.00 47 54 Section 5.1.12 (A). Minimum Quick Ratio. Maintain at the end of Borrower's fiscal quarters ending December 31, 1998 and March 31, 1999, a Quick Ratio of not less than 1.15:1.00 and at the end of each Borrower fiscal quarter thereafter, a Quick Ratio of not less than 1.05:1.00. Section 5.1.13. Officer's Certificates and Requests. Provide each Officer's Certificate required under this Agreement and each Request so that the statements contained therein are accurate and complete in all material respects. Section 5.1.14. Depository. Use the Agent as a principal depository of Borrower's funds. Section 5.1.15. Chief Executive Officer. Maintain Nicholas A. Canitano as Chief Executive Officer of the Borrower and Kenneth L. Conley as President as the Persons with principal executive, operating and management responsibility for the Borrower's business or obtain a replacement of comparable experience and training in the Borrower's industry reasonably satisfactory to the Majority Lenders within 120 days of his ceasing to act in such capacity. Section 5.1.16. Notice of Purchase of Real Estate and Leases. Promptly notify the Agent in the event that the Borrower shall purchase any real estate or enter into any lease of real estate or of equipment material to the operation of the Borrower's business, supply the Agent with a copy of the related purchase agreement or of such lease, as the case may be, and if requested by the Agent, execute and deliver, or cause to be executed and delivered, to the Agent for the benefit of the Lenders a deed of trust, mortgage, assignment or other document, together with landlord consents, in the case of leased property, reasonably satisfactory in form and substance to the Agent, granting a valid first Lien (subject to any Liens permitted under Section 5.2.1 hereof) on such real property or leasehold as security for the Financing Documents, all subject to the limitations of Section 5.2.17. Section 5.1.17. Additional Assurances. From time to time hereafter, execute and deliver or cause to be executed and delivered, such additional instruments, certificates and documents, and take all such actions, as the Agent shall reasonably request for the purpose of implementing or effectuating the provisions of the Financing Documents, and upon the exercise by the Agent of any power, right, privilege or remedy pursuant to the Financing Documents which requires any consent, approval, registration, qualification or authorization of any governmental authority or instrumentality, exercise and deliver all applications, certifications, instruments and other documents and papers that the Agent may be so required to obtain. Section 5.1.18. Appraisals. Permit the Agent and its agents, at any time and in the sole discretion of the Agent or at the request of the Majority Lenders, to conduct appraisals of the Borrower's business, the cost of which shall be borne by the Borrower. Section 5.1.19. Environmental Compliance. Comply strictly and in all material respects with the requirements of all federal, state, and local environmental laws; notify the Lenders promptly in the event of any spill of Hazardous Material materially affecting the 48 55 Premises occupied by the Borrower from time to time; forward to the Lenders promptly any written notices relating to such matters received from any governmental agency; and pay promptly when due any uncontested fine or assessment against the Premises. Section 5.1.20. Remediation. Immediately contain and remove any Hazardous Material found on the Premises in compliance with applicable laws and at the Borrower's expense, subject however, to the right of the Agent, at the Agent's option but at the Borrower's expense, to have an environmental engineer or other representative review the work being done. Section 5.1.21. Site Assessments. Promptly upon the request of the Agent, based upon the Agent's reasonable belief that a material Hazardous Waste or other environmental problem exists with respect to any Premises, provide the Agent with a Phase I environmental site assessment report and, if Agent finds a reasonable basis for further assessment in such Phase I assessment, a Phase II environmental site assessment report, or an update of any existing report, all in scope, form and content and performed by such company as may be reasonably satisfactory to the Agent. Section 5.1.22. Indemnity. Indemnify, defend, and hold the Agent and the Lenders harmless from and against any claim, cost, damage (including without limitation consequential damages), expense (including without limitation reasonable attorneys' fees and expenses), loss, liability, or judgment now or hereafter arising as a result of any claim for environmental cleanup costs, any resulting damage to the environment and any other environmental claims against the Borrower, any Subsidiary, the Lenders and/or the Agent arising out of the transactions contemplated by this Agreement, or any of the Premises. The provisions of this Section shall continue in effect and shall survive (among other events), until the applicable statute of limitations has expired, any termination of this Agreement, foreclosure, a deed in lieu transaction, payment and satisfaction of the Obligations of Borrower, and release of any collateral for the Loans. Section 5.1.23. Trademarks, Copyrights, etc. Concurrently with the acquisition of any trademark, tradename, copyright, patent or service mark collaterally assign and grant a first priority perfected Lien thereon to the Agent pursuant to documents in form and substance reasonably satisfactory to the Agent. Section 5.2. Negative Covenants of the Borrower. From the date hereof and thereafter for so long as there is Indebtedness of the Borrower to any Lender and/or the Agent under any of the Financing Documents or any part of the Commitment is in effect, the Borrower will not, with respect to itself and, unless noted otherwise below, with respect to each of the Subsidiaries, will ensure that each such Subsidiary will not, without the prior written consent of the Majority Lenders: Section 5.2.1. Liens, etc. Create, incur, assume or suffer to exist any Lien of any nature, upon or with respect to any of its properties, now owned or hereafter acquired, or assign as collateral or otherwise convey as collateral, any right to receive income, except that the foregoing restrictions shall not apply to any Liens: 49 56 Section 5.2.1.1. For taxes, assessments or governmental charges or levies on property if the same shall not at the time be delinquent or thereafter can be paid without penalty or interest, or (if foreclosure, distraint, sale or other similar proceedings shall not have been commenced or if commenced not stayed, bonded or discharged within 30 days after commencement) are being contested in good faith and by appropriate proceedings diligently conducted and for which proper reserve or other provision has been made in accordance with and to the extent required by GAAP; Section 5.2.1.2. Imposed by law, such as landlords', carriers', warehousemen's and mechanics' liens, bankers' set off rights and other similar Liens arising in the ordinary course of business for sums not yet due or being contested in good faith and by appropriate proceedings diligently conducted and for which proper reserve or other provision has been made in accordance with and to the extent required by GAAP; Section 5.2.1.3. Arising in the ordinary course of business out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; Section 5.2.1.4. Arising from or upon any judgment or award, provided that such judgment or award is being contested in good faith by proper appeal proceedings and only so long as execution thereon shall be stayed; Section 5.2.1.5. Those set forth on Exhibit 1.8; Section 5.2.1.6. Those now or hereafter granted pursuant to the Security Documents or otherwise now or hereafter granted to the Agent for the benefit of the Lenders as collateral for the Loans and/or Borrower's other Obligations arising in connection with or under any of the Financing Documents; Section 5.2.1.7. Deposits to secure the performance of bids, trade contracts (other than for Borrowed Money), leases, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of the Borrower's or any Subsidiary's business; Section 5.2.1.8. Easements, rights of way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of business by any Borrower or any Subsidiary; Section 5.2.1.9. Liens securing Indebtedness permitted to exist under Section 5.2.8.3; provided that the Lien securing any such Indebtedness is limited to the item of property purchased or leased in each case; 50 57 Section 5.2.1.10. UCC-1 financing statements filed solely for notice or precautionary purposes by lessors under operating leases which do not secure Indebtedness and which are limited to the items of equipment leased pursuant to the lease in question; and Section 5.2.2. Assumptions, Guaranties, etc. of Indebtedness of Other Persons. Assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligation or Indebtedness of any other Person, except: Section 5.2.2.1. Guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; Section 5.2.2.2. Assumptions, guaranties, endorsements and contingent liabilities within the definition of Indebtedness and permitted by Section 5.2.8; and Section 5.2.2.3. Those set forth on Exhibit 5.2.2. Section 5.2.3. Acquisitions, Dissolution, etc. Acquire, in one or a series of transactions, all or any substantial portion of the assets or ownership interests in another Person, or dissolve, liquidate, wind up, merge or consolidate or combine with another Person or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) any material assets, whether now owned or hereafter acquired, or any of the Borrower's or any Subsidiary's interests in real property other than assets which are replaced within 30 days of any asset sale, assignment, lease or disposition with assets of like kind, usefulness and value; provided, however, that the Borrower shall be permitted to acquire all or any portion of the assets or ownership interests in another Person (by merger, consolidation or otherwise so long as the Borrower survives) having aggregate (for all such acquisitions from and after the Closing Date, but excluding however the acquisition of the Acquired Company) consideration not to exceed $15,000,000, of which not more than $2,500,000 of such consideration shall be in the form of cash. At the time of any such Permitted Acquisition the Borrower shall provide or grant or cause to be provided or granted to the Agent a first priority perfected Lien on the assets or ownership interests acquired, including without limitation the assets owned by any Subsidiary, to the extent that the Agent does not already have such a Lien. Prior to the consummation of any such Permitted Acquisition, Borrower shall submit to the Agent a pro-forma Compliance Certificate on a consolidated basis (including the to-be-acquired assets and any assumed liabilities or if ownership interests are acquired, the to-be-acquired Person if such Person is to be a Subsidiary and if not, the to-be-acquired ownership interests, all measured as set forth below in this Section 5.2.3), which such pro-forma Compliance Certificate shall indicate that no Default or Event of Default exists or would exist following consummation of the Permitted Acquisition and that the Borrower would be, in compliance with (on a consolidated basis including the to-be-acquired assets and any assumed liabilities or if ownership interests are acquired, the to-be-acquired Person if such Person is to be a Subsidiary and if not, the to-be-acquired ownership interests), Sections 5.1.10, 5.1.11, 5.1.12 and 5.1.12.(A) following consummation of the Permitted Acquisition, including the to-be-acquired assets, Person or ownership interests and the operating results thereof on the same basis and for the same periods as the Borrower is measured for each such covenant, respectively. 51 58 Section 5.2.4. Change in Nature of Business. Make any material change in the nature of its business. Section 5.2.5. Ownership. Cause or permit the occurrence of any Change of Control. Section 5.2.6. Sale and Leaseback. Enter into any sale and leaseback arrangement with any lender or investor, or enter into any leases except in the normal course of business at reasonable rents comparable to those paid for similar leasehold interests in the area. Section 5.2.7. Sale of Accounts, etc. Sell, assign, discount or dispose in any way of any accounts receivable, promissory notes or trade acceptances held by the Borrower or any Subsidiary, with or without recourse, except in the ordinary course of the Borrower's or any Subsidiary's business. Section 5.2.8. Indebtedness. Incur, create, become or be liable directly or indirectly in any manner with respect to or permit to exist any Indebtedness except: Section 5.2.8.1. Indebtedness under the Financing Documents; Section 5.2.8.2. Indebtedness with respect to trade payable obligations and other normal accruals and customer deposits in the ordinary course of business not yet due and payable in accordance with customary trade terms or with respect to which the Borrower or any Subsidiary is contesting in good faith the amount or validity thereof by appropriate proceedings and then only to the extent such person has set aside on its books adequate reserves therefor in accordance with and to the extent required by GAAP; Section 5.2.8.3. Indebtedness with respect to Capitalized Lease Obligations and purchase money Indebtedness with respect to real or personal property in an aggregate amount outstanding at any time not to exceed $1,000,000; provided that the amount of any purchase money Indebtedness does not exceed 90% of the lesser of the cost or fair market value of the asset purchased with the proceeds of such Indebtedness; Section 5.2.8.4. Unsecured Indebtedness in an aggregate amount outstanding at any time not to exceed $250,000; Section 5.2.8.5. Indebtedness listed on Exhibit 3.1.1.8; Section 5.2.8.6. Indebtedness owing by the Borrower to any Subsidiary or by any Subsidiary to the Borrower or any other Subsidiary; provided, however, that any Indebtedness owing by the Borrower or any Subsidiary to an Affiliate shall be subordinated to the Obligations on terms and conditions satisfactory to the Required Lenders. Section 5.2.8.7. Indebtedness permitted by Section 5.2.2. 52 59 Section 5.2.8.8. Indebtedness outstanding as a refinancing of Indebtedness permitted under another clause of this Section 5.2.8 other than Sections 5.2.8.2 or 5.2.8.8; provided that such Indebtedness as refinanced continues to qualify as permitted Indebtedness under the clause of this Section 5.2.8 under which the refinanced Indebtedness was permitted under this Section 5.2.8. Section 5.2.9. Other Agreements. Amend any of the terms or conditions of any of the Related Transaction Documents in a manner materially adverse to the Agent or any of the Lenders, its certificate of incorporation, bylaws (or comparable applicable charter or governance document), the Subordination Agreement, any other subordination agreement or any indenture, agreement, document, note or other instrument evidencing, securing or relating to any other Indebtedness permitted under Section 5.2.8. Section 5.2.10. [Intentionally omitted.] Section 5.2.11. Dividends, Payments and Distributions. Declare or pay any dividends, management fees or like fees or make any other distribution of cash or property or both to any of the Stockholders other than compensation for services rendered to the Borrower and/or any Subsidiary or use any of its assets for payment, purchase, conversion, redemption, retention, acquisition or retirement of any beneficial interest in the Borrower or set aside or reserve assets for sinking or like funds for any of the foregoing purposes, make any other distribution by reduction of capital or otherwise in respect of any beneficial interest in the Borrower or permit any Subsidiary which is not a wholly-owned Subsidiary so to do. Section 5.2.12. Investments in or to Other Persons. Make or commit to make any Investment in or to any other Person (including, without limitation, any Subsidiary) other than (i) advances to employees for business expenses not to exceed $25,000 in the aggregate outstanding for any one employee and not to exceed $500,000 in the aggregate outstanding at any one time to all such employees, (ii) other employee loans not to exceed $100,000 in the aggregate outstanding at any one time to all such employees, (iii) Cash Equivalent Investments, (iv) Investments in accounts, contract rights and chattel paper (as defined in the Uniform Commercial Code) and notes receivable, arising or acquired in the ordinary course of business, (v) Investments constituting Permitted Acquisitions and (vi) Investments described on Exhibit 5.2.2. Section 5.2.13. Transactions with Affiliates. Except as contemplated by the Related Transaction Documents, engage in any transaction or enter into any agreement with an Affiliate, or in the case of Affiliates or Subsidiaries, with the Borrower or another Affiliate or Subsidiary, except in the ordinary course of business, as permitted by any other provision of this Agreement and then only on an arm's length basis except as set forth on Exhibit 5.2.13. Section 5.2.14. Change of Fiscal Year. Change its accounting policies, reporting practices or its fiscal year from those in effect on the Closing Date. Section 5.2.15. Subordination of Claims. Subordinate any present or future claim against or obligation of another Person, except as ordered in a bankruptcy or similar creditors' remedy proceeding of such other Person. 53 60 Section 5.2.16. Compliance with ERISA. With respect to Borrower and any Commonly Controlled Entity (a) withdraw from or cease to have an obligation to contribute to, any Multiemployer Plan, (b) engage in any "prohibited transaction" (as defined in Section 4975 of the Code) involving any Plan, (c) except for any deficiency caused by a waiver of the minimum funding requirement under sections 412 and/or 418 of the Code, as described above, incur or suffer to exist any material "accumulated funding deficiency" (as defined in section 302 of ERISA and section 412 of the Code) of the Borrower or any Commonly Controlled Entity, whether or not waived, involving any Single Employer Plan, (d) incur or suffer to exist any Reportable Event or the appointment of a trustee or institution of proceedings for appointment of a trustee for any Single Employer Plan if, in the case of a Reportable Event, such event continues unremedied for ten (10) days after notice of such Reportable Event pursuant to sections 4043(a), (c) or (d) of ERISA is given, if in the reasonable opinion of the Majority Lenders any of the foregoing is likely to result in a material liability of the Borrower or any Commonly Controlled Entity, (e) permit the assets held under any Plan to be insufficient to protect all accrued benefits, (f) allow or suffer to exist any event or condition, which presents a material risk of incurring a material liability of the Borrower or any Commonly Controlled Entity to PBGC by reason of termination of any such Plan or (g) cause or permit any Plan maintained by Borrower and/or any Commonly Controlled Entity to be out of compliance with ERISA.] [For purposes of this Section 5.2.16 "material liability" shall be deemed to mean any liability of Fifty Thousand Dollars ($50,000) or more in the aggregate. Section 5.2.17. Capital Expenditures. Incur Capital Expenditures in excess of $1,750,000, in any Borrower fiscal year. Subject to the foregoing, the Borrower shall make its Capital Expenditures substantially in accordance with and for the purposes outlined in the Budget for the Borrower fiscal year in question. Section 5.2.18. Hazardous Waste. Become involved, or permit, to the extent reasonably possible after the exercise by the Borrower of reasonable due diligence and preventive efforts, any tenant of its real property to become involved, in any operations at such real property generating, storing, disposing, or handling Hazardous Material or any other activity that could lead to the imposition on the Borrower or the Agent or any Lender, or any such real property of any material liability or Lien under any environmental laws. Section 5.2.19. Other Restrictions on Liens or Dividends. Enter into any agreement or otherwise agree to or grant any restriction substantially similar to the provisions of Section 5.2.1 hereof or which would otherwise have the effect of prohibiting, restricting, impeding or interfering with the creation subsequent to the Closing Date of additional Liens to secure the Obligations. Section 5.2.20. Limitation on Creation of Subsidiaries, etc.. Establish, create or acquire any Subsidiary or become the general partner in any general partnership. Section 5.3. Reporting Requirements. From the date hereof and thereafter for so long as the Borrower is indebted to any Lender and/or the Agent under any of the Financing Documents, 54 61 the Borrower will, unless the Majority Lenders shall otherwise consent in writing, furnish or cause to be furnished to the Agent for distribution to the Lenders: Section 5.3.1. As soon as possible and in any event upon acquiring knowledge of an Event of Default or Default, continuing on the date of such statement, the written statement of an Authorized Representative setting forth details of such Event of Default or Default and the actions which the Borrower has taken and proposes to take with respect thereto; Section 5.3.2. As soon as practicable after the end of each Borrower fiscal year and in any event within 90 days after the end of each such fiscal year, consolidated and consolidating balance sheets of the Borrower and any Subsidiaries as at the end of such year, and the related statements of income and cash flows or shareholders' equity of the Borrower and any Subsidiaries setting forth in each case the corresponding figures for the preceding fiscal year, such statements to be certified by a firm of independent certified public accountants selected by Borrower and reasonably acceptable to the Majority Lenders, to be accompanied by a true copy of said auditors' management letter, if one was provided to the Borrower, and to contain a statement to the effect that such accountants have examined Sections 5.1.10 through 5.1.13 and 5.2.17 and that no Default or Event of Default exists on account of Borrower's failure to have been in compliance therewith on the date of such statement; Section 5.3.3. As soon as is practicable after the end of each fiscal quarter of each Borrower fiscal year and in any event within 45 days thereafter, consolidated balance sheets of the Borrower and any Subsidiaries as of the end of such period and the related statements of income and cash flows and shareholders' equity of the Borrower and any Subsidiaries, subject to changes resulting from year-end adjustments, together, subject to Section 5.3.7, with a comparison to the Budget for the applicable period, such balance sheets and statements to be prepared and certified by an Authorized Representative in an Officer's Certificate as having been prepared in accordance with GAAP except for footnotes and year-end adjustments, and to be in form reasonably satisfactory to the Agent; Section 5.3.4. Simultaneously with the furnishing of each of the year-end consolidated and consolidating financial statements of the Borrower and any Subsidiaries to be delivered pursuant to Section 5.3.2 and each of the consolidated quarterly statements of the Borrower and the Subsidiaries to be delivered pursuant to Section 5.3.3 an Officer's Certificate of an Authorized Representative which shall contain a statement in the form of Exhibit 3.1.1.10 to the effect that no Event of Default or Default has occurred, without having been waived in writing, or if there shall have been an Event of Default not previously waived in writing pursuant to the provisions hereof, or a Default, such Officer's Certificate shall disclose the nature thereof and the actions the Borrower has taken and prepare to take with respect thereto. Each such Officer's Certificate shall also contain a calculation of and certify to the accuracy of the amounts required to be calculated in the financial covenants of the Borrower contained in this Agreement and described in Exhibit 3.1.1.10; Section 5.3.5. Promptly after the commencement thereof, notice of all material actions, suits and proceedings before any court or governmental department, commission, board, 55 62 bureau, agency or instrumentality, domestic or foreign, affecting the Borrower and/or any Subsidiary; Section 5.3.6. The borrowing base certificates required pursuant to Section 2.1 hereof; Section 5.3.7. On or before January 31 of each fiscal year of the Borrower, an updated proposed budget, prepared on a quarterly basis, and updated financial projections for the Borrower and any Subsidiaries on a consolidated basis (together, the "Budget") for such fiscal year, setting forth in detail reasonably satisfactory to the Agent the projected results of operations of the Borrower and any Subsidiaries on a consolidated quarterly basis, detailed Capital Expenditures plan and stating underlying assumptions and accompanied by a written statement of an Authorized Representative certifying as to the approval of such Budget by Borrower's board of directors. Section 5.3.8. Such other information respecting the Business Condition of the Borrower or any Subsidiaries as the Agent or any Lender may from time to time reasonably request; Section 5.3.9. Written notice of the fact and of the details of any sale or transfer of any ownership interest in the Borrower or any Subsidiary given promptly after the Borrower acquires knowledge thereof; provided, however, that this clause shall not be deemed to constitute or imply any consent to any such sale or transfer; Section 5.3.10. Prompt written notice of loss of any key personnel or any Material Adverse Effect and an explanation thereof and of the actions the Borrower and/or such Subsidiary propose to take with respect thereto; and Section 5.3.11. Written notice of the following events, as soon as possible and in any event within 15 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or (ii) the institution of proceedings or the taking or expected taking of any other action by PBGC or the Borrower or any Commonly Controlled Entity to terminate, withdraw or partially withdraw from any Plan and, with respect to any Multiemployer Plan, the Reorganization (as defined in Section 4241 of ERISA) or Insolvency (as defined in Section 4245 of ERISA) of such Multiemployer Plan and in addition to such notice, deliver to the Agent whichever of the following may be applicable: (a) an Officer's Certificate setting forth details as to such Reportable Event and the action that the Borrower or Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or b) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be. ARTICLE 6. 56 63 EVENTS OF DEFAULT Section 6.1. Events of Default. The Borrower shall be in default under each of the Financing Documents, upon the occurrence of any one or more of the following events ("Events of Default"): Section 6.1.1. If the Borrower shall fail to make due and punctual payment of any principal, fees, interest and/or other amounts payable under this Agreement as provided in any Note and/or in this Agreement when the same is due and payable except that it shall not be an Event of Default if any interest, fees and/or other amounts (excluding principal) is paid within 5 days after it is due and payable, whether at the due date thereof or at a date fixed for prepayment or if the Borrower shall fail to make any such payment of fees, interest, principal and/or any other amount under this Agreement and/or under any Note on the date when such payment becomes due and payable by acceleration; Section 6.1.2. If the Borrower or any Subsidiary shall make an assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall admit in writing its inability to pay its debts as they become due or shall file a voluntary petition in bankruptcy, or shall file any petition or answer seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy laws or other applicable federal, state or other statute, law or regulation, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of it or of all or any substantial part of its properties, or if partnership or corporate action shall be taken for the purpose of effecting any of the foregoing; or Section 6.1.3. To the extent not described in Section 6.1.2, (i) if the Borrower or any Subsidiary shall be the subject of a bankruptcy proceeding, or (ii) if any proceeding against any of them seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution, or similar relief under the present or any future federal bankruptcy law or other applicable federal, foreign, state or other statute, law or regulation shall be commenced, or (iii) if any trustee, receiver or liquidator of any of them or of all or any substantial part of any or all of their properties shall be appointed without their consent or acquiescence; provided that in any of the cases described above in this Section 6.1.3, such proceeding or appointment shall not be an Event of Default if the Borrower or the Subsidiary in question shall cause such proceeding or appointment to be discharged, vacated, dismissed or stayed within sixty (60) days after commencement thereof; or Section 6.1.4. If final judgment or judgments aggregating more than $500,000 shall be rendered against the Borrower or any Subsidiary and shall remain undischarged, unstayed or unpaid for an aggregate of thirty (30) days (whether or not consecutive) after entry thereof; or Section 6.1.5. If the Borrower or any Subsidiary shall default (after giving effect to any applicable grace period) in the due and punctual payment of the principal of or interest on any Indebtedness exceeding in the aggregate $500,000 (other than the Loans), or if any default shall have occurred and be continuing after any applicable grace period under any mortgage, note 57 64 or other agreement evidencing, securing or providing for the creation of such Indebtedness, which results in the acceleration of such Indebtedness or which permits, or with the giving of notice would permit, any holder or holders of any such Indebtedness to accelerate the stated maturity thereof; or Section 6.1.6. If there shall be a default in the performance of the Borrower's obligations under Section 5.1.3 (insofar as such Section requires the preservation of the corporate existence of the Borrower or any Subsidiary), any of Sections 5.1.2, 5.1.10 through 5.1.13 or Section 5.2 of this Agreement or under any covenant, representation or warranty contained in any of the Security Documents for which no cure period is provided in such Security Document; or Section 6.1.7. If there shall be any Default in the performance of any covenant or condition contained in this Agreement or in any of the other Financing Documents to be observed or performed pursuant to the terms hereof or any Financing Document, as the case may be, or to the extent such Default would have a Material Adverse Effect, by the Borrower under any of the Related Transaction Documents, other than a covenant or condition referred to in any other subsection of this Section 6.1 and such Default shall continue unremedied or unwaived, (i) in the case of any covenant or condition contained in Section 5.3, for fifteen (15) Business Days, or (ii) in the case of any other covenant or condition for which no other grace period is provided, for thirty (30) days, or (iii) in the case of any other covenant or condition for which another grace period is provided, for such grace period, or (iv) if any of the representations and warranties made or deemed made by the Borrower to the Agent and/or any Lender pursuant to any of the Financing Documents proves to have been false or misleading in any material respect when made and such falseness or misleading representation or warranty would be reasonably likely to have a material adverse effect on the Agent or any Lender or their rights and remedies or a Material Adverse Effect; or Section 6.1.8. If there shall be any attachment of any deposits or other property of the Borrower and/or any Subsidiary in the possession of any Lender or any attachment of any other property of the Borrower and/or any Subsidiary in an amount exceeding $100,000 which shall not be discharged, vacated or stayed within thirty (30) days of the date of such attachment; or Section 6.1.9. Any certification of the financial statements, furnished to the Agent pursuant to Section 5.3.2, shall contain any qualification; provided, however, that such qualifications will not be deemed an Event of Default if in each case (i) such certification shall state that the examination of the financial statements covered thereby was conducted in accordance with generally accepted auditing standards, including but not limited to all such tests of the accounting records as are considered necessary in the circumstances by the independent certified public accountants preparing such statements, (ii) such financial statements were prepared in accordance with GAAP and (iii) such qualification does not involve the "going concern" status of the entity being reported upon. ARTICLE 7. 58 65 REMEDIES OF LENDERS Upon the occurrence and during the continuance of any one or more of the Events of Default, the Agent, at the request of the Majority Lenders, shall, by written notice to the Borrower, declare the obligation of the Lenders to make or maintain the Loans to be terminated, whereupon the same and the Commitment shall forthwith terminate, and the Agent, at the request of the Majority Lenders, shall, by notice to the Borrower, declare the entire unpaid principal amount of each Note and all fees and interest accrued and unpaid thereon and/or under this Agreement, and/or any of the other Financing Documents and any and all other Indebtedness under this Agreement, each Note and/or any of the other Financing Documents to the Agent and/or any of the Lenders and/or to any holder of all or any portion of each Note to be forthwith due and payable, whereupon each Note, and all such accrued fees and interest and other such Indebtedness shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of an Event of Default under Sections 6.1.2 or 6.1.3, all of the unpaid principal amount of each Note, all fees and interest accrued and unpaid thereon and/or under this Agreement and/or under any of the other Financing Documents and any and all other such Indebtedness of the Borrower to any of the Lenders and/or to any such holder shall thereupon be due and payable in full without any need for the Agent and/or any Lender to make any such declaration or take any action and the Lenders' obligations to make the Loans shall simultaneously terminate. The Agent shall, in accordance with the votes of the Majority Lenders, exercise all remedies on behalf of and for the account of each Lender and on behalf of its respective Pro Rata Share of the Loans, its Note and Indebtedness of the Borrower owing to it or any of the foregoing, including, without limitation, all remedies available under or as a result of this Agreement, the Notes or any of the other Financing Documents or any other document, instrument or agreement now or hereafter securing any Note without any such exercise being deemed to modify in any way the fact that each Lender shall be deemed a separate creditor of the Borrower to the extent of its Note and Pro Rata Share of the Loans and any other amounts payable to such Lender under this Agreement and/or any of the other Financing Documents and the Agent shall be deemed a separate creditor of the Borrower to the extent of any amounts owed by the Borrower to the Agent. ARTICLE 8. AGENT Section 8.1. Appointment. The Agent is hereby appointed as administrative and collateral agent, hereunder and each Lender hereby authorizes the Agent to act under the Financing Documents as its Agent hereunder and thereunder, respectively. The Agent agrees to act as such upon the express conditions contained in this Article 8. The provisions of this Article 8 are solely for the benefit of the Agent, and, except as expressly provided in Section 8.6, neither the Borrower nor any third party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and the other Financing Documents to which the Agent is a party, the Agent shall act solely as Agent of the Lenders and does not assume nor shall the Agent be deemed to have assumed any obligation 59 66 towards or relationship of agency or trust with or for the Borrower, any of the Stockholders, any Affiliate or any Subsidiary. Section 8.2. Powers; General Immunity. Section 8.2.1. Duties Specified. Each Lender irrevocably authorizes the Agent to take such action on such Lender's behalf, including, without limitation, to execute and deliver the Financing Documents to which the Agent is a party and to exercise such powers hereunder and under the Financing Documents and other instruments and agreements referred to herein as are specifically delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. The Agent shall have only those duties and responsibilities which are expressly specified in this Agreement or in any of the Financing Documents and may perform such duties by or through its agents or employees. The duties of the Agent shall be mechanical and administrative in nature; and the Agent shall not have by reason of this Agreement or any of the Financing Documents a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the Security Documents, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any of the Financing Documents or the other instruments and agreements referred to herein except as expressly set forth herein or therein. Section 8.2.2. No Responsibility For Certain Matters. The Agent shall not be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of any of the Financing Documents or any other document, instrument or agreement now or hereafter executed in connection herewith or therewith, or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith by or on behalf of the Borrower, any of the Affiliates, and/or any Subsidiary to the Agent or any Lender, or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. Section 8.2.3. Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted hereunder or under any of the Financing Documents, or in connection herewith or therewith unless caused by its or their gross negligence or willful misconduct. If the Agent shall request instructions from Lenders with respect to any action (including the failure to take an action) in connection with any of the Financing Documents, the Agent shall be entitled to refrain from taking such action unless and until the Agent, shall have received instructions from the Majority Lenders (or all of the Lenders if the action requires their consent). Without prejudice to the generality of the foregoing, (i) the Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for the Borrower, any of the Affiliates, and/or any Subsidiary), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action 60 67 whatsoever against the Agent as a result of the Agent acting or (where so instructed) refraining from acting under any of the Financing Documents or the other instruments and agreements referred to herein in accordance with the instructions of the Majority Lenders (or all of the Lenders if the action requires their consent). The Agent shall be entitled to refrain from exercising any power, discretion or authority vested in it under any of the Financing Documents or the other instruments and agreements referred to herein unless and until it has obtained the instructions of the Majority Lenders (or all of the Lenders if the action requires their consent). Section 8.2.4. Agent Entitled to Act as Lender. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, Fleet in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Commitment, Fleet shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include Fleet in its individual capacity. The Agent and its affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with the Borrower, any of the Stockholders, or any Affiliate or Subsidiary as if it were not performing the duties specified herein, and may accept fees and other consideration from the Borrower and/or any of such other Persons for services in connection with this Agreement and otherwise without having to account for the same to Lenders. Section 8.3. Representations and Warranties; No Responsibility for Appraisal of Creditworthiness. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of the Borrower, the Stockholders and any Subsidiaries of any of them in connection with the making of the Loans hereunder and has made and shall continue to make its own appraisal of the creditworthiness of the Borrower, the Stockholders and the Subsidiaries. The Agent shall not have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto whether coming into its possession before the making of any Loan or any time or times thereafter (except for information received by the Agent under Section 5.3 hereof which the Agent will promptly forward to the Lenders), and the Agent shall further not have any responsibility with respect to the accuracy of or the completeness of the information provided to any of the Lenders. Section 8.4. Right to Indemnity. Each Lender severally agrees to indemnify the Agent proportionately to its Pro Rata Share of the Loans, to the extent the Agent shall not have been reimbursed by or on behalf of the Borrower, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder or in any way relating to or arising out of this Agreement and/or any of the other Financing Documents; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be 61 68 insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. Section 8.5. Payee of Note Treated as Owner. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that Note or of any Note or Notes issued in exchange for such Note. Section 8.6. Resignation by Agent. Section 8.6.1. The Agent may resign from the performance of all its functions and duties under the Financing Documents at any time by giving 30 days' prior written notice to the Borrower and each of the Lenders. Such resignation shall take effect upon the acceptance by a successor Agent, of appointment pursuant to Sections 8.6.2 and 8.6.3 below or as otherwise provided below. Section 8.6.2. Upon any such notice of resignation, the Majority Lenders shall appoint a successor Agent, who shall be a Lender and, so long as no Default or Event of Default exists and is continuing, who shall be reasonably satisfactory to the Borrower and in any event shall be an incorporated bank or trust company with a combined surplus and undivided capital of at least Five Hundred Million Dollars ($500,000,000). Section 8.6.3. If a successor Agent shall not have been so appointed within said 30 day period, the resigning Agent, with the consent of the Borrower, which shall not be unreasonably withheld or delayed, shall then appoint a successor Agent, who shall be a Lender and who shall serve as the Agent, until such time, if any, as the Majority Lenders, and so long as no Default or Event of Default exists and is continuing, with the consent of the Borrower, which shall not be unreasonably withheld or delayed, appoint a successor Agent as provided above. Section 8.6.4. If no successor Agent has been appointed pursuant to Sections 8.6.2 or 8.6.3 by the 40th day after the date such notice of resignation was given by the resigning Agent, the resigning Agent's resignation shall become effective and the Majority Lenders shall thereafter perform all the duties of the resigning Agent under the Financing Documents including without limitation directing the Borrower on how to submit Requests and Interest Rate Elections and otherwise on administration of the Agent's duties under the Financing Documents and the Borrower shall comply therewith so long as such directions do not have a Material Adverse Effect on the Borrower or any Subsidiary until such time, if any, as the Majority Lenders, and so long as no Default or Event of Default exists and is continuing, with the consent of the Borrower, which shall not be unreasonably withheld or delayed, appoint a successor Agent, as provided above. Section 8.7. Successor Agent. Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring 62 69 Agent, shall be discharged from its duties and obligations as the Agent under the Financing Documents. After any retiring Agent's resignation hereunder as the Agent the provisions of this Article 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under the Financing Documents. ARTICLE 9. MISCELLANEOUS Section 9.1. Consent to Jurisdiction and Service of Process. Section 9.1.1. Except to the extent prohibited by applicable law, the Borrower irrevocably: Section 9.1.1.1. agrees that any suit, action, or other legal proceeding arising out of any of the Financing Documents or any of the Loans may be brought in the courts of record of the Commonwealth of Massachusetts or any other state(s) in which any of the Borrower's or any Subsidiary's assets are located or the courts of the United States located in the Commonwealth of Massachusetts or any other state(s) in which any of the Borrower's or any Subsidiary's assets are located; Section 9.1.1.2. consents to the jurisdiction of each such court in any such suit, action or proceeding; and Section 9.1.1.3. waives any objection which it may have to the laying of venue of such suit, action or proceeding in any of such courts. For such time as any of the Indebtedness of the Borrower to any Lender and/or the Agent shall be unpaid in whole or in part and/or the Commitment is in effect, the Borrower irrevocably designates the registered agent or agent for service of process of the Borrower as reflected in the records of the Secretary of State of the State of Ohio as its registered agent, and, in the absence thereof, the Secretary of State of the State of Ohio as its agent to accept and acknowledge on its behalf service of any and all process in any such suit, action or proceeding brought in any such court and agrees and consents that any such service of process upon such agent and written notice of such service to the Borrower by registered or certified mail shall be taken and held to be valid personal service upon the Borrower regardless of where the Borrower shall then be doing business and that any such service of process shall be of the same force and validity as if service were made upon it according to the laws governing the validity and requirements of such service in each such state and waives any claim of lack of personal service or other error by reason of any such service. Any notice, process, pleadings or other papers served upon the aforesaid designated agent shall, within three (3) Business Days after such service, be sent by the method provided therefor under Section 9.6 to the Borrower at its address set forth in this Agreement. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF ANY DISPUTE BETWEEN THE BORROWER AND THE AGENT 63 70 AND/OR THE LENDERS WITH RESPECT TO THE FINANCING DOCUMENTS AND/OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY. Section 9.2. Rights and Remedies Cumulative. No right or remedy conferred upon or reserved to the Agent and/or the Lenders in any of the Financing Documents is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given under any of the Financing Documents or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy under any of the Financing Documents, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 9.3. Delay or Omission not Waiver. No delay in exercising or failure to exercise by the Agent and/or the Lenders of any right or remedy accruing upon any Default or Event of Default shall impair any such right or remedy or constitute a waiver of any such Default or Event of Default or an acquiescence therein. Every right and remedy given by any of the Financing Documents or by law to the Agent and/or any of the Lenders may be exercised from time to time, and as often as may be deemed expedient, by the Agent and/or any of the Lenders. Section 9.4. Waiver of Stay or Extension Laws. The Borrower covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of any of the Financing Documents; and the Borrower (to the extent that it may lawfully do so) hereby expressly waives all benefit and advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Agent and/or any of the Lenders, but will suffer and permit the execution of every such power as though no such law had been enacted, except to the extent the Agent or any Lender is guilty of willful misconduct or gross negligence. Section 9.5. Amendments, etc. No amendment, modification, termination, or waiver of any provision of any of the Financing Documents nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in a written notice given to the Borrower by the Agent and consented to in writing by the Majority Lenders (or by the Agent acting alone if any specific provision of this Agreement provides that the Agent, acting alone, may grant such amendment, modification, termination, waiver or departure) and the Agent shall give any such notice if the Majority Lenders so consent or direct the Agent to do so; provided, however, that any such amendment, modification, termination, waiver or consent shall require a written notice given to the Borrower by the Agent and consented to in writing by all of the Lenders if the effect thereof is to (i) change any of the provisions affecting the interest rate on the Loans, (ii) extend or modify the Commitment, (iii) discharge or release the Borrower from its obligation to repay all principal due under the Loans or release any collateral or guaranty for the Loans, (iv) change any Lender's Pro Rata Share of the Commitment or the Loans, (v) modify this Section 9.5, (vi) change the definition of Majority Lenders, (vii) extend any scheduled due date for payment of principal, interest or fees or (viii) permit the Borrower to assign any of its rights under or interest in this Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Any amendment or modification 64 71 of this Agreement must be signed by the Borrower, the Agent and at least all of the Lenders consenting thereto who shall then hold the Pro Rata Shares of the Loans required for such amendment or modification under this Section 9.5 and the Agent shall sign any such amendment if such Lenders so consent or direct the Agent to do so provided that any Lender dissenting therefrom shall be given an opportunity to sign any such amendment or modification. Any amendment of any of the Security Documents must be signed by each of the parties thereto. No notice to or demand on the Borrower and no consent, waiver or departure from the terms of this Agreement granted by the Agent and/or the Lenders in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.6. Addresses for Notices, etc. All notices, requests, demands and other communications provided for hereunder (other than those which, under the terms of this Agreement, may be given by telephone, which shall be effective when received verbally) shall be in writing (including telecopied communication) and mailed (provided that in the case of items referred to in the next-to-last sentence of Section 9.1 and the items set forth below as requiring a copy to legal counsel for the Borrower, the Agent or a Lender, such items shall be mailed by overnight courier for delivery the next Business Day), telecopied or delivered to the applicable party at the addresses indicated below: If to the Borrower: CCAi Renaissance Centre 5800 Landerbrook Drive Mayfield Heights, Ohio 44124 Attention: Nicholas A. Canitano Telecopy: (440) 684-6700 With a copy to (if given pursuant to any of Sections 5.3.1, 5.3.5, 5.3.9, 5.3.10 and 5.3.11): Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Attn: John Saada Telecopy: (216) 579-0212 If to Fleet National Bank as the Agent and/or a Lender: Fleet National Bank Mailstop: MA OF D07A One Federal Street Boston, MA 02110 Attention: Lucie Burke, Vice President Telecopy: (617) 346-0151 With a copy to (if given pursuant to any of Sections 5.3.1, 5.3.5, 5.3.9, 5.3.10 and 5.3.11) 65 72 Hinckley, Allen & Snyder 28 State Street Boston, MA 02109 Attention: Malcolm Farmer III Telecopy: (617) 345-9020 If to any other Lender, to the address set forth on Exhibit 1.9. or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to the delivery with the terms of this Section. All such notices, requests, demands and other communications shall be effective when received. Requests, certificates, other items provided pursuant to Section 5.3 and other routine mailings or notices need not be accompanied by a copy to legal counsel for the Lenders or the Borrower. Section 9.7. Costs, Expenses and Taxes. The Borrower agrees to pay on demand the reasonable fees and out-of-pocket expenses of Messrs. Hinckley, Allen & Snyder, counsel for the Agent and of any local counsel retained by the Agent in connection with the preparation, execution, delivery, syndication and administration of the Financing Documents and the Loans. The Borrower agrees to pay on demand all reasonable costs and expenses (including without limitation reasonable attorneys' fees) incurred by the Agent and/or any Lender, upon or after the occurrence and during the continuance of any Default or Event of Default, if any, in connection with the enforcement of any of the Financing Documents and any amendments, waivers or consents with respect thereto. In addition, the Borrower shall pay on demand any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery of the Financing Documents, and agrees to save the Lenders and the Agent harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees, except those resulting from the Lenders' or Agent's gross negligence or willful misconduct. Section 9.8. Participations. Subject to compliance with the proviso in the first sentence of Section 9.11, any Lender may sell participations in all or part of the Loans made by it and/or its Pro Rata Share of the Commitment or any other interest herein to a financial institution having at least $500,000,000 of assets, in which event the participant shall not have any rights under any of the Financing Documents (the participant's rights against such Lender in respect of that participation to be those set forth in the Agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder or thereunder shall be determined as if such Lender had not sold such participation. Such Lender may furnish any information concerning the Borrower and any Subsidiary in the possession of such Lender from time to time to participants (including prospective participants); provided that such Lender and any participant comply with the proviso in Section 9.11.7 as if any such participant was a Substituted Lender. Section 9.9. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Agent and the Lenders. This Agreement 66 73 and all covenants, representations and warranties made herein and/or in any of the other Financing Documents shall survive the making of the Loans, the execution and delivery of the Financing Documents and shall continue in effect so long as any amounts payable under or in connection with any of the Financing Documents or any other Indebtedness of the Borrower to the Agent and/or any Lender remains unpaid or the Commitment remains outstanding; provided, however, that Sections 2.2.3 and 9.7 shall, except to the extent agreed to in a pay-off letter by the Agent and the Lenders in their complete discretion, survive and remain in full force and effect for 90 days following repayment in full of all amounts payable under or in connection with all of the Financing Documents and any other such Indebtedness. Section 9.10. Actual Knowledge. For purposes of this Agreement, neither the Agent nor any Lender shall be deemed to have actual knowledge of any fact or state of facts unless the senior loan officer or any other officer responsible for the Borrower's account established pursuant to this Agreement at the Agent or such Lender, shall, in fact, have actual knowledge of such fact or state of facts or unless written notice of such fact shall have been received by the Agent or such Lender in accordance with Section 9.6. Section 9.11. Substitutions and Assignments. Upon the request of any Lender, the Agent and such Lender may assign all or any portion of its Pro Rata Share of the Commitment and the Loans to a Federal Reserve Bank or an affiliate of such Lender and may, subject to the terms and conditions hereinafter set forth, take the actions set forth below to substitute one or more financial institutions having at least $500,000,000 in assets (a "Substituted Lender") as a Lender or Lenders hereunder having an amount of the Loans as specified in the relevant Substitution Agreement executed in connection therewith; provided that no Lender, Selling Lender or Substituted Lender shall have a Pro Rata Share of the Commitment and the Loans in the aggregate of less than 10% and Fleet and/or its affiliates shall retain for their own account at least 25% of the Commitment. Section 9.11.1. In connection with any such substitution the Substituted Lender and the Agent shall enter into a Substitution Agreement in the form of Exhibit 9.11.1 hereto (a "Substitution Agreement") pursuant to which such Substituted Lender shall be substituted for the Lender requesting the substitution in question (any such Lender being hereinafter referred to as a "Selling Lender") to the extent of the reduction in the Selling Lender's portion of the Loans specified therein. In addition, such Substituted Lender shall assume such of the obligations of each Selling Lender under the Financing Documents as may be specified in such Substitution Agreement and this Agreement shall be amended by execution and delivery of each Substitution Agreement to include such Substituted Lender as a Lender for all purposes under the Financing Documents and to substitute for the then existing Exhibit 1.9 to this Agreement a new Exhibit 1.9 in the form of Schedule A to such Substitution Agreement setting forth the portion of the Loans belonging to each Lender following execution thereof. The Agent, [and] each Selling Lender [and the Borrower] shall countersign and accept delivery of each Substitution Agreement. Section 9.11.2. Without prejudice to any other provision of this Agreement, each Substituted Lender shall, by its execution of a Substitution Agreement, agree that neither the Agent nor any Lender is any way responsible for or makes any representation or warranty as to: (a) the accuracy and/or completeness of any information supplied to such Substituted Lender in 67 74 connection therewith, (b) the financial condition, creditworthiness, affairs, status or nature of the Borrower, any of the Affiliates and/or any of the Subsidiaries or the observance by the Borrower, or any other party of any of its obligations under this Agreement or any of the other Financing Documents or (c) the legality, validity, effectiveness, adequacy or enforceability of any of the Financing Documents. Section 9.11.3. The Agent shall be entitled to rely on any Substitution Agreement delivered to it pursuant to this Section 9.11 which is complete and regular on its face as to its contents and appears to be signed on behalf of the Substituted Lender which is a party thereto, and the Agent shall have no liability or responsibility to any party as a consequence of relying thereon and acting in accordance with and countersigning any such Substitution Agreement. The effective date of each Substitution Agreement shall be the date specified as such therein and each Lender prior to such effective date shall, for all purposes hereunder, be deemed to have and possess all of their respective rights and obligations hereunder up to 12:00 o'clock Noon on the effective date thereof. Section 9.11.4. Upon delivery to the Agent of any Substitution Agreement pursuant to and in accordance with this Section 9.11 and acceptance thereof by the Agent (which delivery shall be evidenced and accepted exclusively and conclusively by the Agent's countersignature thereon pursuant to the terms hereof without which such Substitution Agreement shall be ineffective): (i) except as provided hereunder and in Section 9.11.5, the respective rights of each Selling Lender and the Borrower against each other under the Financing Documents with respect to the portion of the Loans being assigned or delegated shall be terminated and each Selling Lender and the Borrower shall each be released from all further obligations to the other hereunder with respect thereto (all such rights and obligations to be so terminated or released being referred to in this Section 9.11 as "Discharged Rights and Obligations"); and (ii) the Borrower and the Substituted Lender shall each acquire rights against each other and assume obligations towards each other which differ from the Discharged Rights and Obligations only in so far as the Borrower and the Substituted Lender have assumed and/or acquired the same in place of the Selling Lender in question; and (iii) the Agent, the Substituted Lender and the other Lenders shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had such Substituted Lender been an original party to this Agreement as a Lender possessing the Discharged Rights and Obligations acquired and/or assumed by it in consequence of the delivery of such Substitution Agreement to the Agent. Section 9.11.5. Discharged Rights and Obligations shall not include, and there shall be no termination or release pursuant to this Section 9.11 of (i) any rights or obligations arising pursuant to any of the Financing Documents in respect of the period or in respect of payments hereunder made during the period prior to the effective date of the relevant Substitution Agreement or, (ii) any rights or obligations relating to the payment of any amount which has fallen due and not been paid hereunder prior to such effective date or rights or obligations for the payment of interest, damages or other amounts becoming due hereunder as a result of such nonpayment. 68 75 Section 9.11.6. With respect to any substitution of a Substituted Lender taking place after the Closing Date, the Borrower shall issue to such Substituted Lender and to such Selling Lender, new Notes reflecting the inclusion of such Substituted Lender as a Lender and the reduction in the respective Loans of such Selling Lender, such new Notes to be issued against receipt by the Borrower of the existing Notes of such Lender. The Selling Lender or the Substituted Lender shall pay to the Agent for its own account an assignment fee in the amount of $3,000 for each assignment hereunder, which shall be payable at or before the effective date of the assignment. Section 9.11.7. Each Lender may furnish to any financial institution having at least $500,000,000 in assets which such Lender proposes to make a Substituted Lender or to a Substituted Lender any information concerning such Lender, the Borrower, Stockholders and any Subsidiary in the possession of that Lender from time to time; provided that any Lender providing any confidential information about the Borrower, any of the Stockholders and/or any Subsidiary to any such financial institution shall first obtain such financial institution's agreement to keep confidential any such confidential information. Section 9.12. Payments Pro Rata. The Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any obligations of the Borrower hereunder it shall distribute such payment to the Lenders pro rata based upon their respective Pro Rata Shares, if any, of the obligations with respect to which such payment was received. Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff under Section 2.5.2 or otherwise or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Financing Documents, or otherwise), which is applicable to the payment of the Obligations of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total amount of such Obligation then owed and due to such Lender bears to the total amount of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, except for any amounts received pursuant to Section 2.2.3, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the Borrower to such Lenders in such amount as shall result in a proportional participation by all the Lenders in such amount; provided further, however, that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. Section 9.13. Indemnification. The Borrower irrevocably agrees to and does hereby indemnify and hold harmless Agent and each of the Lenders, their agents or employees and each Person, if any, who controls any of the Agent and the Lenders within the meaning of Section 15 of the Securities Act of 1933, as amended, and each and all and any of them (the "Indemnified Parties"), against any and all losses, claims, actions, causes of action, damages or liabilities (including any amount paid in settlement of any action, commenced or threatened and any amount described in Section 8.4) (collectively, the "Damages"), joint or several, to which they, or any of them, may become subject under statutory law or at common law, and to reimburse the Indemnified Parties for any legal or other out-of-pocket expenses reasonably incurred by it or them in connection with investigating, preparing for or defending against any of the Indemnified 69 76 Parties, insofar as such losses, claims, damages, liabilities or actions arise out of or are related to any act or omission of the Borrower and/or any Subsidiary with respect to any of (i) the Related Transactions, (ii) any of the Financing Documents, (iii) any of Loans, (iv) any use made or proposed to be made with the proceeds of the Loans, (v) any acquisition or proposed acquisition or any other similar business combination or proposed business combination by the Borrower and/or any of its Subsidiaries and/or its Affiliates (whether by acquisition or exchange of capital stock or other securities or by acquisition of all or substantially all of the assets of any Person), (vi) any offering of securities by the Borrower and/or any Subsidiary after the date hereof and/or in connection with the Securities and Exchange Act of 1933 and/or (vii) any failure to comply with any applicable federal, state or foreign governmental law, rule, regulation, order or decree, including without limitation, any Damages which arise out of or are based upon any untrue statement or alleged untrue statement of a material fact with respect to matters relative to any of the foregoing contained in any document distributed in connection therewith, or the omission or alleged omission to state in any of the foregoing a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, but excluding any Damages to the extent arising from or due to, as determined in a final nonappealable judgment by a court of competent jurisdiction, the gross negligence or willful misconduct of any of the Indemnified Parties; provided, however, that notwithstanding the foregoing, no Indemnified Party shall have any liability (whether direct or indirect, in contract or tort of otherwise) to the Borrower, any Affiliates or any Subsidiaries or to their respective security holders or creditors except for direct (as opposed to consequential damages) determined in a final nonappealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or proceeding to which the indemnity described in this paragraph applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, any Affiliates or any Subsidiary or to their respective security holders or creditors or an Indemnified Party or an Indemnified Party is otherwise a party thereto and whether or not the Related Transaction and the transactions contemplated by the Financing Documents are consummated. Promptly upon receipt of notice of the commencement of any action, or information as to any threatened action against any of the Indemnified Parties in respect of which indemnity or reimbursement may be sought from the Borrower on account of the agreement contained in this Section 9.13, notice shall be given to the Borrower in writing of the commencement or threatening thereof, together with a copy of all papers served, but the omission so to notify the Borrower of any such action shall not release the Borrower from any liability which it may have to such Indemnified Parties unless, and only to the extent that, such omission materially prejudiced Borrower's ability to defend against such action. In case any such action shall be brought against any of the Indemnified Parties, the Borrower shall be entitled to participate in (and, to the extent that it shall wish, to select counsel and to direct) the defense thereof at its own expense. Any of the Indemnified Parties shall have the right to employ its or their own counsel in any case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless the employment of such counsel shall have been authorized in writing by the Borrower in connection with the defense of such action or the Borrower shall not have employed counsel to have charge of the defense of such 70 77 action or such Indemnified Party shall have received an opinion from an independent counsel that there may be defenses available to it which are different from or additional to those available to the Borrower (in which case the Borrower shall not have the right to direct the defense of such action on behalf of such Indemnified Party), in any of which events the same shall be borne by the Borrower. If any Indemnified Party settles any claim or action with respect to which the Borrower has agreed to indemnify such Indemnified Party pursuant to the terms hereof, the Borrower shall have no liability pursuant to this Section 9.13 to such Indemnified Party with respect to such claim or action unless the Borrower shall have consented in writing to the terms of such settlement. The provisions of Section 9.13 shall be effective only to the fullest extent permitted by law. The provisions of this Section 9.13 shall continue in effect and shall survive (among other events), until the applicable statute of limitations has expired, any termination of this Agreement, foreclosure, a deed in lieu transaction, payment and satisfaction of the Obligations of Borrower, and release of any collateral for the Loans. Section 9.14. Governing Law. This Agreement and each Note shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts without regard to such state's conflict of laws rules. Section 9.15. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 9.16. Headings. Article and 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. Section 9.17. Counterparts. This Agreement may be executed and delivered in any number of counterparts each of which shall be deemed an original, and this Agreement shall be effective when at least one counterpart hereof has been executed by each of the parties hereto. 71 78 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument by their respective officers thereunto duly authorized, as of January 12, 1999. In the presence of: CONLEY, CANITANO & ASSOCIATES, INC. - ----------------------------- By: /s/ Paul A. Farmer ------------------------------------ Name: Paul A. Farmer Title: CFO In the presence of: FLEET NATIONAL BANK as Agent for the Lenders and as a Lender - ----------------------------- By: /s/ Lucie Burke ------------------------------------ Name: Lucie Burke Title: Vice President STATE OF ------------------------- COUNTY OF ------------------------- In _________________, in said County and State, on the _______ day of ______________, 199_, before me personally appeared the within-named _____________, the _______________ of Conley, Canitano & Associates, Inc., me known and known by me to be the party executing the foregoing instrument and he/she has acknowledged said instrument by him executed to be his/her free act and deed and the free act and deed of said Conley, Canitano & Associates, Inc. ---------------------------------------- Notary Public: Print Name: My Commission Expires: 72 EX-23.2 6 EXHIBIT 23.2 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-59909) of our reports dated January 29, 1999 and June 8, 1998, on our audits of the financial statements and financial statement schedules of Conley, Canitano & Associates, Inc. and Kelly-Levey & Associates, Inc., respectively. We also consent to the references to the firm under the captions "Experts" and "Selected Financial Data." /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP March 1, 1999 EX-23.3 7 EXHIBIT 23.3 1 Exhibit 23.3 [Langford de Kock & Co. Letterhead] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-59909) of our reports dated January 11, 1999, on our audits of the financial statements and financial statement schedules of Bureau Van Dijk Computer Services, Inc. We also consent to the references to the firm under the captions "Experts" and "Selected Financial Data." /s/ Langford de Kock & Co. Langford de Kock & Co. March 1, 1999 AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS MEMBER OF THE SEC PRACTICE SECTION 1100 South Tower, 225 Peachtree Street, N.E., Atlanta, Georgia 30303 Telephone 404/525-2600 Fax 404/577-4947 -----END PRIVACY-ENHANCED MESSAGE-----